December 21, 2008
The government is finally getting it. The â‚¬500 million innovation fund announced last Thursday is an enormously influential and intelligent move. In years to come, it may even be seen as Whitakeresque in its prescience. For the first time in a long while, we have a vision of this country that complements what is good in the economy and, more importantly, sees beyond the current malaise. In the weekend where the depth of the problems in our banking system were laid bare, it is encouraging to see that Taoiseach Brian Cowen has the capacity to think about the future.
Sure the present has to be sorted out, and we’ll come back to that. But, for the moment, let us concentrate on the positive opportunity engineered by the ‘Innovation Ireland’ idea.
The Irish state – ironically for a country that didn’t have diplomatic relations with Israel for the first 40 years of its existence – has copied the Jewish state. Israel is the most successful high-tech country in the world. It has more home-grown listed high-tech companies than any other country, apart from the US. With a population of only six million, that’s no mean feat. So they must be doing something right.
Up to the 1990s, the Israelis were a bit like the Irish. They competed with us for US multinational investment, and educated – using the military and the universities – an infantry of well-qualified foot soldiers for these multinationals.
Like Ireland, their record at seeding and cultivating home-grown high-tech companies was poor, given the resources at their disposal and the significant multinational activity in the country. Their problem then – like ours now – is that they couldn’t commercialise their ideas. They hadn’t the venture capital know-how or money to bring good ideas to fruition.
Smart Israeli companies, like Irish ones now, sold out to US companies before they could grow into any significant size. All this changed with the introduction of Yozma, an initiative designed to bring in US venture capital and commercial skills, fusing them with Israeli high-tech ideas and creating strong companies that were financially robust enough to become big players. The Israeli state came in as 50/ 50 investors with the US venture capitalists, and the rest is history.
The Israeli tech industry took off and never looked back. After a few successes, there were successful scientific role models for graduates and, within a few years, Israel was listing companies on Wall Street at the rate of one a month. Obviously success begets success, and more and more investment capital flowed into the country, creating the virtuous cycle whereby no Israeli idea would fail due to a lack of commercial nous or financial muscle.
The country used its links to the US and its diaspora there to complement the industrial strategy, something we could also do. This entrepreneurial spirit was so ingrained that, by the time I worked there for a bank in the mid-1990s,we found it difficult to recruit graduates because everyone wanted to start their own company. One thing to remember is that, until the early 1990s, Israel was practically a socialist country, with the state owning the economy.
Last Thursday, Ireland copied the Israeli model. The â‚¬500 million fund – designed to attract co-financing by venture capitalists who are willing to move to Ireland, set up shop and use Ireland as their European Silicon Valley – is ingenious. The government has also, smartly, given significant tax incentives not just to attract capital but to lure people here too. This is a significant move and should be welcomed by anyone who has championed industry in this country. If the venture capitalists move here in significant numbers, we will re-invent the economy. At the moment, it is easy to be cynical. But the question is not why would venture capitalists come here; the question is why wouldn’t they.
We are producing thousands of graduates every year. We have the most significant multinational industry per head of population in the world. There are now clusters of excellence in computing, healthcare and pharma – with all the big names and brands already operating here. The links between these existing companies with their know-how and trained professionals and new, decently capitalised start-ups will be irreplaceable. So why wouldn’t a venture capitalist come and set up here?
In the recession, the things that made Ireland uncompetitive are likely to reverse. House prices and accommodation costs in general will collapse, unemployment will force wage rates down, transport costs will get lower and, more to the point, Science Foundation Ireland will spend â‚¬7 billion on education and training in the years ahead.
We still have the youngest educated population in Europe. Of course, there are problems – our brutal infrastructure is just one – but, with enough capital investment, this can be solved.
Most importantly, our tax system with this new initiative is now explicitly designed to be attractive to entrepreneurs.
For example, a new 16 per cent tax on what is called ‘carried interest’, which is the money a venture capitalist can expect to make when a good idea is commercialised into a success and sold off, will be much lower than anywhere else on the globe.
The big idea is not to attract only US capital and commercial know-how, but to suck in entrepreneurs from all over Europe. At the moment, Europe has huge reservoirs of scientific talent, but a very poor record at creating start-ups. The question many investors ask is: where is the European Google? It’s a fair question. In the next ten years, what if that European Google was set up here using Irish and European brains and US capital? That is the prize.
If you are a regular reader of this column, you might be pinching yourself at this outbreak of optimism. But that’s the point. The time to be critical was when everyone else was cheerleading, and the time to be upbeat is when everyone else is suicidal. There are opportunities in every crisis, and the Innovation Ireland Initiative is one of them.
Frankly, it makes much more economic sense for the pension fund to be investing in the future capital of the country alongside the best venture capitalists in the US, than to be throwing good money after bad into our crocked banking system.
We have to tear up the script. We need to realise that the old Ireland, with its bloated banks, overpriced land and easy credit, nearly destroyed us. By all means, sort out public spending, partnership and the banks themselves, but the endgame is well known. There is really no debate here. Either the state sorts out the present, faces down the vested interests and takes the hard decisions, or the market will do the job for us. We know we are in for a torrid time, so let’s get on with it.
The real challenge is to position ourselves, so that, at the end of this, we have hope and a new vision. We could well have a whole new cast of politicians and leaders by that stage, but the key is to know where we are going.
Innovation Ireland can provide that roadmap. Let’s go for it.