13th June, 2021

Week 24/52

Photo: by me, on the Old Ghost Road

We talk about building an ecosystem of innovative technology start-ups in New Zealand.

In previous weeks I've tried to define what this actually means.

I included a detailed recap last week, so won't repeat that, but here are some links:

• Part 1: Start-ups

• Part 2: New Zealand

• Part 3: Technology

• Part 4: Innovation

• Part 5: Ecosystem

But why? What outcomes do we want? What's the underlying motivation?

Perhaps if we understood this, we would have a better basis for debating the various things we all do to try and make it happen.

Over the next couple of weeks, let's try to end where we should have started...

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🏷 Define (part 6)

What do we want from this ecosystem of innovative technology start-ups in New Zealand? ¹

There is a long list...

Is it more early-stage companies? We love to count the raw number of start-ups. But usually without too much consideration for the current health or future prospects of these companies. Perhaps if we all just start enough companies some of them must go on to be successful. Isn't that how the maths works? Throw enough spaghetti at the wall and some of it will stick! 🤨

Is it more high-growth companies? We celebrate companies with high revenue growth. Sometimes that growth is eye-watering. Bigger is better and getting bigger faster is even better than that, right? Or, to paraphrase Thoreau (see the quote), should we prefer companies that grow a little slower but are far less volatile as a result?

Is it more established companies based here? For a time in the 1990s we fetishised the idea of creating our own Nokia in New Zealand (as I noted previously, this is not a specific ambition you hear anymore!) Interestingly we have one now in Xero, which is a large and globally successful technology company still headquartered in Wellington. Did we get what we wanted from that?

Is it attracting international capital? One guaranteed way to get attention in the ecosystem is to attract a high-profile international investor. This seems like something we want to encourage. For example, NZTE has an excellent team of people working on in-bound investment - helping to connect local companies with international investors who can help them grow. On the other hand…

Is it retaining local ownership? When Minister David Parker re-booted NZVIF as NZGCP in 2019 his stated aim was to “help keep more start-ups in New Zealand for longer“ as they expanded beyond their start-up phase. We only seem to worry about “losing” companies overseas when they are acquired completely, when actually this happens whenever we raise money from (and consequently sell shares to) new investors.

Is it better paying jobs? This seems obvious. We have a significant productivity challenge: we work longer and harder (34.2 hours per week compared to OECD average of 31.9 hours per week), but produce less ($68 output per hour compared to OECD average of $85 per hour). Given that technology jobs typically pay so much more than average and technology companies are more productive than average, that would suggest that more people working on these sort of companies could be a big part of the solution.

(This does beg the question: how many more of these jobs have we actually created in the process of growing the ecosystem? I'll come back to that in future weeks.)

Is it attracting talented and qualified people from overseas? Paul Callaghan famously suggested we need to “be the place where talent wants to live”. But, there are two aspects to this: We need to retain the talented and qualified people who are born and educated here and we need to attract the best people from all over the world to come not just for a holiday or to hide in their bolthole, but to live and work and be part of the solution.

Is it tax revenue? Ultimately we need these companies to actually contribute more cash to the local economy than they take, right? The easiest way to measure this would be to look at the tax paid. I'll write a whole separate post about tax soon, but in the meantime it's useful to note that very few start-up companies are profitable (indeed those who have raised and spent a lot of capital often have significant accumulated tax losses to offset against future profits) so when we talk about the tax they contribute it's really going to be mostly GST and PAYE we're looking for.

Is it export revenue? When goods or services are sold overseas this brings money into the country. So another way to measure what these companies add would be to look at the amount they earn from exports. Unlike our more traditional export categories, which involved putting bulky physical things on a ship or plane², many new companies are selling things that are weightless. Plus they tend to be able to generate export revenue much earlier in their lifecycle. Currently a “high” NZ dollar is called a “strong” NZ dollar. Perhaps that will change when we really start to focus on exports?

Is it selling more companies, and recycling the capital? As well as selling goods and services overseas, start-ups sometimes sell themselves to foreign buyers. Indeed there is one school of thought that says the actual product of a start-up is the company itself. But we get very confused when an acquisition happens. Consider how this gets reported in the media. Either we are celebrating the successful end to a long effort to grow the company and create something of value and looking forward to the next phase (both for the business and for the investors who now have more capital to re-invest). Or, alternatively we are disappointed to see another promising local company being sold. Often both!

Is it wealth? Clearly when start-ups go well they can generate significant capital gains for the founders, their teams (assuming they have some ownership) and investors. However, it's not so clear (at least to me) how that translates into collective benefits. We don't still believe in trickle-down, do we? But, we're still seemingly happy to provide direct grants, subsidised funding and significant support to companies owned by already wealthy investors (myself included!)

Is it being the place where great companies are started, or even more esoterically the country where founders of great companies were born? This might seem silly, but we do love to claim success by association, even where that link is tenuous. For example, I'm a huge fan of the company Tim Brown and his team have built at All Birds, but I did have to laugh when I heard a former MP describe them at an NZTE event overseas as a “company of NZ provenance”. Likewise, many are determined to see Rocketlab as a local success story, but at the same time reluctant to use their correct full name: Rocketlab USA.

Is it successful local venture capital funds? That seems like a weird one, but given the amount of money and attention that has been invested in this objective over the last decade, it would appear to be something we’re still anxious to solve.

Is it better local services? When companies are homegrown it guarantees provision of quality products and services to local people. By comparison our local market is often a rounding error to global tech companies. Consider Trade Me, for example. Where would NZ rank in the priorities of a global provider like eBay, if they had “won” the local market? To pick another example, do we care that most of our banks are regional branches of Australian companies? Does that help or hurt local businesses that depend on their services?

Last but not least…

Is it better use of our scarce natural resources? Perhaps as well as the various measures above that focus on dollars we should also give more consideration to where Greta Thunberg's Emissions Curve fits in?³ We can continue to moan about the impact that successful sectors like agriculture or tourism have on the environment. Or we can both put more capital and technology to work on creating new businesses that don’t require us to ship raw materials out or fly tourists in and on improving those that do.

(I'm sure there must be more things on this list that I've missed. Please let me know if you can think of anything.)

Hopefully the problems with this long list are obvious: Many of these things are contradictory. Depending on which we choose to optimise for, the choices we need to make would be different. Until we’re clear about our why, we’re going to struggle to prioritise the what.

In the meantime, we don’t know what we want, but we’re determined to get it!

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🤑 Benefit

Perhaps it would also help if we were more specific about who we’re doing all of this for.

Designers working in software teams sometimes use fictional personas to describe the groups of people they are designing and building products for.

So, in that vein, meet Hugh...

He lives in Timaru. He works for an importer, as a forklift driver in the warehouse and distribution center. He lives with his partner and has two adult children who have left home. He enjoys a beer with his friends on a Friday after work, and normally needs little excuse to relive his glory days as captain of the Boys High School 1st XV.

Hugh is somebody I like to keep in mind whenever I hear people in the start-up ecosystem talk about different ways that the government can help them to grow their business. Often you’ll hear ideas like direct cash grants, subsidised facilities or services, or tax credits for research and development expenses.

Of course these are not just ideas - we currently do all of these things.

There are even some bold enough to suggest that angel investors should get tax incentives (as they do in many countries including Australia and the United Kingdom). This despite the fact that we already have arguably the most favourable tax environment for venture investors in the world due to our 0% capital gains tax rate.

These initiatives are ultimately funded by Hugh via taxes and rates. So what benefits do he and his whānau get for that investment? How can we make these more obvious, so he’s happy to provide that funding?

Asking the question this way forces us to separate the things on the list above that benefit us all collectively from the things that are mostly private - e.g. start-ups create the possibility to make individual founders and investors very wealthy, but that seems unlikely to impress Hugh on it’s own.

I think the answer goes back to the things that Paul Callaghan was talking about years ago:

One of the serious consequences of becoming poorer as a country, relatively, is that we increasingly struggle to afford things that could directly improve our collective quality of life - schools and hospitals and the skilled staff required to work in them, expensive drugs and medicines, infrastructure like communication and transport networks, and warm and healthy places to live. And it makes it harder to overlook options that generate wealth by exploiting our scarce natural resources.

We need to show Hugh how growing an ecosystem of companies that use technology to create high paying jobs based in New Zealand ultimately flows through to fixing some of those things for all of us.

To do that we’ll need to focus much less on what the government can do for start-ups and narrow in on what start-ups can do for the government. That will make a nice change!

I’ll pick it up there next week (and hang in there, we are getting close to a conclusion hopefully)…

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✅ Complete

If I ever got a tattoo it would be a progress indicator showing 80% complete.

This is my rule of thumb: when something I'm working on is 80% complete then I know that I'm about halfway to finishing it, in terms of time elapsed.

PS I don't think I'll ever get a tattoo.

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Top Three is a weekly collection of things I notice in 2021. I’m writing it for myself, and will include a lot of half-formed work-in-progress, but please feel free to follow along and share it if it’s interesting to you.

1. This is not a new question. 2017 yo!

Rowan Simpson @rowansimpson

Here is a seemingly simple question. I’m interested in your answer: What outcomes/outputs does NZ as a country want from the tech ecosystem?

2. As recently as 2019 the NZ Export Awards were sponsored by AirNZ Cargo. 🤔

3. From Greta Thunberg’s 2019 speech to MPs in the UK House of Parliament:

People always tell me and the other millions of school strikers that we should be proud of ourselves for what we have accomplished. But the only thing that we need to look at is the emission curve. And I’m sorry, but it’s still rising. That curve is the only thing we should look at. Every time we make a decision we should ask ourselves; how will this decision affect that curve? We should no longer measure our wealth and success in the graph that shows economic growth, but in the curve that shows the emissions of greenhouse gases. We should no longer only ask: “Have we got enough money to go through with this?” but also: “Have we got enough of the carbon budget to spare to go through with this?” That should and must become the centre of our new currency.