Raising #15 million (£11.8 million) in venture capital funding is no mean feat at the best of times for a two-year-old software company. To raise it in the teeth of a prolonged downturn in the market for technology stocks is quite an achievement. But to raise it when your target market - European mobile operators - is taking a particular hammering is something that Comnitel is entitled to feel pleased with itself about.
The Cork-based company's second-round fund-raising - completed last week - serves as a road map for the 30 or so Irish technology start-ups looking to raise second or third-round venture capital. To get its money, Comnitel had to come to terms with some of the realities of life after the dot.bombs and associated telecoms shares collapse. It had all been about potential, now it was about profits.
Comnitel develops software for the management of mobile phone networks. It has two main products, with the somewhat macho names Centurion and Praetorian. They monitor faults across mobile networks and claim the technology will allow the operators of the next generations of mobile networks to offer enhanced services.
The jury is still out on whether the products are a winner and negotiations are under way with two European mobile operators. The #15 million raised last week will pay for the marketing effort and also the development of the second product. To raise the money Comnitel had to devise a second-round business plan that reflected a totally transformed venture capital landscape. The days of being able to assume that third, fourth and even fifth-round funding would be available were gone.
The fall in the value of quoted technology companies hit the value of unquoted ones and, the amount of money they could raise from venture capital companies. Venture capitalists are now homing in on profitability. When they came to see Mr Declan Fox and Mr Kieran Moynihan of Comnitel they made it clear they wanted a return on the investment. "Spend this money as if it was your last," they said. Comnitel's response was to refocus products to suit existing GSM, or second-generation mobile operators, which will be moving to the halfway house of 2.5G rather than the much delayed 3G. The business plan also predicted profitability by the end of 2002, with no further injections of capital required. The prospective investors did not just take this at face value but subjected the financial projection to extensive testing to see what the implications were of a longer than expected US downturn and other scenarios.
When the serious talking finally started it became apparent that the venture capitalists would be looking for a much bigger stake than they would have accepted 12 months ago, reflecting the fall in valuations of technology companies.
What helped Comnitel was getting the SAIC Venture Capital Corporation on board. It is a subsidiary of Science Applications International Corporation, the largest employee-owned research and engineering company in the US. SAIC's support was a significant coup because it is more than a pure financial venture capital house and takes strategic investments in companies that it believes can develop leading edge technologies. It clearly saw potential in Comnitel and its position as the largest dedicated developer of management systems for mobile networks. Where SAIC goes many other US funds follow and once it committed, Comnitel was in a stronger position to deal with more hesitant European investors.
SAIC is a newcomer on the Irish scene as was another of the investors, Hamburgische Landesbank, the state bank of Hamburg. Also there at the end was Mr Ian Armitage's Mercury Private Equity, which is well known in Ireland. ICC Venture Capital, which participated in the first round with Enterprise Ireland, also took part in the second round.
The offer was oversubscribed, but despite the surplus of investors Comnitel paid a hefty price for the new capital. It initially set a target of giving away 20-30 per cent of its equity in exchange for #15 million. The result was closer to 30 per cent. The lessons for the estimated 40 Irish software companies looking for funds are clear. First, you must have a topclass product. Second, get a strategic investor or the pure venture capital companies will make you pay dearly. Either way, it will not be easy.
