Raising funding from private investors continues to be the single biggest challenge facing Irish start-ups, according to Scale Ireland research.

In the lobby group’s largest-ever survey of start-up founders and CEOs, with 340 respondents, 50.3 per cent of respondents said funding is their biggest issue, dwarfing the 16.2 per cent cost of doing business, recruitment and retention of staff which is put at 13.2 per cent, lack of expert advice and support at 8.2 per cent and tax and regulation burdens at 6.8 per cent. 

A total of 79 per cent of respondents said that attracting private capital was either difficult or very difficult. 

Funding was the biggest issue identified in the same Scale Ireland survey last year with 51.6 per cent selecting it, underlining that it continues to be a significant challenge for Irish start-ups.

At first glance, it could be simply assumed that Ireland is a victim of the global challenges facing venture as an investment class, challenges which were brought on by investing at questionable valuations during the era of cheap money. But while investment levels have plummeted in the US and China, that’s not the case in Europe.

As previously reported, VC investment in European start-ups was about $45 billion last year, which when the Covid years of 2021 and 2022 are stripped out, was a healthy increase on the $41 billion invested in 2020. As Atomico, the VC firm behind the research, put it: “The resetting of investment levels appears to reflect a correction to the long-term upwards trajectory, following two outlier years of overheated activity”.

So why do Irish start-ups still struggle to raise funding? It’s clearly a real issue and not just the view of founders. Atomico’s research found investment in Irish start-ups dropped by 48 per cent in 2023 to just $647 million, compared to a 38 per cent fall in investments in European start-ups last year. This suggests that VCs are eschewing Irish tech companies in favour of their European neighbours. 

Could the elephant in the room be the State’s investment policy? It’s a notable feature of the Irish market that the State is the dominant player in early-stage investing. When measured by the number of deals it has participated in, Enterprise Ireland (EI) is, by some distance, the most active European investment fund, according to data from Pitchbook. 

EI made 988 investments between 2018 and the first half of 2022, with the French sovereign wealth fund Bpifrance the only fund to come even close with 696 investments over the same period. Consider the size of the Irish market against France and it is clear that the State agency has an outsize impact on the local funding environment. 

EI’s strategy is also markedly different than other state-backed investors who focus on backing indigenous companies. EI is often the first institutional money into a company. Its median deal size is just €0.5 million compared to €2.5 million for Bpifrance.

EI chief executive Leo Clancy has been vocal that by investing at seed or pre-seed stage, it hopes to attract private investors for later rounds, which in theory should be less risky. 

Angel investors have the experience

However, Enterprise Ireland is investing taxpayer’s money and so its due diligence and application processes are much more onerous than angel investors, who in other markets are the most common source of funding at that stage. 

Not only do angels move quicker, allowing start-ups to focus on growing their nascent business rather than drafting business plans, but they also generally have relevant industry experience, which can help their portfolio companies avoid mistakes they’ve seen. 

To be fair, EI’s remit is wide. Browse its recent investments on Crunchbase and, alongside the tech ventures that a typical VC would back, you’ll see grants to businesses as diverse as ice cream shop chain Gino’s Gelato and The Pavilion Garden Centre in Cork.

It’s also notable that indigenous tech successes like Wayflyer, Intercom, LetsGetChecked, Fenergo, Transfermate and Workhuman, who achieved unicorn status in recent years with backing from top-tier international investors, do not have Enterprise Ireland on their cap table. 

Of course, direct funding from EI is not the only state support that start-ups in Ireland can avail of, but the Scale Ireland survey suggests many of those schemes have yet to hit the mark. Just 11.5 per cent of respondents said they’d used the Key Employee Engagement Scheme (Keep), which reduces the employee tax burden when granting share options, provided certain criteria are met. 

The majority of 54.5 per cent also said the Employment Investment Incentive Scheme (EIIS) was not relevant to their company, with 31.1 per cent saying the process around the scheme was either not easy or very difficult. Similarly, just 35.9 per cent of respondents availed of the R&D tax credit, but the majority 54.1 per cent said they found the process complicated. 

Budget gave start-ups renewed optimism 

Certainly, there seems to be more optimism about more recent budget measures for start-ups. Almost 80 per cent expect a positive impact from increasing the rate for the R&D tax credit scheme from 25 per cent to 30 per cent, while 58 per cent agree that the reduced capital gains tax for angel investors will have a reasonably positive impact. 

Perhaps the most positive finding of the survey is that just 11.5 per cent of respondents said they laid off staff in the last year, which goes against the prevailing narrative of job losses in the tech sector. Counterintuitively, start-ups are now a more secure employer when compared to the big tech firms.

In contrast to large public companies, Scale Ireland’s members are focused on growth rather than profitability and aren’t forced into cost-cutting measures whenever profits start to slow down. Also unlike the multinationals, decisions about headcount in Ireland are made by local management rather than by executives in boardrooms in California. 

Interestingly, the skills gaps identified by respondents were primarily marketing and sales, at 46.5 per cent, rather than technology expertise at 29.7 per cent and finance and operations also showing a significant gap of 30 per cent. 

Funding is still the perennial issue for Irish start-ups but, for now at least, they continue to be creators of attractive long-term employment. Given that’s the main measure on which Enterprise Ireland is measured, it would seem unlikely its investment strategy is going to change any time soon.