From Ireland: Much in Tech Startups Familiar to Illinois, But Not All – WP Original
Múineann gá seift. (Need teaches a plan.)
By: Mark Glennon*
A strange sense of familiarity often strikes visitors to Ireland from Chicago, and no doubt from much of America. That’s no surprise given the ethnic background of so many of us, but spend some time looking at the technology startup community here and you’ll find it goes a wee bit furter. (They need to learn to pronounce th properly, as we do in Chicago — d.)
Illinois’ startup sector indeed has much in common with Ireland’s. The sector has over-performed in both despite sub-par economies for 15 years. Some of the reasons for their counter cyclical success are likewise shared, though there are notable differences. They face distinct challenges going forward but each may, at least in part, gain from considering the experience of the other.
Two economic storms slammed Ireland in the last fifteen years, both of which were more severe for Ireland than for Illinois. First, the collapse of the tech bubble in 2000 was exceptionally harsh on Ireland. For several years before, Ireland’s economy floated at the very top of that bubble, internationally hailed as the “Celtic Tiger.” Today, the Irish self-ridicule over that hubris is widespread — a period of “BMWs, the biggest debt in Europe and second homes in Capri,” as Fodor’s puts it, which really never suited the Irish.
Then, in 2007, just as it was recovering, Ireland was the first in Europe to sink into the Great Recession. It hit Ireland particularly hard. Unemployment soared to 14% and real incomes sank 18%. A grossly over-leveraged banking system unraveled, resulting in national credit downgrades and severe austerity. Only today is Ireland reaching pre-recession status by most measures.
But Ireland’s startup sector survived and grew through it all. It’s now an established and meaningful piece of the Irish economy, not unlike Illinois’ — proportionate to size, that is. Keep in mind that Ireland is tiny — just 4.7 million people compared to Illinois’s 12.9 million. And Dublin’s population is less than a fourth of Chicago’s. (Interestingly, Ireland’s population still hasn’t recovered from a drop of almost 50 percent from around 1850 to 1950 from famine and emigration; its population today remains 40% less than its high near 1850.)
Its tech startup sector performed particularly well since the start of the recession. More than 1,000 companies have raised over $2 billion since 2007, employing some 30,000. Today, the “Silicon Docks” is Dublin’s tech epicenter, where hundreds of startups, incubators and accelerators are located.
The main reason for its counter cyclical success should be familiar to Illinois. Need, indeed, teaches a plan, and a prospering tech sector by no means proves that everything has been swell in Ireland or Illinois. On the contrary, a struggling economy means good people striking out on their own, lower rent and other costs, and abundant, inexpensive labor. In Ireland’s case, a lower Euro helped further in the past year. It’s now approaching parity with the dollar at about $1.10 per Euro. To put it in meaningful terms, a pint of Guinness is four or five bucks, and it’s easy to get a great meal for two for under $50.
Labor is the big one for startups, and Ireland has a special advantage attracting tech talent compared to Illinois. Tech workers from the entire European Union are generally free to come to Ireland to work for startups or on their own, with few restrictions. Ireland thereby has access to a huge pool of talent — the EU’s population is 60% larger than the U.S.’s. Those workers swap out easily depending on need. Talented workers commonly come to Ireland for a couple years, stay if things work out, return home if they do not, and are replaced by specialists with the more current skill sets.
Illinois, too, has a labor advantage, though in different form. Ours is indigenous — huge numbers of talented graduates from universities in Illinois and neighboring states. Illinois’ Department of Commerce and Economic Opportunity has wisely begun emphasizing that asset in its marketing. Our challenge has been keeping them here upon graduation.
Ireland’s biggest advantage is for larger companies, but startups benefit indirectly. Its top corporate tax rate is just 12.5%, about the lowest in the developed world. In the U.S., the top corporate rate is 39%. Illinois adds 5.25% plus a replacement tax of 2.5%. Startups typically don’t care about taxes because they won’t be paying them for years, so there’s no direct impact. But large corporations care immensely, so multinationals, particularly from the U.S., have flocked to Ireland, bringing talent and people with them. Amazingly, foreign firms, mostly American, account for about 90% of Irish exports — and Ireland consistently runs a nice trade surplus.
Still more striking, all of the top 10 U.S. tech companies have a major presence in Ireland. They employ thousands: Apple, 4,000; Dell, 2,500; IBM, 2,000; and Google around 3,000. Skim through the list of the other biggest employers in Ireland. It’s dominated by U.S. tech. In total, the Irish tech sector employs over 100,000. Pharmaceutical manufacturers have also flocked to Ireland because of the tax rate. The Irish like to brag that they make more Viagra than any other nation — all for export, they quickly add.
Challenges ahead are entirely different for the two.
Ireland’s cost advantage is being significantly undermined by stunning, recent increases in commercial rents and housing costs. Though the property bust in 2008 cut home values in half, commercial and residential costs have now spiked back up, approaching $50 Euros per square foot for commercial property. Home affordability is now seen as a national crisis.
And there’s no end in sight. I haven’t seen a single crane or evidence of any commercial or residential construction while here. New construction projects actually dropped 20% for the first quarter compared to last year’s. Perhaps banking regulators leaned too far in the wrong direction. After the recession, they incented bank investments in venture capital but cracked down on real estate lending. Chicago’s real estate has tightened, too, but new supply is always coming online.
For Illinois, our big hit is still to come — the impact of the state and municipal financial crises, which has been deferred and allowed to compound. The results will be brutal, but the particular consequences for the tech sector are debatable. Higher taxes, reduced services, more flight of people and employers? Or maybe real reform on the underlying problems, and maybe the counter cyclical history of startups will repeat ever stronger.
Startups and tech have been, by no means, the solution for a troubled economy, either in Ireland or Illinois. Unemployment in Ireland is officially 9.8%, and under-employment is epidemic, as in Illinois. Startups and tech are simply too small to offer a cure. But a lesson from both places is that they help materially.
Ireland is also a reminder that our competitors aren’t just Indiana or Wisconsin, any more than Ireland’s are just the U.K. or Germany. Competition is worldwide. And Ireland is certainly a reminder that our competitors are not enemies. The Irish are as warm towards Americans as they can be, and it’s hard to imagine any visitor here wishing them anything but success. To thrive alongside friendly competitors like Ireland likely will require not just a competitive business climate, but specialization and exploitation of unique assets — the standard ingredients of mutually beneficial trade.
Update 7/24/15: Ireland is now debating what to do with a €1.5 billion surplus and is expecting an exceptionally high GDP annual growth rate of 4.5%.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.