I get a lot of unsolicited email.
So many of those messages are investment pitches, from people who think that it’s perfectly normal to just email somebody they’ve never met and ask for money, as the very first question. I find it odd.
A surprising number are from founders who need more money urgently to keep the lights on. None of them ever explain why their existing investors are exhausted.
Worst of all are the emails I get from companies who have raised most of a round, and imagine that I might be interested in filling in the remainder, without having had any input into their plans or shape or terms of the round.
Delete. Delete. Delete.
I literally built an app to make this easier.
However, every now and then there is a correspondent who briefly grabs my attention. This week it was Adam from London, who sent a message with the subject line “Premier League”.
It started:
Dear Rowan,
I hope you're well.
Yes, thank you Adam … my dear?
I try to look after myself, and appreciate your concern.
He continued:
I wanted to connect as we are currently working on new unique majority investment opportunities with two high profile teams across Europe's top Football leagues - The Premier League and English Championship, which I thought may be of interest to you. My note is intentionally short to maintain confidentiality.
Best regards,
Finally!
I thought they would never ask!
Unfortunately Adam’s timing was poor. At the moment I have my hands full to overflowing with the things I’m already invested in and working on, so I’m focussed on those rather than looking to add anything new into the mix. But it’s fun to dream.
This is not the first pitch like this I’ve got. A few years ago I was approached much more directly with an offer to “invest” in a local professional sports team. I’m using scare quotes because, when I looked into it, the opportunity was a request to invest $500,000 the first year, then another $500,000 the second year, and then a further $500,000 each year for as far into the future as they were projecting. Their business model, more-or-less, was that the costs of running the team - and especially the costs of attracting and retaining the best players for the squad - would cost roughly 120% of whatever the revenue was. The only reason the investment required every year didn’t increase was because they were - quite optimistically, I thought - predicting that income from sponsorship and broadcast television rights would make up the difference.
So what was the point of ownership? I would be able to say I was an owner, and impress my friends (although, I’d probably need to get new friends, as not very many of my existing friends would be that impressed, I suspect). I would be able to attend matches and sit in the fancy comfortable seats.1 I would hopefully get some sweet merch, and maybe even socialise with the players. If the team was successful - on the field - then I’d have the opportunity to be photographed holding the trophy and perhaps given some of the credit for the championship season. But let’s be clear: it wouldn’t be an investment, it would be an expensive hobby.
At least, until somebody else came along who was willing to pay even more for those benefits of ownership. In finance this is called the Greater Fool Theory.
I decided I wasn’t the lessor fool and passed on the investment opportunity.
Anyway, this isn’t a post about football, it’s a post about industrial policy.
In his excellent recent piece in BusinessDesk, Dileepa Fonseka defined that as:
… strategic actions or subsidies by the government to increase productivity and the growth of particular industries.
Source: The industrial policy debate never seems to go away
Every time I hear a spokesperson from a specific industry sector asking for government support, I like to imagine they are the manager of a struggling football team, asking their long-suffering owners for just a few million more dollars to spend on marquee players.
And there is a long list of sectors that expect support - it’s not just the traditional sectors of agriculture and tourism that regularly put their hands out. Two sectors that have successfully lobbied for additional support in recent years include the space sector and the video game development sector.
Even closer to home for me, in the last couple of weeks the people behind KiwiSaaS have been in the news. In their case they are nervous that the $11.2 million worth of funding they receive to run community events and training programs on behalf of software-as-a-service businesses won’t be renewed.
Xero, Gallagher and Datacom - three companies who are at the very top of the list of most successful “tech” businesses we pay TIN to compile for us each year - wrote an “open” letter to the minister, Judith Collins.2 Nick Whitehead, who is the Chief Marketing Officer at Serko - a SaaS business who coincidentally this week announced interim financial results showing total income increased 48% on the previous year - did an interview on NewstalkZB.
In all of these examples the argument seems to be the same: we need help to compete.
If you go back and read or listen to those news reports I’ve linked to above you’ll spot some recurring patterns. The headline is always how much money is needed. Those asking for support never explain how their sector contributes - beyond a vague hand wave to longer-term growth, productivity and jobs.
Even the average egotistical football team owner would, I expect, ask more questions than that before handing over any funds. So, let’s dig into those three things…
Jobs
This is where sectors that use technology at their core should have an obvious advantage - because the people employed by these companies tend to be paid much more than average.
But keep in mind that’s also true of footballers - averages can be deceiving.
Why don’t we hear much more about the specific jobs in the sectors we’re asked to subsidise? The relevant details are: how many people are employed in New Zealand, what they earn (and correspondingly how much tax they pay) and what genuine opportunities exist to increase both of those numbers via government investment (rather than something that is just going to happen anyway).
The government collects income tax from all of those employees, so it should be trivial to compare the amount of the subsidies and tax breaks paid to employers or their industry bodies to the amount of tax collected.
In the absence of league-imposed salary caps, there is nothing to stop footballers from demanding higher and higher salaries until they have soaked up all of the revenue and then some, leaving nothing for the owners (not counting the value of selfies).
I wonder if jobs data would show the same dynamic for those industry sectors that get government subsidies. In other words, does the cost of underwriting a specific sector just expand until it’s greater than the amount that sector ever contributes back?
Growth
I’m the last person who needs to be convinced that investing in growing companies can be lucrative. When a startup is sold for hundreds of millions of dollars it’s a great outcome for all of the shareholders and in most cases also for the employees. This explains why investors like me are willing to contribute capital to highly illiquid businesses - often for many years before they see any returns. Also it also partly explains why early employees are willing to work long and hard - often for much less pay than they could earn in more secure jobs. Both are taking the risk that their efforts will eventually produce outsized returns. I’ve experienced that first-hand multiple times, and it’s wonderful.
But, by itself, that’s not a justification for government subsidies.
Depending on how employee options packages are structured there is usually tax to pay on those gains, however arguably only what would have been collected along the way if people were paid what they were worth.
But because there are no capital gains taxes in NZ, for those who invested capital the gains are entirely private. Remarkably this doesn’t stop some investor groups asking for additional government support, even while acknowledging “a lack of definitive evidence of a causal relationship between tax incentives and better venture and angel investment outcomes”.
If the argument is that subsidies are useful because they help more private companies grow and achieve this kind of outcome then what we’re really saying is that we still believe in the trickle-down effect. We have 40 years of data on this now - how is it working for everybody?
Productivity
It’s not news that that our long-term track record on productivity is poor and getting worse. The question that nobody seems to have a great answer to is: what could we do about it?
It’s likely that collectively (via the government) we do need to invest in areas which can contribute to increasing our productivity.
Note: I said “invest” not “spend”. That distinction is important. The thing that will ultimately make the difference is not how much cash we throw at a problem (or a potential solution) it’s whether it works or not.
So, do these subsidies work? What are the outputs? How will we know?
We seem to go to great lengths to avoid ever asking this question.
Maybe spending $11.2m on "peer-to-peer networking experiences”, the annual Southern SaaS conference, and a guided delegations of NZ SaaS companies to SaaStr in the US will pay back. But before I invested that much in something like that I’d want a lot more information about who this actually helps, what constraints they currently have and how doing any of the things this funding is for will remove those constraints. The real question is: how would we know this is working? It’s far from obvious to me.
And, even then, I’d question why those companies that will most directly benefit from this, which in this case includes many of the largest “tech” companies we have, shouldn’t pay for it themselves, if the benefits are so obvious.
Finally, I’d want to know the timeframes. When does that investment phase out and become self-supporting? Or, like the $500,000 annual football team owner stipend, is this something that will need to be re-invested every year?
If you’re going to write an open letter to the minister asking for support, it should at least include all of these details, so all of us can see what we’re subsidising and who will benefit as a result.
To paraphrase Cuba Gooding Junior in Jerry Maguire: show us the money.
If you think the government should invest in your sector then explain the return-on-investment.
And, while you’re at it, you might also like to nominate the other sectors that should pay more or receive less support, in order to cover your costs.
Work with me?
Hoku Group, our family office, is recruiting for a Finance & Operations Director.
This is a unique senior role, in our small team, and one that won’t come around too often. If you’re interested hit the “Apply” button on Seek:
https://www.seek.co.nz/job/75457212
Headline Photo by Joshua Hoehne on Unsplash
This reminds me: I need to write up the story of the time I watched the All Whites beat Bahrain to qualify for the FIFA World Cup from the best seats in the stadium, along with Wynton Rufer, Sam Morgan and Terry Serepisos. A chocolate fish to the first person who can guess what one thing the four of us have in common.
The NZ Herald called it an open letter, and included some quotes, but I failed to uncover the full text when I went looking for it. You’d think that KiwiSaas would publish it on their website, but apparently not. Perhaps your Google-skills are better than mine?
Four RC boys x
The connection is Rongotai College… Says the Wellington College Old Boy