This is the third round of such funding, on top of 200m already committed, and it may be the last. "In five years' time, if we are looking at a venture capital industry still not making good returns, you'd have to question as a matter of industrial policy whether it is possible to make money from technology companies in Ireland, " said Denis Murnane, Enterprise Ireland manager of venture capital.

Some might say the government is already a glutton for punishment: the venture capital industry went through a dreadful few years at the start of the decade. The net internal rate of return of Irish venture capital funds in the years to 2004 was minus 11% over three years, minus 10% over five years and minus 8% over 10 years, according to EI.

Murnane suggests, though, that Enterprise Ireland has little choice but to press ahead. Venture capital investment will be crucial to the growth of Irish "knowledge industry", he said.

"We used PwC to look at the market and see if there was a need for the state to get involved. The venture capital industry on its own is not sustainable, not robust enough, without people like government saying 'we believe in this'."

The argument in favour of government support goes that the VC industry needs critical mass to create a market and woo overseas investment. If 2000 had not happened it would be a different world, but burnt investors are running a mile from high-tech investment these days. Property everywhere from St Lucia to St Petersburg looks more enticing, and big private equity deals are proliferating.

"The only way early-stage companies can be supported is through an equity instrument, " Murnane said. "They can't get loans, and tax-based incentives don't seem to work because people have other options."

In any case, research commissioned by EI from PricewaterhouseCoopers shows that the Irish venture capital industry gets proportionately less support from government than the EU average, he added. "PwC said Ireland is actually behind other governments on state support. We're around 14%, other governments are 16%."

On the bright side, the venture capital industry has grown since the government first got involved in the then pretty much non-existent industry back in 1994. But even with 21 members signed up to the Irish Venture Capital Association, there is some way still to go.

A study commissioned by IVCA to nudge government thinking in the right direction found that venture capital investment in Ireland as a percentage of GDP is still only 0.042%, compared with an average of 0.1% in Europe and 0.2% in the US.

The study also found that Irish VCbacked companies' revenues rose by 13.7% in 2004 to 1.6bn, and that employment in those companies rose by 14.6% over the same period.

"From the state point of view, investing in venture capital is a complete nobrainer, " suggested Owen Murphy of Act Venture Capital, the country's largest VC fund, which will be setting out to raise around 170m later this year.

"If you can keep the indigenous sector moving nicely, the tax revenue alone . . .

with the additional employment . . . would more than balance the books. On top of that, government has made some money."

But sceptics argue that continued government investment in VC is not the answer for Ireland's small businesses. "What is this 175m going to get us that the prior 200m hasn't already?" asked Diane Mulcahy, former visiting research fellow at The Policy Institute of Trinity College Dublin and author of a study called Angels and IPOs: Policies for Sustainable Equity Financing of Irish Small Businesses.

"The idea of the equity gap has been advanced by Enterprise Ireland for the past 12 years, but there is really no evidence of an equity gap, " she argued.

"There is tons of VC money. The reason EI started to do equity and seed capital in 1994 was to close the equity gap. Millions of euro later they are still saying there is an equity gap."

Absolutely, says Murnane. It took the US 50 years to develop a venture capital industry. Israel struck it lucky after the government got involved in the Yozma scheme back in 1991 and 1992, and the government-backed funds exited cash-rich before the bubble burst.

"With all that, if you went to Israel they'd still say there was an equity gap."

While EI is happy to keep investing for now, there ha been a refinement of its thinking. Funds too narrowly focused on a specific sector are no longer likely to be favoured, so out go the telecoms specialists.

Given that the philosophy is about spreading risk and not putting commercially ill-advised artificial constraints on funds, regional funds are no longer flavour of the month. "That doesn't mean we wouldn't support a strong regionally-based fund like Enterprise Equity or Bank of Ireland's Kernel fund in Cork, " Murnane said.

There is also growing recognition that scale is important, both so that funds have the expertise to add value to investments and so that they can write a follow-on cheque. The favoured "sweet spots" for investment will be companies in the "knowledge industry" with strong potential to export.

The new round of investment comes as the venture capital industry appears to be emerging from a spectacular boom and bust investment cycle. Industry sources say things are looking up, with Irish software companies' customers back in an investment cycle, more mergers and acquisitions movement, and more talk of flotations.

"The top quartile of funds are probably doing well, the bottom quartile losing money and those in between are there or thereabouts, " Murnane said.

Enterprise Ireland will, as usual, cut itself a decent deal this time around, Murnane said. Unlike in Britain, where some regional enterprise funds give private investors priority status, the agency is treated pari passu in venture capital investment.

"We are not propping up the VC industry, we are supporting it, " he said. "We are looking for the same commercial returns as the private sector."

The hope is to leverage the new state commitment to generate a pool of capital of between 800m and 1bn. EI wants to encourage VCs to invest in very early stage companies, and it would be "nice" to see pension funds get involved, Murnane said.

"We're putting down a marker saying VC, as an asset class, is something we feel should be supported. If we are oversubscribed 10 times, if people are prepared to put in a couple of billion euro, then I would say the state shouldn't be there. But we're going to have to beat down doors to get people in."