Uncertain future for early-stage Irish technology companies

According to Irish Venture Capital Association (IVCA) figures, international funding fell by more than 50% between the first and second quarter of 2022 – from €303 million in the first quarter of 2022 to €152m. While current levels of investment across the sector remain fairly strong, this sharp decline is a cause for concern for early-stage technology companies, who have been heavily reliant on overseas investment in recent years.

In an increasingly uncertain geopolitical climate, there is a growing sense that the sources of foreign investment into Irish early-stage companies are drying up.

A volatile market

In the first quarter of 2022, 79% of funding to Irish start-ups came from international sources, according to the IVCA. While this has contributed to the maintenance of a buoyant investment market in technology companies, it leaves the sector particularly vulnerable to a tightening of global capital.

The IVCA also reported a 7% year-on-year drop in seed funding investments in the second quarter of 2022, following an earlier 40% fall in year-on-year seed funding in the first quarter. This is undoubtedly a worrying trend, which seems indicative of a market whose growth for 2022 has been largely driven by a number of high value deals in the technology sector involving established companies in that space. While this of itself is not a negative development, it masks the underlying issue that funding in early-stage technology companies has materially reduced over the past 12 months.

This is a particularly vulnerable time for the technology sector in Ireland. A recent survey by ManpowerGroup indicated that recruitment in the technology sector will drop by 25% in the coming months, with a number of tech giants freezing their immediate hiring plans. It has also not escaped the attention of investors that share prices in the tech sector remain extremely volatile after a number of months of sharply falling trading prices – both in the US and European markets.

State-funded investment options

These factors combined will create a challenging environment for early-stage tech companies seeking seed funding and also those seeking funding to scale up and expand. The sector achieved boom level growth and expansion during the pandemic though observers expected that, eventually, the appetite for investment would begin to fall. The Irish government has faced calls to allow Irish pension funds to increase the equity holdings allocated to private equity and venture capital funds as a means of counteracting the anticipated further slowdown in investment from overseas.

The sector can, however, take comfort in the fact that several state-funded investment options will remain viable options for early-stage tech. Enterprise Ireland was recently named Europe’s most active domestic venture capital investor by deal count, and the new €90m Irish Innovation Seed Fund will come on stream in the coming months.

The future of tech investment

The Irish tech sector generally remains in a strong position after a record-breaking €1.6 billion of tech funding was raised in 2021. Even with an uncertain economic outlook, investment appetite remains for the areas in the industry with high growth potential. Healthtech, enterprise solutions and fintech, for example, are all continuing to attract investment at all stages of the company life cycle.

Despite this, however, a unique set of funding challenges now await early-stage tech companies, as foreign investment dwindles amid fears of global recession. There will likely be fierce competition between companies for the domestic investment options and supports, in addition to the overseas investment funds that remain in the game. As ever, the companies with the strongest prospects for scale and growth will receive backing.

Certain areas of the industry have become a crowded field in recent years, and it remains to be seen what impact a reduction in available capital will have on the future growth and valuations of these companies and their technology. It is widely anticipated that those companies developing technology in the areas of artificial intelligence, autonomous systems and blockchain will perform strongly.

Written by Conall Ennis of Pinsent Masons.