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“Viable but Vulnerable”? Enterprise Ireland provides support
The Irish Venture Capital Association has recently reported that Irish technology firms funding for the first half of 2009 has increased by 7% on the previous year. Securing that funding is still very challenging in this market and there can be quite a time lag to get to completion in funding rounds. Meanwhile, there is ongoing evidence of flat lining of discretionary spend by customers in the ICT sector and severe price competitiveness and deal flow and decision making disruption on the customer side mean that many companies are burning cash in the form of pursuit costs but still finding it very difficult to secure longer term, revenue generating and profitable deals. There is a general expectation that the various steps that have been taken by Government in relation to the banking sector in Ireland should result in banks restarting ‘normal’ lending. However, it is likely that there will still be some time lag before the evidence of this is clear. The result is that some companies with good and relatively advanced stage business models find themselves in something of a hiatus which, in some cases is causing them to resort reluctantly to headcount reduction and other cost reduction measures and is preventing them from maximising opportunities in the marketplace.
Enterprise Ireland is in the process of administering a fund with a total budget of €100 million for companies which are "viable but vulnerable". The Enterprise Stabilisation Fund was launched in April this year and to date €9.5 million has been approved for 26 companies with a further €28 million under active negotiation with 40 companies. Funding is offered primarily through the issue preference shares, repayable after five years and typically at a three per cent coupon. In order to qualify for the Enterprise Stabilisation Fund companies must:
- operate in the manufacturing and/or internationally traded services sectors;
- have a sound, robust and sustainable business plan that is financially viable in the medium term;
- be able to demonstrate financial commitment/contribution of promoters, other investors etc. to the business plan; and
- be able increase their exports as the world economy improves.
These criteria are assessed by an Enterprise Ireland Investment Committee and there are some noteworthy exclusions. In particular, the fund does not apply to pre-revenue, early stage start-up companies or companies that were in financial difficulties before July 2008. Also excluded are companies that sell exclusively on the Irish market and intend to continue to do so.
Enterprise Ireland requires that it should be possible to complete the funding within a period of six weeks following initial approval. This timeline is relatively tight, and so the standard investment documentation has been amended to make the process less cumbersome and costly for companies. In a recent briefing, Enterprise Ireland emphasised that the key to obtaining the required efficiency in the process is engaging with legal advisers early in the process, as a kind of pre-approval stage. This ensures that the six week turnaround time is achievable and the company can meet the standard completion requirements in time. In general, the legal documentation does not delay the investment. Underlying issues in relation to the structure and assets of the company tend to present the major showstoppers.
There are a number of key steps to the process:
The company and its legal advisers discuss and prepare for the post-approval process, the terms attaching to the Subscription and Shareholders Agreement, and the post-approval requirements.
The Investment Committee makes a decision, and may impose conditions on the funding.
- Post-approval (six weeks)
The Subscription and Shareholders Agreement is finalised, the required documentation is furnished (eg tax clearance certificate, amended articles of association, share capital certificate) and evidence of additional funding (if any) and compliance with conditions set by the Investment Committee (if any) is provided.
As part of the pre-approval process, the company and its legal advisers are being encouraged by Enterprise Ireland to discuss and deal with issues that can arise in the post-approval stage, for instance in relation to intellectual property ownership and infringement risk, any pre-existing legal obligations the company has, obtaining additional matching funding (if required), and the structure of the group to which the company belongs. It is critical that companies looking for this Enterprise Ireland funding are prepared before entering the post-approval stage.
The Enterprise Stabilisation Fund is due to complete by the end of 2010. Until then, it may offer the chance to secure vital funding for viable but vulnerable companies to get them through the hiatus.
Further information in relation to the Enterprise Ireland Stabilisation Fund is available from our Emerging Business Programme Team