BUSINESS OPINION:Long delays and change in tack raise questions but Cowen's ambitious plan could still pay off, writes JOHN COLLINS

MORE THAN 18 months after it was first mooted Taoiseach Brian Cowen last month finally put some flesh on the bones of the €500 million venture capital fund that is designed to transform Ireland into Europe’s “innovation hub”.

The State will contribute €250 million to Innovation Fund Ireland over the next five years – €125 million from the National Pension Reserve Fund and €125 million from Enterprise Ireland. It is hoped this Government funding will attract a matching €250 million from “top-quartile” venture capitalists, ie some of the leading names from Silicon Valley and Boston, who will establish their European operations in Ireland as a result.

At the launch of the fund at the New York Stock Exchange, Cowen described this fund as “a key pillar of the Government’s Smart Economy strategy” and painted a vision of the future where Ireland is “the best place in Europe to start and grow an innovative company”.

The Taoiseach and his advisers cannot be accused of lacking in ambition for this project but is it likely to succeed?

The delay of a year and a half between the first announcement of this fund and its launch last month is not encouraging. It should be noted that international investors will not be asked to formally express interest in the scheme until September. This suggests it will be almost this time next year before Innovation Fund Ireland makes its first investments.

Since December 2008 we were told that the National Treasury Management Agency (NTMA) was “road testing” the idea on international markets, while at the launch it was suggested that conditions had not been favourable for raising venture capital before now.

On the plus side the Taoiseach’s department and the State agencies have not been sitting on their hands. Officials from the NTMA, Enterprise Ireland and the Taoiseach’s special economic adviser made a number of trips to the US to meet with venture capitalists in Silicon Valley and Boston. Cowen also entertained a number of US investors at a dinner in Farmleigh – much to the chagrin of the indigenous investment community who weren’t invited.

The upshot of all this is that the operation of the fund has evolved. Initially it was hoped top-tier US investment houses could be convinced to establish a European presence in Dublin that would invest the €500 million fund exclusively in Irish companies.

The discussions with the US firms have informed a more flexible approach by the Government which is now looking at the ancillary benefits of having some of the most successful global investors based here.

The change in tack is an implicit admission that there simply will not be enough Irish start-ups with potential to invest €500 million into over the next five years. It also raises a politically thorny issue – State monies could end up being invested in overseas firms at a time when the Government is looking to make cuts of at least €3 billion in next year’s budget.

Cowen’s comments about the poor state of venture capital in Ireland have irked local VCs. But with €250 million on the table and American firms unlikely to want to establish operations here from scratch they are gritting their teeth as they seek to work on building alliances with US peers.

Israel has been cited as a successful model for the current plan but it is not that different from schemes Enterprise Ireland has operated to co-invest with domestic VCs since 1994. The current Seed Venture Capital Programme 2007-2012 has seen Enterprise Ireland invest €138 million alongside the private sector.

Although VCs might not like to admit it, the investment scene in Ireland has been less than ideal for most of the last decade. With due respect to Paddy Power, it is probably telling that the bookie now claims to be the largest e-commerce operation in the land, rather than any of the firms that have been nurtured by VCs.

Given the high-risk nature of venture capital many of the firms backed by the new fund will fail, but to deliver a return to its investors it only needs to back a small number of big successes.

It is comforting then that the Government has appointed an experienced investor, Damien Callaghan of Intel Capital, to chair an advisory board for the fund which also includes successful internet entrepreneur Ray Nolan and experienced technology executive Bernie Cullinan.

While well-intentioned there is no guarantee this fund will have the desired effect of creating thousands of jobs and changing the focus of the economy. But given that venture capital investments have a five- to seven-year lifespan, most of the current players are likely to have left the stage by the time we find out if Innovation Fund Ireland is money well spent.