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Ireland should buy from startups, not just give them cash

Each year, Ireland invests a ton of cash – probably well north of €100 million – into new and emerging companies.

Enterprise Ireland is the main funnel for government funding of companies – each year it invests millions of euros in hundreds of companies it considers High Potential Startups (HPSUs), and later-stage developing companies. This cash – “EI money” – has become a major part of the startup ecosystem in Ireland, and it’s one expense that isn’t getting the axe in government budgets.

Public investment money flows to Irish startups in other ways, too. Much of the private sector money invested in Ireland is in fact government money managed by Irish VCs and other administrators, and blended into seed capital funds. Seed capital funds are administering the investment of at least €124 million of public money. In addition, there’s the competitive start fund, and the innovative High Potential Start Up fund. If you can impress the right people, there’s a lot of cash about.

The government is doubling down on this strategy of growing companies through investment. It recently gave US-based investment firm Sofinnova €30 million to invest in Irish healthcare and life sciences companies, and invited other investment firms to come to Ireland and help invest public money in Irish startups. Plus there’s generous tax relief available for startup investors – some Dublin accountants boast that between tax relief and government money, they can quadruple the cash value of any investment.

How do all these companies perform afterwards? It’s hard to say – there are fewer press releases about how everyone is doing three years out. The good side is that EI (and Ireland) gets a slice of the cake when there are successful exits – when companies get acquired further down the line. On the other hand, the process feeds the phenomenon of “grantepreneurs”. In Business Plus magazine last year I read an investigative piece about companies that got millions in public investment, and didn’t have much – or anything – to show for it. Some didn’t even seem to have tried.

As new tech companies start to influence more and more of the economy, Ireland wants to support its emerging entrepreneurs. But you know what would be even better than investment? Customers.

Government: Ireland’s biggest customer

Government spending accounted for 47.5% of Irish GDP in 2010. This included everything from social welfare to recreation, defense to education, and thousands of services and products. That money feeds a lot of mouths.

Now imagine if it was possible for startups to compete for a slice of that spending? Traditionally, the public sector has been slow to take on new technology or vendors. Just like no-one ever got fired for buying Microsoft, no-one ever got fired for hiring Accenture, Arthur Cox, Microsoft or PriceWaterhouse Coopers. So any upstart who thinks they can do a better job of helping the department of social welfare manage its data, or the Gardai manage their schedules, or Coillte manage its supply chain, or feed children, or help some quango “raise awareness” – well, good luck. You’re facing an uphill battle, and you’ll probably have an easier time selling into the UK or the US.

Many government departments, state companies, and quangos have tried and trusted vendors, relationships. There isn’t the same pressure as the private sector to innovate – the public sector doesn’t have shareholders to account to, or reasons to change. Some public bodies don’t have the expertise to draw up their own procurement terms for major software changes – meaning the big consulting firms draw up the terms of reference, write their bids the next day, and – surprise, surprise – win the contracts.

Of course, sometimes you need the big guns. But sometimes you don’t. Right now, the public purse is open to startups in a narrow way – investment. Here’s some cash, Sonny – now go away and leave Daddy alone. See if you can sell your wares abroad. But investment can burn up pretty quick without customers, and new customers are the hardest step for any startup. So why not start buying our products and services?

The reason is simple: there’s a sea change going on in tech right now, and Ireland needs to build some global companies from it.

Software eating the world

Super-investor Marc Andreessen has predicted that in the coming years, software will eat the world. So what does that mean? In a few years time, web-connected software (apps and websites built into everything from your phone to your fridge) will help you do everything in your life, from locating your friends on Saturday night, ordering the right food, managing your fitness, navigating foreign cities, knowing when to visit the dentist, subletting your spare room, and carpooling. Software will tell farmers when to cut their grass, will tell you where to buy the cheapest gas, and will turn on your heating as you drive home. Software in your phone will help you find the best price for the blender you want to buy, and then you’ll buy it through software in your phone. All these things will come to pass, and some very big natural monopolies will develop – like Facebook, Google, Amazon, AirBnB, and Apple. We live in the era of a great technology land grab.

If Ireland is to produce software companies that will eat the world, and win some turf in this land grab, sure, they will need investment. But investment tends to follow good ideas anyway, and savvy Irish entrepreneurs are getting good at bringing in the bacon from foreign and domestic VC funds. Ireland has a pretty hopping angel investment scene, too. What software companies need even more is initial customers, who’ll take a risk on the new technology or approach to solving a problem. Having some happy customers who’ll sing your praises to prospective clients is worth far more to a company than a chunk of cash.

So: what if we were to invert the public sector attitude – and turn the Irish public sector into a place where new ideas and processes are embraced, tested, and tried out? The public sector – including government departments, the courts service, universities, and state owned companies – solves thousands of problems each day. It employs hundreds of thousands. It spends a billion or two a week. And it’s reputed to have some inefficiencies.

Many of the things governments pay for – from managing a consultant doctor’s schedule to providing public information – will be eaten by software in the coming years.  If Ireland is at the forefront of this historical change, producing stellar companies in the field by giving them a head start now, we can reap some of the benefits of it.

Plus, on the filpside, this approach would save taxpayers a fortune. If startups got their agile, low cost, customer-oriented mentality into some government processes, well, there’s a chance they’d be done better.

Of course, if functions of government are to be trusted to young companies, all existing (logical) safeguards and standards should stay in place. (Personally, I’d like to see the destroyer of critical thinking called “best practices” banished, though.) The best companies should still win. And needless to say, we’d have to prevent any corruption or gombeenism in public contracts. But given how much our government spends on technology, legal, accounting, healthcare, food, security and everything else every year, and given what a deplorable job some existing firms have done, isn’t it worthwhile imagining something new?

So here’s my question to Ireland, Inc.: if you really believe in all these startups you’re funding, why don’t you start buying their stuff?

  • I agree with the general sentiments here,  but there is a dichotomy between public procurement of well-proven,  tried and tested,   low risk solutions using taxpayers money;   and innovative but unproven and high risk solutions.   However there is at least one approach which should resolve the difficulty:  see my talk http://chrisjhorn.wordpress.com/2011/05/10/talk-to-the-innovation-in-public-services-forum/

    best wishes
    Chris

    • Thanks for sharing that Chris. I’d hope there are a good number of areas – perhaps away from the real core of government functions – where public money could be well spent on worthwhile, innovative solutions from Irish growth companies. I’d agree that the state should be very careful in managing risk in providing its services.

  • Anonymous

    Paul, good post. EI is acutely aware of the difficulties startups face in selling to the public sector (in Ireland or overseas), and we have a dedicated team to assist clients, see http://www.enterprise-ireland.com/en/Export-Assistance/Building-Export/Selling-to-the-Public-Sector-in-Ireland-and-Internationally.html

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