The big question that I kept getting as a result of the acquisition was to do with Irish technology companies generally. I mean, we had begun in Ireland, but we had made the decision to move out to the US. And there are all these media questions like, did I think, or do I think that, like, all Irish technology companies should make that switch or, for people who are thinking of starting a technology company in Ireland, should they just straight away move out to the US and not even bother setting up in Ireland initially, or all that kind of stuff. And I always try to kind of avoid answering those questions, because my answer to should a technology company set up in Ireland, my answer is sort of, ‘No, but,’ and inevitably that just becomes no, and so I didn’t really want to answer them unless I could answer it right.
And so today I’d like to give, like, a slightly fuller answer to that question. Part of the reason I don’t want to get it wrong is that I think it’s actually pretty important. I was talking to a friend of mine about this a couple of days ago, and he reminded me of the Lisbon Strategy, which was this EU document released in, I think, 2004, that sets out this sort of grand ambition for the European Union to produce, and I quote, ‘the most dynamic and competitive knowledge-based economy in the world by 2010’. I mean, identifying this knowledge-based economy, they explicitly name Silicon Valley as what they want to emulate. What distinguishes Silicon Valley is, obviously, the huge number of successful technology companies. And all of those successful technology companies were at one point small start-ups. And so by saying that we want to create the world’s premier knowledge-based economy in the EU, what they’re really saying is, we want to make sure we’ve lots of start-ups.
And so, I think it’s pretty important that we get the start-up ecosystem right. Even though start-up is kind of a funny term, in the sense that people never seem to be completely clear on what it means. I mean, it’s a fairly recent word. I think it’s actually a pretty old concept, and this notion of there being risky, innovative, creative enterprises in which people should invest small amounts of money with the prospect of a much larger return has obviously been around for a long time. In particular, I think start-ups are very relevant today, with the dawn of computer-related start-ups. With something like biotech or even electronics companies, start-ups are still a pretty good proposition, but they’re reasonably expensive to establish, whereas start-ups that basically are software companies have a really low activation energy. Almost anyone can get one going.
And so, for that reason they’re especially attractive to young people. And so, over the last, I guess, 10 years or so, well, 20 perhaps, there have been an increasing number of young people starting start-ups. I think that’s a really interesting phenomenon. And I think the numbers considering that path are going to grow. In particular with the current economic climate, large companies are obviously suffering right now, and will continue to suffer for quite a while. But startups generally tend to do pretty OK in poor economic conditions. I mean, Google and eBay did really well during the last, albeit brief recession during 2001. So I think start-ups in general over, say, the next couple of decades are going to be really important to young people and also to the economy as a whole, and especially in the next couple of years, just as we’ve, like, these rough economic times, I think it’s a big deal.
To come back to what I was saying a couple of minutes ago, the blunt truth today is that starting a technology company in Ireland is not a particularly attractive proposition. And I think we have to be honest and realistic about that fact, and then focus on how we should change it. I think that the biggest problem that exists in Ireland today is that our investment community could do with some improvement. But all these criticisms, I feel, conceal actually an awful lot of optimism, in the sense that Ireland is actually quite well positioned. We’ve a reasonably well-educated population, we’re fairly well off. We’re a small country and so we can enact change fairly quickly. And so I don’t see any reason that Ireland cannot become the Silicon Valley of Europe.
But with that said, there are significant problems. And as I mentioned, I think the investment scene is probably the biggest. I guess all of us have been reading quite a bit about finance in the past couple of weeks, and one of the most interesting things I read is that, if you look at the – do you guys know the S&P 500 index? I’m sure most of you do. Right. So if you look at this index of the 500 largest companies in the US, and look at the returns of this index over, say, the 10year period between 1997 and 2006, you find that the average annual return on investment is 8.4%. But over the course of those, whatever, 3,650 days, if you miss out, or if you missed out, on the 10 best performing days, the average annual return goes down from 8.4% to 3.2%, just by missing the best 10 days. And so, if you invested $1,000 in 1997, and if you left that money invested for the entire period, you would have $2,400. If you missed out on those best 10 days, your returns go down to $1,300. Basically, your return is almost a third of what it would otherwise have been.
And I think this is the problem with the investment community in Ireland too. It tends to be quite risk-averse. It does not value failure in the same way that investors in the US do. And so I think collectively in Ireland this is something we really need to fix. The 'outliers', the really risky propositions, are where the great returns come from, and we don’t value this enough in Ireland. Even though investment is a kind of dry topic, I really think it’s something that we actually should get passionate about for the reasons I was mentioning before, about the growing importance of start-ups to young people and the economy generally, and all the rest.
And while the risk profile and the people’s, the community’s differing appetites for risk is a big part of the problem, I think an even bigger one might be the mindset generally. In Ireland it can seem like an extremely intimidating prospect to go and get some sort of start-up investment or seed funding or whatever it is. And it seems intimidating largely because it is. And I mean, I was browsing the Enterprise Ireland site and Y Combinator sites yesterday afternoon when I was preparing this talk, and I was just struck again by the extent to which this is the case. And so, I’m quoting here from the Enterprise Ireland website – this is where they outline their application process – and what they write is, ‘Project ideas must be discussed with your assigned development adviser prior to submitting a completed online application form. You’ll be required to clearly demonstrate to your development adviser the specific benefits of undertaking the proposal. There is a cumulative grant limit within a rolling twoyear period for all proposals approved under this category of funding. For further information please discuss with your development adviser.’ I mean, I honestly don’t know what that means.
And then I went to the Y Combinator site, and here’s how they describe their application process. ‘We’ll review applications by October 29th, and invite the groups that seem most promising to meet us in Mountain View on the weekend of November 14th. We’ll decide who to fund that weekend. Decisions will include the amount we’ll invest, and the potential of the company we’d want for it. If we accept your offer, we’ll write you a cheque immediately for as much as you need to cover your initial expenses. After you’re accepted, we’ll set up all your company paperwork for you, including getting you incorporated. Once your company exists, we’ll write a cheque to it for the rest of the money. You can spend the money however you want.’ In the light of that difference in mindset, I don’t think it’s any surprise that people find it far less intimidating in the US to go ahead and start a company.
The other issue is that, even if you do manage to get accepted in Ireland and do get some investment, the terms are not particularly good, and the models on offer are just not very favourable for young companies. One thing that Enterprise Ireland favours a lot is this notion of matched funding, where they will give you as much money as you spend yourself. And this just isn’t all that great when you have no money yourself. And so, I mean, again, it’s not particularly attractive to young people. And so, again, to compare it to the US, when Auctomatic, when we had used up the initial seed capital that Y Combinator gave us, we decided we’d like to raise it a little bit more, and we were approached by Paul Buchheit, who was the creator of Gmail, and he offered to invest 75K in the company. But he’s a particularly paperwork-averse guy, so he agreed to make this investment and then kind of just forgot about it. Then a couple of weeks later we sort of had this problem whereby we were due to go to a conference. We were going to go to eBay Live. We needed to buy some servers, but we didn’t have the money for it. So I was scratching my head, wondering how we’d fix this problem. And on the phone to Dell and talking about different options like leasing and, you know, how we’d pay them back in a couple of years when we had millions and millions of dollars. And they weren’t really buying it, so we were kind of stuck.
Do any of you know Twitter? Yeah? OK. So, for anyone who doesn’t, Twitter is the site where basically you provide short status updates that describe just what you’re doing or what you’re thinking or what’s going on. And then people who know you can choose to receive those updates. So I just wrote a short tweet saying something like ‘Trying to figure out how we can possibly pay for these servers,’ or something to that effect. And Paul Buchheit, this investor, saw that tweet, and he kind of phones up and he’s like, ‘Hey,’ you know, ‘I agreed to invest, didn’t I?’ And we were like, ‘Yeah.’ He was like, ‘So, I mean, why don’t I just give you my credit card number?’ I was like, I mean, as you do, I was like, ‘Sure.’ And so, yeah, he gave it to us, and we bought our servers. And once again, I think this is the difference between Ireland and the US. I mean, in Ireland, if you go with this matched funding option, you’ve to get audited accounts, and different monies are ring-fenced to be spent in different areas, and this must be certified R&D, blah-blah-blah. Again, it’s… I don’t understand it. And in the US we get a phone call from an investor offering us his credit card number. And from the perspective of a start-up founder, I mean, I think it’s pretty obvious which is preferable.
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