The Irish VC ep26: John Flynn on ACT, Tech, and the Evolving Start-up Ecosystem

Hello, and you're very welcome to this episode of the Irish VC, and I'm delighted to be joined by John Flynn, the managing partner of ACT. And as we've mentioned before in this podcast, this year the IVCA celebrates 40 years of its existence. And while John wasn't around in the IVCA 40 years ago, ACT were certainly one of the founding companies and one of the founding members of the IVCA. So John, you're very welcome, and thank you for joining us today. I, Sarah Jane, very happy to be contributing. Great. And John, just thinking about that kind of 40 years, which I suppose it's a milestone and hopefully not a millstone, because 40 years is a fairly significant chunk of time in Ireland's industrial history anyway. If we think back 40 years ago was a very different Ireland, maybe just talked to us a little bit about how ACT became involved in the IVCA and your highlights of the last 40 years in this industry. Sure. Well, I give a little bit of context to my background. And back in 40 years ago, I was still in school to say, so I wasn't involved. Just to just say. Just to say. But I think ACT was a captive fund as part of AIB originally and then spun out in 1994 as an independent company where AIB have been a very good support of us in our funds ever since, but it is an independent company. And I joined in the late 90s. And my background really was not a financier at all. And my core degree was in physics and maths. So I was seeing myself as more of a technologist. And I spent about five years after graduation working both in the UK and the US as a software developer. And over that journey, I kind of moved into, if you like, business development and sales and then decided to leave. There was an opening to move into their consulting division. This was really in a company called ADS. And at that time we were selling the company. We sold it successfully to Hewlett Park Arch. And after that time, I came back to Ireland to do an MBA. And when I finished that, I kind of had, in my mind, before I started it, that I might go into consultancy. But I kind of think during that course, I kind of decided, look, I don't want to go into a kind of service level area. I wanted to get closer to being an operator. When I had left college, I actually had an idea to start a business at that time. Little little little streak of entrepreneurialism in there. Well, I always define an entrepreneur as somebody who not just has the idea, but takes some action on the idea. And I'm sure you guys fell down on the latter part. So I did have a great idea, but it didn't really translate into much. So it's kind of a test I have for any entrepreneurs that I look at today. But I certainly failed that test. But I did want to get closer to my kind of deep tech roots. And I met a guy called Nile Tarral, who was the leader of ACT at the time and had led the the spin out of ACT from AIB. And he observed, and they had a very successful first fund, which was very focused on developing indigenous businesses, but not really focused on tech. But he like me had a tech background. And he had seen some of the seedlings of what Ireland was heading into at that point. And let's call it the late 90s. And we had some great spot successes like CBT and Iona with Unreal 2 and Chris. And they had really shown that there is something changing and something different coming out of universities. And there was an opportunity. And I bumped into Nile and kind of explained my backstory that I was really a somebody who'd worked as a software developer in business development had been through a company that got sold and really wanted to go back to deeper tech roots. And he asked me to join for a year or two instead of counting you any harm. And I did. And I'm still here. So it's kind of one of those industries that sucks you in. And you meet some fantastic people. So back in those days, I think we were very focused on semiconductors software. And what I call web 1.0. We did have some really interesting companies. We had BCO, which floaters and was eventually sold to ADI S3, which kind of like a stalwart of semiconductors in Ireland still exists. We've added the S3 was actually three companies of which two of them we have ex-aditioned. We still have one remaining. It's been a super investment for us. And then there were many others in the web 1 space. We met great entrepreneurs like Terry Cannelli and Stockbite and another software area. I had invested with Enray on a second time round with Kate Clear, which is basically went on to sell to work day and now work day employees. I think over two thousand people in Ireland and another company, Kena, Sopin, Belfast, which is on the stock market in the UK and probably employees that many people as well. So it was a rewarding journey, but I'd say it wasn't what added difficulties. And I'd say it was laced with excitement to begin with. And then I realized this is a real apprenticeship. And it was upset by a couple of different key milestones along the way. And I'd say that the big reset I would say happened in the tech crash around the 1990-2001 period. Where I always felt that Ireland had got, you know, we'll fast forward in a few minutes. A lot of the core ingredients to be a really great startup nation. And they were starting to be put together then, but it was kind of reset, heavily reset across the globe. But, because I think at that point in time, back in the late 90s, I remember every quarter traveling over to Silicon Valley to meet with board members from Axel and Greylock. And it was at a time where nobody knew about venture. You try and explain what you did to people and they just wouldn't know. It wasn't commonplace, it wasn't understood. There wasn't until late about 10 years later when you start the Facebook era, you know, people started to recognize what you did for a living. But it was nonetheless very exciting, very exciting, but very important. You kind of mentioned that recess in the '19 kind of, I suppose, the, yeah, the dot com kind of crash. And do you think, because it's interesting, you're the second person who's referenced a second person from our industry, who's referenced that time to me. And has said that maybe we haven't actually fully recovered, that some of the things that we had in place then and the trajectory that we were on was maybe more positive than the trajectory that we're on now. And that some of the firms themselves have never quite recovered. What would be your view? My view would be that we've more than recovered, actually. I do think we had some key pieces of the jigsaw coming into focus back in that period. But I think, you know, like everything in life, you know, what's really worthwhile comes with some difficult periods. And I think the periods true, the 2000 periods, 2000, 2009, was a tough one for the tech industry. And it was made even tougher because it was kind of paralleled with an in Ireland with a booming economy. And I think that was, you know, it felt like we were into the headwinds when the economy here was kind of growing, you know, with it, you know, largely property-based kind of booming sort of society. But I think there was a huge amount of lessons learned in that period. And we really earned our stripes and learning. And I think today, when we fast forward, you know, it's completely different. I mean, I just feel that the ecosystem that we've developed is just, you know, completely different to what was back, you know, 15 years ago. And I took over the firm in 2009. And I would consider the pre-2009, 10 years as being a real apprenticeship, but the post-2009, you know, the world did change. You know, post-the financial crash, I think there was a rotation in some ways, into innovation. The governments realized there was a huge impact, a huge opportunity that was some real evidence of what FDI had done for Ireland and particular could be replicated with an indigenous industry that could have aspirations to build companies of that scale. And I think the government led from the top. And I think some of the agencies that we have now, and Enterprise Ireland and Isof, has been too really strong. I think the entrepreneurs have got better, the VCs have got better, you know, the LPs have got better. And I think it's a completely different phase. And I think it's been growing from a really solid base from about 2009 onwards. Okay, that's good. And it's good to hear. And we always like optimism as well. And, you know, during all of that time in the industry, like what would you say the biggest change to the day-to-day job or how you do business has been? From when you started to today? Well, you know, there's always many changes and something stays the same. But, you know, I think in terms of the job, you know, there's a lot changed in the industry over that period. So I mentioned the ecosystem. And I think you know, now we're not trying to go down to one university or we're not trying to talk to, you know, a cohort of maybe 10 people that have done it before. But it's much larger and we've got like, you know, accelerators, like institutions like, you know, Dogpatch, HBAN, you know, EII, Isof, repeat entrepreneurs of which there's a huge cohort. And not only just repeat entrepreneurs, I think eggs that are entrepreneurs and we've now got, you know, from an act perspective, we were sitting down recently and looking at AIT companies that we've got board experience, non-executives, CEOs, founders, and all the other functions that could build out. So I think the job today is a lot more complex. The ecosystem is way more developed. So it's a more positive environment, but it's a busier environment. Yeah, and you know, you touched on it earlier and you kind of referenced it there about exits and, you know, your own kind of entry into the industry was through a company being sold and we have numerous examples of that, you know, through throughout kind of our industry in Ireland. And, you know, in terms of the exit environment and the global outlook, that's been a little bit slower in recent times, you know, how essential is a thriving exit market for repeat entrepreneurs and recycling? I look, I think it's essential, but I think if you zoom out from just the period that we're in today and you know, I'll come back to the period we're in today, but if you zoom out and take a sort of 10-year view and look at Europe, I mean, we weren't able to really talk to significant outcomes in Europe and now you've got Revolution, you've got Spotify, you've got Skype, you've got Whiz, you've got Clarna, you've iPad, and you know, and we've striped that we can claim, you know, as strong Irish connections, Irish founders. So, you know, I think the exit environment and the role model successes are emerging and I think they're only going to get better. In terms of the current environment, I mean, I think we've had a very strong exit period from about 2010 to 2022. So, we've had 12 very, very strong years. And, you know, with that, I think the VC market has had to grow significantly, I mean, we've 10xed over a 10-year period in terms of quantum invested both globally and in Ireland. So, fun sizes have got a lot bigger and liquidity in terms of trade sales have got bigger, but are probably a little bit lighter on the ground right now. But what has changed is the maturity of, you know, growth investors. And what I've noticed in the last few years is that, you know, it's not just trade sales that can generate liquidity, strong liquidity options. It used to always be the case that trade sales were seen as the best way to get immediate liquidity for founders and all the stakeholders in the business. And it's a recycling industry, so you need that. But I think, over the last few years, we've found that a lot of financial investors actually have an interest in buying out our stakes. And they're competitive with the trade prices. So, you know, there's just more capital at the late-stage growth funds that are prepared to do secondaries that opens up a whole new opportunity set for us. So, I think if you're going to be narrowly focused on trade sales, you can find it's pretty dry, a dry path right now. And, you know, we had hoped this year that that tends to come from is the IPO window open or closed, as they say. And right now, it's pretty closed. And it's pretty closed, even though we told we were going to have a great year this year. I think the charm of story of US and the whole sovereignty issues that are emerging over the last month or two have firmly shut that door. And when doing that, it kind of puts a lot of companies in a position where they're concerned. They don't want to spend capex, they don't want to necessarily buy companies. They don't even want to expand their employee base. So, investment decisions get frozen when there's uncertainty. And I think that's not helpful. I think it will get resolved. I think there are silver linings to all of that. And I think right now, we're leaning into financial buyers that we think are more open for business. Yeah. And, you know, you kind of mentioned reference that you think it will get solved. If you were to gaze into the crystal ball and, you know, taking that perspective of the last 40 years, and what might happen over the next 40 years, where would you lay down your chips? Yeah, well, look, I'm, you have to be an optimist. You do in this industry. But, you know, I think if you add all the things together about our, where have we got to over the last 40 years, and you look at the kind of draggy report that we all saw last year, I think there's an improving and emerging, louder narrative about Europe wanting to stand up. And I think what we've seen in the last few months on a global basis of trade is going to have some real silver linings, as I mentioned. And I think one of the silver linings will be a real coming together in Europe. I think it presents huge opportunities to build much bigger businesses that are going to be focused on key areas of sovereignty around energy, around security. And I think those opportunities are going to be easier to build as a result of what's happening right now. And I then think we're going to revert to trading blocks that have their own sovereignty, if you like. But it's not going to be, when we talk to VCs in the US, they're still very interested in our European businesses. They still want access to a European market. And okay, the value chains are going to have to emerge, but we're not established businesses that has to undo stuff. We're in the lucky position where most of the companies we're invested in, we're building upwards. So we can build a supply chain for US customers in the US, and we can build a supply chain for European customers in Europe. So I just see it as a shift in goalposts, but I'm very optimistic that there is with those shifts, there's opportunities. So if I look 40 years out and I look at, you know, those particular pieces coming together, I think we can look forward to another 10X I think, and with that, we I think we'll see some real GDP mover companies emerge from Ireland. Okay, and that kind of brings us neatly on. I'm going to circle back to some of this in a little while, but it does bring us neatly on to the question of, you know, either your best investment or the one you're most proud of or the one that's the most memorable. Yeah, so I mean, we've probably sold over 80 companies over the last, you know, since since I've been involved. And I guess in the last 15 years since I've been managing partners, probably close to 60. So there's lots of companies to talk about. Yes, it's like asking do you have a favorite child? A little bit like that. And I think, you know, but as I mentioned about the financial buyers, I do like financial buyers, which I didn't, I mean, I've changed my mind on this. I used them to like them five years ago. There was always that a discount to the market price where I really like about financial buyers now. And I like, this even black just four or five years ago, we still, you know, I mean, overall our exits, we've probably generated enterprise value of about four and a half billion. But and one very proud exit was Decoave, which we sold in 2000 for about 400 million. But, you know, that was to a trade buyer and it kind of feels like the end of the journey, which is always a little bit or sweet. And with, you know, what I measure by, you know, what when you ask me what's your best eggs that I kind of look at, okay, returns are probably number one. You know, I suppose impact is probably number two. But enjoyment is kind of probably number three, but, you know, it's a close number to number one and two. And, you know, most of the, most of the companies that I've personally been involved in, I actually become really good friends with the founders. And we both learn, I hope, from each other. And it's just amazing to see how they flourish, how they grow, how they build their teams. And to go to a company that's actually grown to maybe 200 million in revenue with an established kind of like FTI style headquarters based in Dublin. And it'll be part of it. So the two that I'd highlight are probably cubic and echo. So in cubic, we were a seed investor with Barry and Shane and Dave. And, you know, they're just great guys. Really enjoyed how they built that the team, how they were so culture focused in building their business with a really vision and just huge energy. And just relentlessness. And, you know, I guess the returns on cubic first off, you know, I mean, Barry's built a business now from when we got involved at about a 20 million valuation to a 1 billion valuation. We have taken liquidity off the table. Our seed investment was probably about 10 years ago and generated about a 17X. So the returns were very good. But the, the, the, one of the interesting things there was that within our phones, we like to bring our LPs in. So we probably invested in totaling about 8 million into cubic. But some of our family office investors invested about 4 million and ice of invested about 10. So it was over 21 million that we actually had invested, we look across the kind of like act ecosystem. So that was very satisfying to be able to not only make a good return for the fund but also leverage in our private LPs and Isof in doing that. And you know it's a company now that has about a hundred million in revenue. It's growing very quickly and we're still a shareholder. So the fact that it's a soft bank deal meant that we we were able to stay with financial investors, you're not looking at a trade buyer. So they they actually don't mind you and want you to stay on as an investor. So you're not removed from the journey. It's really nice to see that although we're not as involved as we were. It's really nice to you know be able to find out what's going on. And the same with the echo guys. So echo was a piece of paper that came into us with two guys that had huge experience in buying and building companies in the software security space. And we just saw that experience is so fascinating that they'd done this before in the US. They wanted to do it for Europe. It wasn't really you know I mean they wanted to do it from Ireland as Irish people and build a company and they've gone from just the two of them when we met them about 10 years ago to about a thousand people and about 200 million in revenue. And yes we've we know we trade a lot of our stake at about a from a seed valuation of less than 10 million to our most recent valuation was about 355. So again you know very satisfying returns. We brought in LPs. We brought no other VCs into that picture. And it was easy to explain as a business because it had a very odd thing called profits. So our LPs really liked it and they all got involved. A lot of them got involved and they all made great money. And we're still great friends with Johnny and Owen and they're just great guys and it's the most you know I'm not saying I'm not great friends with all the exits that sell to trade but it's it's just a really interesting feature to be able to continue the journey. Yeah and I think you know I do think obviously you know VCs are financial asset class so there's you know there's always a planned exit but I think the the effort it takes on everyone's behalf investors and founders to get businesses to that stage it really is lovely when you can you can stay in and have some level of involvement and I think it's particularly lovely when they you know they stay and grow as you as you mentioned out of Ireland you know that's that's a wonderful benefit that everybody enjoys. It's a huge benefit. I mean I do think the VC world and you mentioned change over the period. You know a lot of the changes are you know the ecosystem is said but also you know the opportunity says has got better. The world is completely flash when it comes to technology now and that's why we're seeing some great companies getting built out of Europe you know you've you've had this and this has only happened in the last 10 years where you've seen open source you've seen the internet you've seen data centers you've just seen that capital willing to move from Silicon Valley and invest across the globe and I think that's a that's a really positive change. I think we need to stand up ourselves and and react to that change we've seen the growth of VC in terms of capital but sophistication in terms of exit markets and we've seen innovation cycles get tighter and tighter and with each innovation cycle be it you know mobiles and cloud now AI you know it's not only faster but it's bigger the opportunity set keeps on getting bigger. I do think we're we're in a rewriting the investment playbook at the moment I think yeah AI is very different to what we've seen in the past and I think it's a huge learning curve for both entrepreneurs and investors and that you know the speed at which we got used to have in cloud which was fast was kind of like everybody looking for a North Star of a 3x 3x 2x 2x kind of growth rates and that's what you were reading in in the valley was the was the North Star if you got to there you got the optimal valuations along those different junctures from seed to series A to series B. Well that book has just been rewritten in the last year and you know we're starting to see companies that are completely breaking those walls down like companies growing from zero to a hundred million in less than two years you know we've got cursor both lovable you know mid-journey a lot of the AI companies are now actually rewriting the rulebook however with that comes other challenges and some of the other challenges are you know it's it's it's harder to retain the revenue and the biggest issue if you talk to usvc's at the moment is what is the most that we have around this revenue and there's a what I'd call a kind of a prosumer our consumer kind of feel to some of this revenue growth whereby you know it's it's all of the attributes of GitHub and open source scalability features are very very easy to turn on but they're also easy to turn off so this kind of consumer fields which is kind of uncomfortable for a VC that likes to I mean we concentrate on enterprise and deep tech so we've never really been a consumer and don't really understand consumer behaviors I would say as a VC and there are VCs that do that very well but we we'd have stayed away from that and concentrate on enterprise and deep tech but what we're finding now is in this AI world that there's consumer style behaviors and so there is a rewriting of the investment playbook and what it takes to be successful. Interesting very interesting I always find your your insights really you think about things in a slightly different way John that's why I'm kind of glad you you had the time to to talk to us today I have two more questions for you and one is around you know for some of the people who will listen to this podcast they they may be in you know in the realm of seeking investment or coming to you at some point in the near future maybe you could share with us you know what are the biggest reasons or the main reason why you you know you don't invest in a company because you've talked very well about the the successes but what is the number one I suppose controllable that if a company is coming seeking an investment that you would you would you would advise. Well the first thing I'd say is that venture isn't really for every company and you know I think you know venture if it's the wrong tool could you know can can destroy very good companies and unfortunately I've seen you know companies that were very solid businesses raise venture from some of the world's best VCs and the VC objective is to grow at a certain pace and they lose interest if the company isn't growing at that pace and sometimes it can break companies and it's it's a shame to see companies I always feel that if a company gets to 10 million in revenue they should survive. Yeah if a company gets to 10 million in revenue is heavily venture back and has to reset its valuation what was a great idea and could be a great company forever in Ireland or anywhere could be destroyed by venture by being over capitalized too early. So I guess you know when I say you know why would we turn down an investment sometimes it's not that it isn't a nice business and in fact it could be a nice business but it's not just suited to what we think the journey that we want to go on and it's it's a small percentage of companies so I guess there are other routes and there's nothing wrong with you know bootstrapping a company in fact I actually really like founders who make as far as they can by bootstrapping and but to answer your question I guess market timing is probably one real reason because if if something's bootstrapped to be a nice business but the market opportunity is in the short term and you've got that opportunity set to meet that opportunity are the products set to meet that opportunity you probably do need venture and it probably is a good fish and you know when we look at seed investments we put a different hash on we're kind of a we are a multi-stage investor so at seed I guess it's always going to be about the market and the founder and more about the founder than anything else so if if one of the key reasons I would probably hesitate on an investment is if I felt there was a mismatch between our ambition and the founders ambition our timelines I kind of real read flag if there's multiple founders and we feel that they're on a different page to each other so it might that be that there's some conflict of some forms but a lot of the time when we turn down businesses it's it's not that it's never going to be right for us and we try and be as constructive as we can and so to say look here's what we think is not quite right today but I don't know how many I mean in deckaways business I probably met here on Connell over a period of 10 years before I invested and the challenge is always you know for to keep a relationship with a founder until the intersection and the intersection in that case was you know he was doing some really interesting stuff in semiconductors but the road map that's very clearly laid out as standards road map he needed to intersect with an investment just ahead of when the road map was right and it's published so you know every time we meet we go oh look look let's look at the standards body and see where they're going with this wireless standard and it's Until they started really talking about it, I said, "You know what, Karen? Now is the right time." And so it turned out it may not be because we don't like it, just we don't like it at this time. That can be very beneficial to founders, because the biggest mistakes we tend to make is about market timing, and we're prone to making mistakes as well. And that is when we invest, we spend too much before the market actually matures. And that is a death trap for a company that has to go back and raise more capital, having, say, invested in a sales force before the market is ready or you've got product market fish. So it's different. It's a seed, it's a lot about the founder, it's always about the market timing. And as you move into expansion sage, it gets more about more detailed product assessment and competition. And it's really about traction and where you are in terms of evolving your product and product roadmap alongside or against other competitive offerings. And it gets harder because it is a global market now. So we concentrate our investments largely in Ireland, but our businesses global and all our founders know that very well. And they're always assessing their offering against other global offerings. So it makes the opportunity set so big, but it makes the challenge so much bigger as well. Yeah. And my final question, kind of bringing it all together a little bit because you have vast experience in the industry and great success. We talked about looking back 40 years and maybe looking ahead. If you were the Minister for Finance or the European Commissioner with responsibility for this area tomorrow, what do you think are the key things that could really firepower this industry and European and Irish economy for the years to come? Okay. Well, I would say this wouldn't I, but I think we need more capital. And I think what's happened and what's been great is the government's loud institutions directly have done a super job of standing up to this opportunity across EIF, across EIB, across the more locally in ice of the EI. And I think at the bottom, I think angel investors that have touched off and had success are great at giving back and helping other entrepreneurs. And I think as a VC, I think the bit that we feel is always missing is the institutional capital. And I think that we need to work hard as a if you like an ecosystem to see how we can unleash that because that's the difference between Europe and the States right now. It's the institutional capital there, which is not government. So it's not really the Minister directly. It's indirectly. That we encourage institutional capital and unfortunately we are talking into pension funds. And traditionally we had a load of pension funds in our in our funds. And for, you know, regions of it is an liquid asset class. It takes time. It takes patient capital. But one would think that pension funds are very, very well suited to that. And in the States, they've managed to, you know, solicit that capital into the market. And I think the returns have been fantastic over the last 10 years. So it's not a returns issue. And maybe it was at one point in time, but it's certainly not now. I think it's really around, you know, the operational side of it, the regulatory side of us and how we make it attractive for pension funds to want to invest. And I think there's a body of work that's commenced there. And I hope we can solve that. And then, you know, just two other points on what would make it great and what would I advise. I think we do stand at a very interesting precipice right now with what's going on in the US. What made Silicon Valley super, super as an innovation culture was obviously the clustering. But, but it was also research, university research, core research, deep tech research. They have leveraged off that so well. I mean, Stanford is the unicorn of unicorns of universities. And this new administration of the US is trying to turn those taps off. So that's a problem for, I would say Silicon Valley. It's not an immediate problem, but given innovation cycles are so quick, I think it's going to become a fairly immediate problem. And I tell the thing is that, you know, there's a there's a movement to weigh from immigration in the states. And that's the second pillar that made Silicon Valley great, attracting the smartest people across the world to Silicon Valley with the best research. And I think we should really observe what's going on with those two trends and sort of say, you know, if we can tackle immigration to our benefit and concentrate and leaning into the research at a deep tech level, I think that along with the capital, you know, sets us up for a really, really positive and equalizing kind of opportunity with the US. If we look forward 40 years and see, you know, where the next wave of great companies going to come from, I do not see why it can't be from Europe, I'm even from Ireland. Brilliant. Thank you, John. And you're one of the few people that I've spoken to in recent times who has more optimism and positivity about global economic events and the negativity. So that's also a bonus, but thank you so much for your time today, John. Thanks Sarah. Take care.