US tech investor trend offers clue to Xero’s rapid rise

First published in the New Zealand Herald on Thursday July 25, 2013

New research from the United States might help explain the meteoric rise in New Zealand tech star Xero’s share price over the past year.

A study by CB Insights, a research firm that tracks venture capital investment, found only 2 per cent of total funding in the internet sector went to social media firms during the second quarter of this year.

That’s 19 percentage points down from the peak in the third quarter of 2011, when social media companies led by micro-blogging service Twitter took in 21 per cent of the total US$3.8 billion ($4.8 billion) in internet deals by VC firms.

New buzzwords have arrived and “big data” and cloud-computing companies are now grabbing the attention of venture capitalists, said Anand Sanwal, founder of CB Insights.

Cloud computing is the delivery of computer services over the internet.

Wellington-based Xero, which develops cloud-based accounting software for small and medium-sized businesses, has seen a 258 per cent increase in its stock over the past 12 months, making it the best-performing NZX stock in 2013.

Earlier this month Milford Asset Management executive director Brian Gaynor said the massive rise in the company’s share price was being driven by US investors who were more interested in Xero’s strong growth in customer numbers than traditional methods of analysing businesses, such as earnings multiples.

Xero chief executive Rod Drury has also said overseas investors, particularly those in the US, wanted exposure to cloud-based technology like Xero’s.

“In US investor circles they’re seeing this massive transition to the cloud like we’ve seen in mainframes [the computers that pre-dated PCs] to mini computers,” Drury said.

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Software firms miss out on tax aid

Proposed tax changes that aim to improve cashflow for start-ups include some fishhooks for software companies and firms that run clinical trials, a Deloitte partner says.

An Inland Revenue Department policy paper proposes allowing 100 per cent of eligible tax losses arising from research and development expenditure to be immediately deductible.

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US tech investor trend offers clue to Xero’s rapid rise

New research from the United States might help explain the meteoric rise in New Zealand tech star Xero’s share price over the past year.

A study by CB Insights, a research firm that tracks venture capital investment, found only 2 per cent of total funding in the internet sector went to social media firms during the second quarter of this year.

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Incubator graduate sells to rival

Wellington company Dash Tickets, one of the first to go through business incubator Creative HQ, has been sold to a rival.

The Fortress Group, based in Dunedin, owns TicketDirect which was established in 1999.

Yesterday it announced it had acquired Dash Tickets, the company Nick Schembri co-founded as a student at Victoria University, for an undisclosed sum. It had been part owned by Ministry of Sound.

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SEC Lifts Ban On General Solicitation, Allowing Startups To Advertise That They’re Fundraising

The SEC has just voted 4 to 1 in favor of implementing section 201(a) of the JOBS Act, which lifts the ban on general solicitation and permits startups, venture capitalists, and hedge funds to openly advertise that they’re raising money in private offerings. While it may pose added risk of investors being misled, it should make it significantly easier for companies to raise capital to start or continue financing a business.

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New Govt service launched to raise capital investment

Economic Development Minister Steven Joyce today launched a new Government service in Auckland to help businesses raise capital and accelerate their international growth.

New Zealand Trade and Enterprise’s Better by Capital service is one of 50 initiatives in the Government’s Business Growth Agenda, Building Capital Markets.

“To achieve the Government’s target of increasing our exports to 40 per cent of GDP by 2025, it is estimated New Zealand will need to increase collective investment in export industries by 70-90 per cent on current levels,” Mr Joyce says.

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Reeling in the big investors

Last year there were around 100 angel investments in New Zealand startups, according to the Young Company Finance Index.

All these companies had to perfect their pitch to get investors on board.

Learning how to make an investment pitch is critical for any startup CEO, because external investment is likely the only way he or she will be able to grow the business quickly.

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Draft rules aim to free up raising of capital

Draft policy decisions about new regulations to New Zealand’s financial markets and “significant freeing up of capital raising” have been announced in Parliament by Commerce Minister Craig Foss. Changes in the Financial Markets Conduct Bill include allowing new forms of capital raising such as crowd-funding platforms and person-to-person lending services. The move to open new channels of capital has been welcomed by the business community. Read more

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Start-ups that really get going

A fast-growing company is a bit like a precocious child. It might eventually slow down and mature, or it might crash and burn along the way.

But if luck and good management is on its side, it will become a long-lasting sizeable export earner at a scale which will benefit our economy.

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Innovate contest finalists picked

This year’s 10 finalists have been selected for Innovate, a startup ideas competition run by Palmerston North incubator the BCC.  Judges Simon Barnett, owner of sports equipment company OBO; Vicki Stewart, director of Stewarts Electrical Supplies, angel investor Sharon Bryant; InspireNet founder James Watts and the owner/founder of Rural Fuel, Larry Ellison, heard pitches from 32 semifinalists over two nights.

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Govt mulls R&D payback

The Government is considering new rules that would require research and development funding to be repaid by companies if taxpayer-supported R&D projects prove particularly successful.

Economic Development Minister Steven Joyce told the Business Herald that the measure, if introduced, would apply to the new Project Grants scheme, unveiled in last week’s Budget, which provides 30 to 50 per cent public co-funding for specific R&D projects.

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Govt mulls R&D payback

First appeared in New Zealand Herald Thursday May 23, 2013

Success for firms taking part in grant scheme may bring request for return of funding Steven Joyce is wary of discouraging firms from seeking grants. Photo / APN

The Government is considering new rules that would require research and development funding to be repaid by companies if taxpayer-supported R&D projects prove particularly successful.

Economic Development Minister Steven Joyce told the Business Herald that the measure, if introduced, would apply to the new Project Grants scheme, unveiled in last week’s Budget, which provides 30 to 50 per cent public co-funding for specific R&D projects.

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Startups raise $3m of investment in one day

Entrepreneurs going through the first Lightning Lab intensive incubator raised $3 million of investment in one day in Wellington.

Nine startup digital companies went through the intensive three-month business planning and mentoring programme at Creative HQ, culminating in a Demo Day pitching to an audience of 140 angel investors at Te Papa last week.

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Lightning Lab’s Demo Day a sign that NZ’s startup scene is growing up

With the first intake of Lightning Lab’s accelerator programme now successfully behind us, the next phase is going to be vital for the ongoing evolution of New Zealand’s startup ecosystem from wobbly toddler to confident teenager. Luckily, the future’s looking bright if the feedback from last week’s Demo Day is anything to go by.

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Business incubator launches in Hawke’s Bay

First published in the New Zealand Herald on Friday April 19, 2013

Auckland-based business incubator The Icehouse, which offers training, networks and access to funding for start-up companies, has launched a hub in Hawke’s Bay.

The Icehouse officially kicked off in the region last night at a Mission Estate event attended by local business owners and stakeholders.

Chief executive Andrew Hamilton said his organisation was on a mission to help New Zealand businesses grow.

“In an effort to help more Kiwi organisations to lift their business performance, Hawke’s Bay is the second region The Icehouse will be operating from, with others to follow.”

The Icehouse was set up in 2001 in recognition of the massive number of SMEs in New Zealand and their importance to the economy.

It has since worked with more than 4,500 owner managers who range from start-ups to multi-million dollar companies.

Hamilton said having an Icehouse branch operating in Hawke’s Bay would allow for greater networking and growth opportunities for organisations there.

People would no longer have to get on a plane to participate in programmes, he said.

“There’s already a heartbeat in Hawke’s Bay among our alumni and by opening permanently we provide the glue around local business to create a wider and stronger network with a stronger heartbeat.”

Hawke’s Bay business owners would be able to attend an Achieving Business Growth Workshop in May and Owner Operator Programme in June. Other tailored programme options would also be offered.

In deciding whether Hawke’s Bay was a viable option, the incubator had talked with local businesses and other stakeholders like Business Hawke’s Bay and the Chamber of Commerce, Hamilton said.

Michaela Vodanovich will act as regional manager, leading operations and working closely with key partners like BNZ.

Business owners can call Vodanovich on 021 365 678 to find out how they can work with The Icehouse.

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Growing funding network gives support to tech start-ups

First published in the New Zealand Herald on Monday April 15, 2013

Angel investors provide both capital and capability to entrepreneurial initiatives.

How is the New Zealand Angel Association – and you personally – involved in the IT industry?

I’m an Angel investor as part of the AngelHQ club in Wellington, but we syndicate investment opportunities all over the country. The role of the Angel Association is to represent Angel investors across the innovation and entrepreneurial ecosystem and to encourage more Angels. Angels provide both capital and capability and with my background in ICT, I tend to gravitate towards ICT businesses or those that are heavily enabled by ICT.

What potential does New Zealand have to be an innovator in technology?

The potential is significant off the back of very capable and creative people. We are highly productive in early-stage endeavours as we are resourceful, work hard and costs are relatively low. We are also inclined to take on new technologies so we have a market that lends itself to validation, proof-of-concept and incubator-type initiatives.

How do New Zealand tech businesses make their ideas and products scalable?

The main challenge is scalability from a go-to-market perspective. This either requires significant investment in direct marketing and sales capability or alignment with channel partners, which will ideally have complementary technologies and where joining forces produces a strong collective value proposition.

Where are tech startups getting their funding from?

Funding comes from different sources depending on the maturity of the business. Early-stage funding comes from company founders and friends and family. We have a growing formal Angel network and new ventures also get great support from the Government through NZVIF, NZTE and MoBIE as well as regional incubators such as CreativeHQ and Icehouse.What other support do tech businesses need?I would like the Government to put more into developing the context and culture under which tech innovation, entrepreneurship and investment occur. This includes being clearer about where the nation should focus its limited resources; for instance, by building niche leadership as opposed to trying to build global businesses on a broad basis.

Do you encourage New Zealand tech businesses to try their hand in big international markets?

Certainly. Angel investment revolves around building a portfolio of which five out of 10 ventures will fail, four will survive and one will excel to deliver a return on all your investments. To generate a significant return, business will need to go global or target large markets like China and the US. Timing the run will depend on the nature of the business. If there is a genuine domestic market, this can deliver early-stage revenue and credibility, but on the other hand it can delay your entry and potential competitive advantage offshore.

It’s only by being in-market that the real learning happens and opportunities open up.

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Kiwi angels see US meet as heaven sent

First published in the New Zealand Herald on Thursday April 11, 2013

Fast-growing technology companies all face the same challenges but few have solutions, writes Sam Knowles.

What are the challenges for small- to medium-sized New Zealand technology companies?

High-tech start-ups in growth mode struggle to find the right resources – the people – to build the business. Commercialisation capability to help take their idea to market is their second challenge. And finding capital is still a big issue. Few SMEs have all three areas well covered.

Why are certain tech companies doing well?

For the ones doing well, it is all about business leadership. For instance, with businesses such as Xero and Orion Health, success comes down to the persistence of an individual. It is about the leader’s ability to get the industry specialists together and to identify and implement smarter ways of doing things.

What else do fast-growing tech businesses need?

Another real gap in many New Zealand tech SMEs is sales leadership. Culturally in New Zealand we don’t value sales skills and we don’t teach them. The university business degrees don’t have sales courses. In business, people don’t talk enough about sales, they talk about marketing or commercialisation. For most of the international New Zealand businesses I am working with, this is the area that limits their potential.

How easy is it for SME tech companies to find capital?

Finding capital is always an issue, particularly in early stage growth. A recent report on New Zealand angel investment showed only 25 per cent of the $27 million invested last year went into new ventures. For new businesses trying to get initial investments from $300,000 to $1 million, that $27 million doesn’t go very far and for those seeking next stage growth capital of $3 million to $5 million, there are only a small number of active investors. Unfortunately New Zealand has not yet developed the institutional structures of other countries to funnel a small proportion of superannuation and endowment investment into higher growth companies.

Where could the business environment in New Zealand improve?

The area that needs the most attention is how to get our young best and brightest into high-growth start-ups and to take on risk rather than joining the exodus to corporate Australia. The success model in most parts of the world is for talented employees who take the risk of employment in young companies to take lower salaries and be offered significant equity through options as part of their reward. These are only of value if the company is successful. It is very hard and expensive to do here because of our securities law and there is no tax relief to encourage these types of arrangements.

Should universities be playing a role?

I would like to see stronger links between universities and business. Our university model doesn’t seem to have the incentives to create these links. For example, US university rankings are influenced by the number of students who get great jobs. In New Zealand, university success seems to be measured by balanced budgets and how many academic papers are written.

Do you have final tip for tech SMEs?

Tech businesses need a deeper understanding of how their smart idea fits in the wider scheme of things. Many start-up tech leaders have a great idea but don’t fully understand the business. You have to find a nice big problem and work with industry specialists to understand how best to deliver your solution. We don’t attract enough older, more experienced professionals into start-up companies who can help with funding and commercialisation within the industry context.

Sam Knowles is chairman of Xero and other technology companies.

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Govt mulls R&D payback

First appeared in New Zealand Herald Thursday May 23, 2013

The Government is considering new rules that would require research and development funding to be repaid by companies if taxpayer-supported R&D projects prove particularly successful.

Economic Development Minister Steven Joyce told the Business Herald that the measure, if introduced, would apply to the new Project Grants scheme, unveiled in last week’s Budget, which provides 30 to 50 per cent public co-funding for specific R&D projects.

“But we haven’t got to the stage where we’re comfortable with the final rules so it’s just a bit of conjecture at this stage,” Joyce said.

The Project Grants, which will be overseen by Callaghan Innovation – the Government’s new high-tech development body – are targeted at firms with small research budgets and those that are new to R&D.

Andy Hamilton, chief executive of Auckland business incubator The Icehouse, said that while the mooted repayment requirement may not prove popular with some businesses, it was hard to disagree with.

“Entrepreneurs don’t actually mind paying back [money] if something proves successful,” he said. “We all agree that there’s only so much money a government can invest and if this provides the opportunity for some recycling of that money into other companies then I think that’s a really good thing.”

Hamilton didn’t think the requirement would put firms off signing up for the Project Grants.

But Joyce said the Government needed to be careful not to discourage firms from taking funding.

“If we provide [funding] and it’s got so many strings attached that people don’t want it then you’re back at square one again,” he said.

Technology commentator Peter Griffin said there could be some difficulties around defining “success” in R&D projects.

“If you’re the next Google or something, sure, you’d be happy to pay it back but what’s the definition of success?”

Entrepreneur and business commentator Lance Wiggs also said the devil would be in the detail.

“An R&D project develops the technology, but an innovation project develops something that people actually want to buy so how do you define what an R&D project is and how do you measure success?” However, Wiggs supported the introduction of the repayment requirement.

“You can look at it almost like debt funding,” he said. “[The Government] can say, ‘Here’s a hundred grand for your project, if it’s a success you can pay us back and if it’s a failure then you don’t need to pay us back’.

“It’s probably a fairer proposition to everyone concerned where they can roll that hundred grand over and give it to the next company.”

When announcing a number of changes to the R&D schemes last week, Joyce also signalled that funding will be repayable if a company shifts research and development work overseas.

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Ahead of the pack

First published in the New Zealand Herald on Tuesday February 26, 2013

Pick your targets and avoid distraction, say company leaders TIN’s top performers

All CEOs are motivated achievers but Skope Industries boss Guy Stewart has an incentive to succeed not shared by most: he’s managing his parents’ retirement nest egg.

Stewart’s father, Robert, bought the family’s Christchurch technology business in 1965 and after decades at the helm has stepped back into a governance role, albeit as a very engaged chairman of the board.

“I succeeded my father somewhere between 12 years ago and yesterday depending on how he feels I’m doing,” Stewart junior quips.

“I butt heads with my chairman and primary shareholder on a regular basis … but that’s part of the flavour of a family company in New Zealand, and part of what makes it exciting,” he says.

“Every family lunch is an impromptu board meeting.”

The family ownership model appears to have worked well for Skope, which last year celebrated topping $100 million in revenue for the first time.

It reached the milestone despite grappling with the challenges of dealing with an earthquake-hit manufacturing plant, intense global competition and a strategic review which has seen it drop its iconic line of heating products to focus on the more lucrative commercial refrigeration market.

Last year’s $12 million revenue hike was enough to propel the company into the top-10 list of the TIN100’s fastest-growing local technology businesses.

Technology Investment Network has been tracking the performance of the country’s high-tech sector (covering IT, biotech and high-tech manufacturing) since 2005.

The 100 companies in the TIN index managed to eke out a reasonable 2.2 per cent growth in annual revenue last year but for the top-10 performers the combined rate was a more impressive 9.6 per cent. Between then, the 10 companies added $182 million in sales, taking their combined revenue to $2.08 billion, and accounting for just under 29 per cent of all revenue generated by the 100 companies on the list.

So what differentiates the top performers from the rest of New Zealand’s high-tech exporters?

Aside from his inescapable mealtime pep-talks with dad, Stewart says maintaining a laser focus on producing innovative products has been a vital factor behind Skope’s growth. “Innovation is critical to our business, and to any New Zealand business,” he says.

“I shared a taxi to an airport in the States recently with one of our global competitors.

“We make 15,000 to 20,000 units a year. He makes 1,500,000 units a year, and so we’re more innovative, we’re better, and we take a whole lot of our innovation guidance from our customers.

“We drive ourselves to be better because if we’re on the same terms as everyone else, we’re dead.”

Aside from product innovation, TIN100 data shows company growth also depends on successful targeting of export markets. Since the global financial crisis high-tech exporters have reduced sales to the US and Europe in favour of targeting Australia.

For many in the TIN cohort, low trade barriers and geographical proximity mean Australia is the easiest territory to break into. It also offers a sizeable market for new exporters seeking growth opportunities.

IT services company Datacom, which topped the 2012 TIN100 growth chart with a $62.8 million increase in sales, is an example of a business generating more revenue across the Tasman than at home, after a concerted drive to establish itself in the Australian market.

But making it in Australia is still fraught with difficulty, says Paul Hargreaves, a Datacom co-founder.

“Having a baseload of work to go in on is important.

“Being thoroughly profitable back home in New Zealand is essential – and not being in a position where you are going to be embarrassed if things are tough for a period,” he told the TIN100 Report.

“We tried initially in the early 1980s in association with a client who wanted us to go with them, but we weren’t ready to take it further and pulled out after a period of market investigation.

“We returned 10 years later in the early 90s, this time with a base business providing a support service for Microsoft Australia.”

Other companies in the IT services and support sector also reported strong growth in Australian business last year as they cashed in on New Zealand’s lower cost base but comparable culture and free trade access.

But though lower salary expectations for New Zealand-based IT staff enable some companies to offer competitive international pricing, other TIN100 businesses say they are struggling to attract qualified workers in the local market.

Kevin Lawler, chief financial officer for fast-growing Diligent Board Member Services, says the difficulty in finding suitably experienced software developers to work in its Christchurch office has prompted the company to take up the unattractive option of employing staff in the US.

“The main issue is there just aren’t enough to go around. We’re looking for the top echelon of software deveqlopers.”

After a rocky start as a listed company in 2007, Diligent has gone on to achieve solid success with its software that securely distributes corporate board papers electronically, to a large extent thanks to the success of Apple’s iPad in corporate circles. Diligent’s system is now used by more than 16 per cent of Fortune 1000 companies in the US.

Staffing is a problem because “we want to have the capacity to produce a lot more than we’re currently producing,” says Lawler.

“While we were out of the gate very quickly with the iPad, some competitors have now leap-frogged us in some areas and we want to retain that number one position, so we’ve got to get on.”

Lawler says there is no simple solution to the recruitment issue that could be addressed by government, echoing the views of other TIN100 leaders.

“We can’t wait for the government or for [students] to come out of the tertiary institutes.”

Skope’s Stewart agrees the technology sector needs to focus on what it can control rather than worrying about potentially fickle government policy.

Having achieved his company’s $100 million revenue target, he is contemplating the next goal, whether it be $150 million or $200 million.

“You’ve got to pick another target because if you stop looking into the future it’s really easy to get distracted and lost,” he says.

“You’ll wake up one morning and find you’re a $70 million company because you weren’t paying attention, or you’re out of business.”

TIN’s top performers

1. Datacom Group: 2012 revenue $788m; Annual growth $62.8m (8.6 per cent)

2. Tru-Test; 2012 revenue $103.4m; Annual growth $18.8m (22.2 per cent)

3. Fronde Systems; 2012 revenue $47.6m; Annual growth $13.4(39.1 per cent)4NDA Group; 2012 revenue $165m; Annual growth $13m (8.6 per cent)

5. Gallagher Group; 2012 revenue $187m; Annual growth $12m (6.9 per cent)6Skope Industries; 2012 revenue $105m; Annual growth $12m (6.9 per cent)

7. Diligent Board Member Services; 2012 revenue $22.3m; Annual growth $10.9m (96.1 per cent)

8. F&P Healthcare; 2012 revenue $516.7m; Annual growth $10.6m (2.1 per cent)9Xero Ltd; 2012 revenue $100m; Annual growth $9m (9.9 per cent)

10. Orion Health; 2012 revenue $100m; Annual growth $9m (9.9 per cent); Wyma Engineering; 2012 revenue $25m; Annual growth $9m (56.3 per cent)

Simon Hendery was research and publication manager for the 2012 TIN100 Report

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Report card from top world scholars

First published in the New Zealand Herald on Tuesday February 26, 2013

Staff from the renowned Massachusetts Institute of Technology (MIT) will produce a scorecard of Auckland and NZ’s innovation system, and the results should be favourable.

Institute professors Edward Roberts and Scott Stern, will lead a three-day MIT Regional Entrepreneurship Acceleration Programm workshop in Auckland from March 25-27.

Roberts, an expert on advanced technology management, is the founder and chairman of the Trust Centre for MIT Entrepreneur ship. Stern, a leading author on innovation, heads the MIT Sloan School’s technological innovation, entrepreneurship and strategic management faculty. They will be joined by Bill Aulet, managing director of the Sloan School’s trust centre, and Fiona Murray, the trust centre’s faculty director and associate professor of technological innovation, entrepreneurship and strategic management. They will present the latest research on innovation and entrepreneurship, and the drivers that create an effective innovation ecosystem and transform local economies.

Under the spotlight will be three local projects – the Wynyard Quarter Innovation Precinct and The FoodBowl in Auckland and the Wellington-based Lightning Lab, New Zealand’s first digital accelerator designed to get start-ups funded and operating within three months.

Brett O’Riley, chief executive of Auckland, Tourism and Economic Development (Ateed) and a member of the New Zealand regional team, says the workshop is an opportunity “to benchmark what we are doing in terms of innovation with other parts of the world.

“The MIT staff are global thought leaders on innovation, and we have to ensure that innovation does create a step change in our economic Top scholars’ report card growth.

We need to produce hard, bottom line results for Auckland and the country.

“We also need to understand in more detail what is the best practice for accelerators compared with the more traditional incubation area.”

The MIT staff have developed a two-year acceleration programme based on the Cambridge/Boston innovation ecosystem.

The Cambridge Innovation Centre in the Greater Boston region is close to MIT and Harvard University, while the Boston Innovation Centre was established on the other side of the Charles River.

The two precincts are in “the white hot centre of start-up activity and focus on entrepreneurial population density.” The entrepreneurs share working spaces and are eager to collaborate, and the precincts help new ventures gain access to funding and venture capital partnerships.

Auckland should score well in this regard.

The Wynyard Quarter Innovation Precinct and The FoodBowl are based on critical mass and connections, and the participants share resources and common issues.

The MIT programme involves regional teams from Britain, Turkey, Spain, Finland, China, the US, Mexico and New Zealand, made up of representatives from economic development agencies, entrepreneurs, venture capitalists, corporates and universities, intent on designing strong innovation ecosystems.

The NZ team is leader Joseph Stuart, a principal business adviser; O’Riley; Peter Rose, a project director; David Beard, partner in MOVAC venture capital firm; and Professor Ian Town, deputy vice-chancellor of Canterbury University.

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R&D policy under fire

First published in the New Zealand Herald on Tuesday February 5, 2013

Sale of another tech company overseas sparks debate over fair use of taxpayer funds.

The sale of a technology company to a British buyer has reignited debate over the Government’s approach to research and development funding and the growing number of innovative Kiwi firms shifting overseas.

Ebus, a provider of cloud-based video transfer services to broadcasters and television advertisement production firms, has been acquired by London-based media logistics company IMD for an undisclosed sum. The company was established in Auckland in 2005 after its founder, Italian businessman Carmine Masiello, sailed his yacht from Europe to New Zealand and decided to settle here.

Ebus’ shareholders include Auckland business incubator The Icehouse, investment groups Movac and Sparkbox Ventures, and Trade Me founder Sam Morgan’s Jasmine Investments. Singaporean investors also hold shares.

Ebus received around $240,000 in government R&D grants and $304,000 in NZTE market development funding between 2006 and 2009, said Economic Development Minister Steven Joyce.

The Icehouse chief executive Andy Hamilton, who was also a director of Ebus, said the company had initially conducted research and development in this country but that work was now carried out in Singapore.

Masiello also relocated to Singapore in 2009 to be closer to the firm’s core markets in Asia, leaving Ebus with only one remaining New Zealand-based employee, chief operating officer Michael Orton.

Technology entrepreneur Selwyn Pellett said the Government’s strategy around R&D funding was in some cases having “very questionable outcomes” for taxpayers.

In December Pellett traded blows on Twitter with Joyce after the politician took umbrage at him saying New Zealanders should be unhappy with the sale of Auckland-based technology firm Endace to a US company.

Endace, which Pellett founded in 2001 and left in 2010, had received more than $11 million in government R&D grants.

Pellett has suggested introducing a convertible notes scheme in which government grants could be turned into equity in takeover events.

Joyce said the Government could request repayment of grants in some cases, but only within three years of a funding round’s completion, meaning it would not be able to recoup the funds allocated to Ebus.

The Government was reviewing policy on grants and whether they should be repayable in the case of a foreign takeover, he said.

Hamilton, who declined to reveal the price IMD paid for Ebus as it was subject to a confidentiality agreement, said the company had paid taxes in New Zealand and the returns investors such as The Icehouse, Movac and Jasmine Ventures reaped from the sale would be reinvested in Kiwi start-ups.

Ebus’ move to Singapore in 2009, he added, had been fundamental to the success of the business and IMD’s acquisition would allow the company to grow further.

Data from the Technology Investment Network show more than 30 of New Zealand’s most innovative companies have been acquired by overseas buyers in the past decade.

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Looking for an angel at the Summit

Tags: Angel Summit

First published in the New Zealand Herald on Friday November 23, 2012

From clever ‘bio-beads’, to seamless online searches, to virtual worlds for kids, a tempting array of entrepreneurial talent was on offer at this year’s Angel Investor Summit, writes Lesley Springall.

Tracy Thompson feels as if he has done little else but raise capital for the past four years.

The United States-born chief executive of biotechnology company Polybatics says raising money in New Zealand is like a treadmill you can never turn off.

“It’s constant. I feel like I’m on life support thinking ‘quick nurse, bring me another drip bag’.”

Polybatics was one of 13 carefully selected companies at this year’s Angel Association annual summit. The 13 offered a smorgasbord of investment potential – from formal investment virgins to those who, like Thompson, have done it all before, in a diverse range of sectors and regions.

Each had just eight minutes to flaunt their figures to a host of angels and potential angels – people with a bit of spare cash who might be persuaded to take a punt on the Kiwi companies of tomorrow.

“It’s like a normal angel investor club evening, but on steroids,” says Marcel van den Assum, Angel Association vice-chairman.

He led the charge, introducing the company showcase and appealing to the 200 or so well-off individuals gathered at Te Wharewaka o Poneke on Wellington’s waterfront, by explaining why he became an angel.

Yes, there was the chance of making money, but it was more than that, he said: it was the chance to do something new; something different; something for New Zealand’s future.

Each of the 13 firms pitching had already been put through their paces by an angel group or angel investment firm, so they all had a lead angel to champion their cause. “The majority of investors are followers, so clearly you want to pitch deals where there is already a reputable lead that will act as a catalyst in the equation,” says Van den Assum.

Though important for the firms, the evening was also about attracting new blood into the angel world, says Dave Allison, showcase organiser and business strategist at Wellington regional development agency spin-off Creative HQ. “First and foremost the event is about showcasing angel investment. We wanted people to get a flavour of what angel investment was all about.”

Van den Assum says it’s “critical” to attract more angels to the cause. With more formally accredited angels, the sector has more clout with the Government, more capital to draw on to take investments further down the track and more like-minded folk to share the workload and risks.

“You can discuss deals with somebody; you don’t have to be the lone wolf, putting everything at risk on one deal. You can spread the risk and use others’ expertise,” says Allison.

“This is about creating value; connecting the ecosystem; and being willing to go out and take some chances, accept some failures and celebrate the one in 10 that’s a fantastic success.”

Many of those present were “stunned” by what was on offer, he says. “A lot of people come along and don’t ever become angels; it’s not their thing. But no one is ever disappointed they spent the time looking.”

Here are the companies that stood out (read more about them by following the links):

Others pitching at the 2012 showcase were:

  • Vigil, a wireless patient monitoring technology that provides real-time vital signs monitoring.
  • 77 Pieces, a business employing Weta Digital-type technology that allows online buyers to realistically predict how they will look in the clothing they might buy.
  • InvisiShield, a hush-hush company that plans to revolutionise the work of the humble scarecrow.
  • iGloLEDset, a complicated name for a business that offers a funky Wi-Fi controllable LED lighting system.
  • Showcase, a complete set of sales tools that can be updated at the touch of a button so salespeople never again have to worry about suitcases full of brochures or bar charts.
  • HSL, or Hunter Safety Lab, which has come up with some clever technology to prevent hunters from accidental shootings.
  • ShowGizmo, a smartphone app for event organisers to better connect with their audience.

Though some of the companies presenting were not keen on having their wares talked about too publicly, others like ShowGizmo founder and managing director Frances Manwaring were peeved to be left out. Allison was also lambasted by some company founders who were disappointed at not making the showcase cut. But then, every founder and every investor believes they’ve got the next big thing, he says. At best, however, only 10 per cent of angel-investment companies make big returns for their investors, with many investors counting themselves lucky if, after several years of investment, they get their money back.

The Herald will be keeping an eye on its 2012 Angel Summit showcase picks to see who made their capital raising targets, what they’ve done with the money and which, if any, might be on track to making a few angel dreams come true.

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If you would like to find out more about the 2014 Summit, please see AANZ Summit 2014.

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Polybatics: Biotech firm needs $1.5m more

First published in the New Zealand Herald on Friday November 23, 2012

Tracy Thompson, chief executive of Polybatics, has been here before. This is the fourth formal funding round the Manawatu-based biotech company has embarked upon since Thompson took over the Massey University spinoff in 2009.

“You never have enough money if you’re a tech company. We’re producing something to a pharmaceutical standard: it’s expensive.”

So far, Thompson has raised $3.8 million in three rounds from the Manawatu angel investor group, Warehouse founder Stephen Tindall’s K1W1 early-stage company investment fund and the Government’s NZ Venture Investment Fund. But the end is in sight, he says. The company reported revenue of $900,000 last year, has three contracts with international pharmaceutical companies, and four pending, and several large, international collaboration partners.

In a nutshell, Polybatics’ technology allows it to grow protein-covered, biodegradeable bionanoparticles, or “bio-beads”, cheaply and efficiently. The current beads are plastic, expensive to produce, inefficient and require toxic chemicals during manufacture.

The beads are used as an important production and delivery mechanism for vaccines, enzymes and monoclonal antibodies (the basis of many drugs), and in other industrial and medical processes.

One collaborative partner is evaluating Polybatics’ technology in the production of insulin; another as a vaccine for hepatitis C; while Crown Research Institute AgResearch recently landed a US$100,000 grant from the Bill & Melinda Gates Foundation to evaluate a new tuberculosis vaccine using Polybatics’ technology.

The Polybatics-TB vaccine, if successful, not only has the potential to be far, far cheaper to produce, it won’t require cold storage so it can be used in many of the poorest countries of the world, says Thompson.

Polybatics is seeking $1.5 million in this latest round to finish developing the technology and launch the product to a wider market.

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Rich dose of innovation will improve prosperity

First published in the New Zealand Herald on Tuesday November 6, 2012

ATEED: Right moves will see Auckland set for major period of economic growth

Kiwi expat Sean Gourley, the founder of a $20 million high-tech business in California’s Silicon Valley, believes Auckland is well placed to become an innovation hub.

“You have great talent coming out of the universities, creative, hardworking software developers on a par with anyone anywhere in the world,” says Gourley, a former Rhodes scholar, originally from Christchurch.

These talented people would stay in Auckland and others including Americans would move here if they had the right (working) environment, sayd Gourley. The lifestyle, recreation, safety, cheaper living and good schooling are all attractions.

“In terms of developing high-tech innovation, you’ve just got to play your cards right – by making strong connections with the West Coast of United States (Silicon Valley), getting density and vibrancy in downtown Auckland, and keep telling the stories about why you are developing new technology.” He says 20 talented graduates could start six high-tech companies in Auckland every year.

Auckland Tourism, Events and Economic Development (Ateed) is determined to create a culture of innovation that drives long term economic growth. Online high-tech innovation has strong export potential, adding diversity, creating new jobs, and acting as a buffer to traditional commodity-based exports.

Gourley says Auckland’s appeal would rise if it builds high density living in the city centre with creative outlets where entrepreneurs can meet, chat and spark ideas – similar to the environment in Silicon Valley.

He says it is important to strengthen connections with Los Angeles and San Francisco for promotion and investment opportunities. “Auckland is only a direct 12-hour flight to San Francisco – a lot of Americans don’t realise that – and we are close culturally and on time zones if New Zealand businesses were prepared to work Tuesday to Saturday.”

Gourley’s company Quid, which employs 42 people including five Kiwis, builds software that collects large amounts of data, applies algorithms and categorises the information so that organisations can make better strategic decisions. An internationally renowned physicist, he is happy to transfer his knowledge to New Zealand. After speaking at the recent TEDx event, Gourley indicated he would consider opening an office in Auckland’s new Wynyard Quarter Innovation Precinct.

“I can get some research and development and 3D visualisation programmes done here,” he says.

Auckland Council’s vision, outlined in its 30-year plan, is to become the world’s most liveable city. Ateed – one of the council subsidiaries – has the mandate of improving New Zealand’s prosperity by leading the successful transformation of Auckland’s economy through the implementation of the council’s economic development strategy.

The goal is to double annual regional export growth to 6 per cent and productivity to 2 per cent, and increase annual GDP growth from 3 per cent to 5 per cent. To achieve this, the culture of innovation needs to thrive. And Auckland will be known as a major innovation hub of Asia Pacific that is internationally connected and export-driven.

The Wynyard Quarter Innovation Precinct will be a showcase for the world class research and high-tech ventures; stage one is under way.

Ateed chief executive Brett O’Riley believes the local region is poised for a major wave of economic growth. “There has been a lot of investment over the last decade into infrastructure and other elements.

“We now have an innovation eco-system, involving incubation, angel investment, research and development, tertiary institutions and emerging companies, which can be developed further. Wrapped around the eco-system is a cohesive economic development strategy that outlines the opportunities and challenges.

“And Ateed is the facilitator to make things happen and create outcomes – at pace in partnership with other players in the eco-system.

“We want everyone to work collaboratively as a unified Auckland growth engine, and we will be using a new transparent approach, a combination of technology combined with traditional principles like kotahitanga. Our business survival rate for start-up companies is high, and pace is important. We have the iwi of Tamaki Makaurau emerging from the settlement process energised and ready to partner to grow our city, which is tremendously exciting.”

O’Riley says Brisbane Marketing recently looked at entrepreneurship and innovation around Asia Pacific and found there was an outlier leading the pack – Auckland as a proxy for New Zealand.

Next March, Auckland will host the latest Massachusetts Institute of Technology’s Regional Entrepreneurship Acceleration Programme workshop – this year’s were held in Boston and Edinburgh. “This is a reflection of the good work we’ve been doing in Auckland and New Zealand in developing innovation-based entrepreneurship, and targeted initiatives like innovation precincts, the Food Innovation Network, Health Hub and Advanced Technology Institute.”

Ateed is focused on export-led growth opportunities. It has targeted three key sectors where there is the greatest opportunity for business and export growth – food and beverage (1700 processing companies already contribute $3 billion to the local economy); information and communications technology, including screen and digital content (about 6500 businesses contribute more than $4 billion), and life sciences including health technology, medical devices, pharmaceuticals and biotechnology.

Ateed is also supporting growth opportunities in areas like marine, tourism, niche manufacturing and advanced materials, sustainability and clean technology sectors, and international education.

Within the key sectors, some ground-breaking projects can be found. The FoodBowl – Te Upu Kai, located near Auckland airport, has seven state-of-the-art processing halls and provides businesses, both start-up and established, a cost-effective and low-risk opportunity to develop, test and prove their initiatives through to commercialisation. It is part of the Food Innovation Network, a partnership between central and local government, universities and CRIs, and is open to all firms in the food and beverage industry.

“We have built a unique proposition,” says O’Riley. “The FoodBowl is focused on development rather than research and it can become the focal point for New Zealand’s capability around food safety and security, and the creation of 21st century food and beverage products.

“Companies from Hong Kong and Australia are looking at bringing their food development to Auckland, and in some cases planning to partner with Auckland companies to manufacture the food products here.

“We can also leverage the FoodBowl’s intellectual property. If the Food and Drug Administration in the US is the gold standard for managing drugs, then why can’t New Zealand become the gold standard for food safety and development?”

There’s plenty of interest in the Wynyard Quarter Innovation Precinct, which kicked off in March when 3D mapping and simulation company, Nextspace, moved into Pakenham St West. O’Riley says about 60 smart businesses, multi-nationals and R&D organisations want to be part of the precinct, and stage one is close to being fully tenanted.

The new Advanced Technology Institute, a $166 million initiative from central government, will likely have a significant presence in Wynyard Quarter.

The precinct, designed as a campus, will provide 48,000 sq m of office space and the first stage – expected to be opened in 2014 – involves the refurbishment of the Southern Spars, Lysaght and Total Marine Services buildings. Ateed is anticipating the Total Marine Services space will be used for acceleration programmes in which early stage companies stay for up to six months.

“We may have underestimated the tenancy demand,” says O’Riley. “The good thing is that companies now understand the power of collaboration – something that historically Kiwi firms haven’t relied on.”

Ateed is also looking at the potential of a media village concept which could include large and small screen production and incorporate education and training, expanding opportunities for Auckland youth to get involved with the sector.

O’Riley says the film industry, which grossed $2.3 billion last year, has world-class capability, from producers and directors to technical crew and facilities, and Ateed is looking to understand the mix of infrastructure and programmes that could further grow the sector.

Auckland is also part of the recently-launched New Zealand Health Innovation Hub. “New Zealand has had an established capability in health and social wellbeing – including medical devices – and we can grow this sector,” says O’Riley.

He talks about other economic opportunities based on projects and events.

“We will have a new cruise ship passenger terminal. Not only can we receive more visitors, but also Auckland can become a hub for replenishing the ships and completing maintenance on them.

“The Auckland leg of the world triathlon circuit is now the first one on the international calendar and there is interest from athletes to train in Auckland rather than Sydney. They can utilise Auckland’s world class sports science and coaching at the Millennium Institute of Sport and Health, and the sport science facilities at Massey and Auckland Universities.

Ateed is also focused on providing services and assistance through its six offices interfacing with business customers across Auckland. “We will continue to provide access to R&D funding, business capability assessments, acceleration and awards programmes, increasingly in collaboration with business and industry organisations including local business improvement associations.

There are plenty of exciting initiatives but ultimately it is about taking a disciplined approach that delivers measurable growth, just as we do with our approach to major events,” says O’Riley.

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Partnership opens doors for fund managers

First published in the New Zealand Herald on Thursday October 18, 2012

The Government-backed New Zealand Venture Investment Fund says a partnership with its Taiwanese counterpart will open doors to Asian venture capital networks for local fund managers and the high growth firms they invest in.

NZVIF has signed a co-investment partnership with Taiwan’s National Development Fund (NDF), which it says could invest up to $200 million into funds in Taiwan and this country.

Through the partnership, NZVIF and the NDF will invest up to $25 million each in any new venture capital fund in New Zealand or Taiwan.

Venture capital fund managers will have to raise 40 per cent of total fund capital from private sources.

“At least half of any fund will be invested into New Zealand companies,” NZVIF said.

Franceska Banga, NZVIF’s chief executive, said the partnership was aimed at stimulating more venture capital activity and opening access to Asian networks for the local industry.

“This partnership makes the prospect of larger venture capital funds possible, which will help to build the capacity and capability of the New Zealand venture capital sector,” Banga said. “If a New Zealand venture capital fund manager is able to raise $30 million from private investors, the partnership could invest around $45 million, meaning a total fund size of around $75 million, which is considerably larger than might otherwise be the case.”

She said the partnership could see up to five VC funds established, which would invest in high-growth Kiwi and Taiwanese firms.

“For New Zealand companies receiving investment, the partnership offers significant benefits in opening up access to Taiwanese expertise, follow-on capital and extensive networks into Asia,” Banga said.

She said Taiwan was New Zealand’s eighth-largest export market and the island nation, off the coast of China, was already an important source of investment.

“[Taiwan] has a strong venture capital sector and has made considerable progress in developing its high-tech sector across a number of industries, including most recently green technology,” Banga said.

She said the partnership was designed to invest equally in companies in Taiwan and New Zealand.

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Fund wants 20 firms listed

First published in the New Zealand Herald on Wednesday September 26, 2012

The New Zealand Venture Investment Fund has set an aggressive target of getting 15 to 20 of its portfolio companies listed on the NZX over the next decade.

The Government-backed fund has invested in 125 local firms and expects that number to grow to 180 by 2017.

NZVIF chief executive Franceska Banga concedes that taking up to 20 of its firms public is an ambitious target.

Since the fund’s establishment in 2002 only one of its portfolio companies, cloud accounting software provider Xero, has floated on the stock exchange.

“When you set yourself an ambitious goal you start thinking about what needs to happen to achieve it,” Banga said. “It’s deliberately ambitious.”

Another NZVIF portfolio company, Blenheim-based craft beer maker Moa, is mulling a listing and the Business Herald understands the company has been meeting with fund managers to gauge market interest.

Geoff Ross, whose Business Bakery owns a stake in Moa, said the company was looking at various options for funding an expansion of its brewery, but it was too early to say exactly which route would be taken.

NZVIF needed to work with the investment and sharebroking community on building a pipeline of prospective listings, Banga said.

“If this can be achieved, the NZX will benefit from a deeper, broader offering to investors from more high-growth technology companies being listed.”

She said NZX chief executive Tim Bennett was interested in working together with the fund on getting more of its portfolio firms listed.

“I think that’s very encouraging.”

Banga said that for companies to list they would need to prove themselves through raising $2 million to $5 million from private investors. A major challenge for New Zealand growth firms was the lack of follow-on investment in the $5 million to $10 million range.

“For many companies strategic acquisitions by large international competitors are the preferred way to fund the next stage of development and that will remain the case,” Banga said. “But we need to develop the domestic IPO [initial public offering] market as a viable … alternative.”

Over the past decade 32 local technology firms have been acquired by overseas buyers, according to figures from the Technology Investment Network.

Diverse portfolio

NZVIF’s portfolio companies include:

  • Yike Bike
  • Martin Jetpack
  • Moa Brewing Company
  • BioVittoria
  • Nexus6
  • IkeGPS
  • Zephyr Technology
  • TracPlus

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The singular vision of Peter Thiel

First published in the New Zealand Herald on Friday May 18, 2012

Why is this internet billionaire so keen on New Zealand? And why are we handing him taxpayers’ money to invest? Chris Barton reports.

In JRR Tolkien’s Middle Earth fantasy, the Valar are deities who chose to enter the world they created, to give it order and shape its development.

It’s probably more coincidence than divine intervention that in 2010 Valar Venturesdescended with financial largesse upon New Zealand, the scenic backdrop to The Lord of the Rings movies. Except that, in some circles, Valar’s billionaire president, Peter Thiel – PayPal co-founder and early Facebook investor – is seen as god-like. As a teenager, his favourite book was The Lord of the Rings which he read again and again.

Thiel’s interest in New Zealand began 18 years ago on a 10-day outdoor adventure trip beginning in Queenstown. He enjoyed the “crazy things you can do in New Zealand that you can’t do anywhere else”. But what really impressed him was “how great the people are” – matching his 1993 guidebook’s description of New Zealand as the friendliest country in the world.

Thiel now owns property here, has invested in three New Zealand companies and has started managing a venture capital fund, backed with $20 million of government money.

Despite a series of requests to Valar’s principal Andrew McCormack asking to talk to Thiel for this story, The Business was greeted with silence.

The 43-year-old Thiel – contrarian, futurist, gay, Christian, lawyer, hedge fund manager – is an avowed follower of the libertarian creed that many read into Tolkein’s literary works. In his 2009 essay The Education of a Libertarian Thiel wrote: ”I stand against confiscatory taxes, totalitarian collectives, and the ideology of the inevitability of the death of every individual.”

He’s put his money where his mouth is, plunking down US$2.6 million to support libertarian Christian Ron Paul’s failed bid for the US Republican presidential nomination. Thiel also donates to the gay Republican organisation GOProud and hosted its “Homocon 2010” meeting at his New York apartment.

As they watch the death throes of the libertarian inclined Act Party, the question New Zealanders might want to ask is whether Peter Thiel, now sometimes walking amongst us, is considering bringing its corpse back to life.

Fighting death is another of Thiel’s hobbies. In 2006 he gave US$3.5 million to the Methuselah Foundation and controversial academic Aubrey de Grey to support longevity and research. No matter that a 2005 report by 28 scientists concluded that none of de Grey’s therapies (Strategies for Engineered Negligible Senescence) “has ever been shown to extend the lifespan of any organism, let alone humans”.

Thiel has invested in biotech start-ups focused on anti-aging and curing diseases and is a supporter of regenerative medicine research. At PayPal, he apparently proposed making cryogenic storage an employee perk. In February Thiel told CBS:”To all those people who think death is natural, that it is just part of life, I think nothing could be further from the truth. I think it is the opposite of life.”

Well, yes – it’s death. Thiel makes such pronouncements as though he’s saying something profound, to challenge the status quo and mark his territory as an iconoclast and freethinker. A profile in The New Yorker last year noted that his friends valued his “openness to intellectual weirdness” and his critical thinking “unconstrained by convention”.

Others are less kind; feminist blogger Amanda Marcotte called him a “complete wackaloon'”. That was in response to a particularly unconstrained Thiel view in The Education of a Libertarian: “Since 1920, the vast increase in welfare beneficiaries and the extension of the franchise to women – two constituencies that are notoriously tough for libertarians – have rendered the notion of ‘capitalist democracy’ into an oxymoron.”

It’s not the first time Thiel’s wild ideas have attracted controversy. The Diversity Myth: “Multiculturalism” and the Politics of Intolerance at Stanford, which Thiel co-authored in 1995, defends the behaviour of law student, Keith Rabois who shouted, “Faggot! Faggot! Hope you die of Aids!” outside an instructor’s on-campus residence. Rabois went on to work for Thiel at PayPal. The Diversity Mythsays Rabois challenged fundamental taboos about Aids by showing “one of the multiculturalists’ favourite lifestyles is more prone to contracting the disease and that not all lifestyles are equally desirable.”

In a post headed ”Peter Thiel Is Totally Gay, People”, Thiel was outed in 2007 by Valleywag, the Silicon Valley arm of the media and gossip site Gawker.com. Thiel was not impressed, later calling Valleywag the “Silicon Valley equivalent of Al Qaeda.” But he clearly doesn’t see all journalists as terrorists because the Thiel Foundation has sponsored the Committee to Protect Journalists.

The New Yorker profile indicates Thiel has since softened his Diversity Mythstance: “All of the identity-related things are in my mind much more nuanced. I think there is a gay experience, I think there is a black experience, I think there is a woman’s experience that is meaningfully different.”

Slate’s Jacob Weisberg regards Thiel’s philosophy as “puerile libertarianism, infused with futurist fantasy” that demands attention only because it “epitomises an ugly side of Silicon Valley’s politics”. At a dinner event organised by the Independent Institute in 2004 Thiel told the audience, “We know that the way of politics, and government, and things like that, runs by a sort of murder and madness; that’s a sense in which government is an almost literally demonic entity in the world we’re living in today.”

Which raises the question. Why would the New Zealand government hand over management of $20 million of its money to one who is so anti-government and who no longer believes “that freedom and democracy are compatible”? Come to think of it, how is that such an avid libertarian would be getting into bed with government? The answer: Thiel – wackaloon or not – is a highly successful technology investor, quite possibly the most successful in the world.

His return on investment record is the stuff of legend. Thiel co-founded online payments company PayPal in 1998 which, when it was acquired by eBay for US$1.5 billion in 2002, earning him US$55 million. In 2004 he was the first significant external investor in Facebook, putting up US$500,000 which was converted to a 10.2 per cent share. Thiel sold about half his stake to Digital Sky Technologies in 2009, leaving his remaining share, since diminished by dilution, at 2.5 per cent. Even so that could be worth US$2.5 billion if Facebook achieves its expected US$100 billion valuation when it goes public.

In 2004 Thiel co-founded Palantir, in which he has invested US$30 million, largely through his San Francisco-based venture capital Founders Fund. Today Palantir’s valuation is being talked up beyond $US2 billion. It’s named after the The Lord of the Rings’ mystic “seeing-stones” which are a sort of crystal ball-cum-phone allowing those with the power to peer into any part of Middle Earth. Spookily, Palantir’s software, backed by the CIA’s venture capital firm, In-Q-Tel, and described as “like plugging into the Matrix” does much the same - turning its penetrating gaze on torrents of information to find subtle patterns.

Palantir had some explaining to do last year when it was implicated in a proposalto launch a campaign of illegal cyber-attacks and misinformation against WikiLeaks and its supporters. Odd, as The Nation has pointed out, that such software – used by the American Defence Department, the CIA, FBI, and police departments to track down terrorists, fraudsters, and other criminals – should be developed by those professing libertarian ideas of individual liberty.

The only glitch in Thiel’s glittering career is his hedge fund, Clarium Capital Management, which he started in 2002. At its peak in mid 2008, it managed around US$7 billion, but the fund has floundered ever since, losing 90 percent of assets at end of 2010 according to a Bloomberg report. Following three consecutive losing years – by betting wrong, variously, on rising oil prices and a sinking dollar – the fund sank to around US$460 million last year, including some $200 million of Thiel’s his own money.

New Zealand Venture Investment Fund chief executive Franceska Banga began talking to Valar Ventures about 18 months ago with the idea of filling a gap in the market – a venture capital partnership with international connections. The government fund, established in 2002, to help build a venture capital market here, has NZ$200 million under management. Banga was well aware of Thiel’s reputation. “There is quite a lot of material online. He’s a pretty deep thinker,” says Banga. “He’s a contrarian, often those people see opportunities where others don’t. He’s not going to follow the herd.”

Except that Thiel’s success can in a large part be attributed to doing just that – or rather following herd-like behaviour. His ideas are shaped by French literary critic,Rene Girard who taught him at Stanford University about “mimetic desire”. Girard’s theories give lie to the view that people make choices about what they want in an individual and spontaneous way. What actually happens is that our desires are borrowed from, and are mediated through, other people. In other words we’re like sheep moving in flocks and will copy one another without giving it much thought.

The mimetic propensity for people tending to want the same thing, helps explain the appeal and success of social networking web sites and viral, word-of-mouth marketing. Plus – if he was putting theory into practice – how Thiel saw the commercial potential of both PayPal and Facebook before anyone else.

Thiel’s contrarian thinking didn’t much enter discussions between the New Zealand Venture Investment Fund and Valar, except in relation to what sort investment opportunities Valar was looking for and why. “Where it came into play was looking for technologies that are about what might be happening in the future rather than what people are already investing in – that is, yesterday’s investments, ” says Banga. “We were interested to understand his view, including why some technologies might not be of interest.”

So far Valar Ventures has made three technology investments in New Zealand: $NZ4 million in online accounting firm Xero, in October 2010 and a further undisclosed sum this year; in 2011 an undisclosed amount in Pacific Fibre which isbuilding a second fibre-optic cable linking Australia, New Zealand and the United States; and an undisclosed amount in Booktrack which provides synchronized soundtracks for e-books.

In March Valar’s existing New Zealand investments, totalling $NZ6 million, were rolled into Valar Ventures LP, a new $40 million fund comprising $20 million from the government backed New Zealand Venture Investment Fund, around $5 million from other New Zealand investors, and $9 million of new money from Thiel.

“My prediction is his fund will likely be the first venture fund that exercises the buyout right,” says Andy Hamilton chief executive of Auckland based start-up incubator and angel investor network the Icehouse. “Within a five year period the private investors have the right to buy out the government at a base-plus-interest-rate return. None of the New Zealand venture funds have done that yet.”

Hamilton makes the prediction, because with Thiel at the helm, he’s expecting to see some investments take off, delivering the 25 or 30 percent return venture capitalist here only dream about. “He’s quite mythical in terms of his reputation, but the value he brings is quite remarkable,” says Hamilton of Thiel. “He’s energetic, insightful, restless, driven and pretty focused. My observation is that his personal views of the world are not overlapped exactly with investment.”

Hamilton sees Thiel’s investments here as a “fantastic milestone” for New Zealand, but also part of trend. He points to former Sun Microsystems chief executive officer Vinod Khosla as another who looks globally has found opportunity In New Zealand. In 2007 Khosla Ventures invested $3.5million in LanzaTech New Zealand which develops platforms for producing fuel ethanol. “They [Valar and Kholsa] see an arbitrage opportunity when they look at New Zealand around value and what they can do to assist in execution in the United States market.”

Not everyone was happy about the Valar deal. Jenny Morel, managing director of Kiwi venture capital company No8 Ventures pointed out the New Zealand Venture Investment Fund’s purpose was to develop the local venture capital market and the effect of buy-out clause was that private investors got a subsidy from New Zealand taxpayers. “You would have to ask how does [the Thiel deal] help the development of a New Zealand venture capital industry and are we for some reason subsidising a foreign investor,” Morel told Unlimited.

Surprisingly, Thiel’s overall view of technology is downbeat. In The End of the Future he laments the lack of technological progress in several domains including medicine, biotechnology and transport. “We are no longer moving faster,” says Thiel noting the explanation – the high cost of fuel – points to the much larger failure in energy innovation.

Even computer and information technology, the only sector where technological improvement continues unabated, gets faint praise. Despite internet start-ups being created every day, the immense value created by virtual worlds, and Facebook being radical enough to be outlawed in China, Thiel remains unimpressed by the internet revolution. Overall he says it hasn’t been revolutionary in manufacturing and productivity, has resulted in more jobs, and hasn’t dramatically improved living standards. “Like Alice in the Red Queen’s race, we (and our computers) have been forced to run faster and faster to stay in the same place.”

Thiel wonders whether the internet run out of ideas. “We went from the development of telecommunications to the internet and from the internet to social networking,” Thiel told an audience at the Said Business School in Oxford. “Maybe there is no innovation left any more, and we have to look for it in a completely different direction. Maybe we have to go back to space and science fiction novels.”

Thiel would rather see more effort put into tackling big, challenging problems, like space exploration and longevity. Or preparing for “the singularity” – the day machines become smart enough to make themselves smarter and leave human intelligence behind – another of Thiel’s preoccupations.

One of the reasons we’re not making much technological progress is because our faith in higher education, which Thiel regards as the next bubble. ”A true bubble is when something is overvalued and intensely believed. Education may be the only thing people still believe in, in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

But Thiel is, as always, unafraid to put his money where his mouth and last year put in place a scheme for 20 fellowships for students under 20 who would be awarded US$100,000 grant to drop out of college and pursue entrepreneurial projects.

The way Thiel sees it, the government should stop standing in the way of technology and progress. “There is so much about the political sphere that has become poisonous – people collectively hating other people. That’s basically what politics is about – collective hatred – and we need to figure out a way to escape from it,” he declared to Reason.tv’s Tim Cavanaugh.

Thiel’s exit plan is a homestead on the high seas – yes, really. “You can try to move onto the internet. There’s the question whether that’s real. You can try to move to outer space. There’s a problem with that being too far away. So the seasteading experiment is a bit of an in-between option.”

The experiment is to “create new acreage on the vast and empty ocean” for libertarians to boldly go where they’ve never gone before - onto oil-rig-type platforms in international waters with lax building codes, no welfare and a relaxed attitude towards guns. Details magazine described it as a ” vivid, wild-eyed dream-think Burning Man as reimagined by Ayn Rand’s John Galt and steered out to sea by Captain Nemo”.

Crazy as it sounds Thiel is throwing money at it – so far some US$1.25 million given to the Seasteading Institute, headed by Patri Friedman, a former Google engineer and grandson of the Nobel Prize-winning economist Milton Friedman. The first stage is Blueseed, which aims to anchor a passenger vessel off San Francisco, allowing start-ups to skirt American visa rules. The cost of climbing aboard the brave new world is about $US1600 a month.

In Thiel’s worldview seasteading makes sense because he believes “the freedom to leave is one of the most fundamental freedoms”. He often talks about whether it’s more important to have a voice or an exit and at what point is the “exit more important than voice.” Seasteading coalesces Thiel’s dissatisfaction with the way things are – whether it’s in the lack of technological progress, the pushback against globalisation, too much government regulation, the failure of education or the inevitability of death – and his quintessentially American dream to start over.

Some have speculated that’s why he’s interested in New Zealand. “What could the famously contrarian investor possibly sees in a country of 4 million people whose economy is mostly based on agriculture and tourism?” asks Business Insider writer Pascal-Emmanuel Gobry. ”Here’s a thought: maybe Peter Thiel wants to turn New Zealand into the next Silicon Valley. Or maybe even the libertarian utopia of his dreams.” Asked about the idea, Thiel told Gobry: “New Zealand is already utopia. But Silicon Valley and New Zealand can learn a lot from each other, and we want to help make that happen.”

So far the New Zealand companies Valar has invested are learning just how useful Thiel’s name can be. Pacific Fibre chief executive Mark Rushworth says it’s been particularly helpful in dealing with the big American telcos. “It adds a layer of credibility and gets a foot in the door. Your introduction has almost been done for you,” he says. “Everyone knows Sam Morgan, Steven Tindall and Rod Drury in New Zealand, but when you are talking to investors in Australia and the United States they don’t know who these people are. But the certainly know who Peter Thiel is.”

Thiel invested in Booktrack when the company was in “stealth mode” – six months before it was live in the market. “One of the key issues in launching into global markets is strategy and that’s where Peter Thiel is masterful.” says chief executive Paul Cameron. “He’s very smart. He exudes confidence and intelligence. It feels like you get a lot of his thought power when you speak with him.”

Trademe founder Sam Morgan who has invested in both Xero and Pacific Fibre also highlights the connections Thiel’s name provides. “We can go into the United States and get any meeting with anyone we want as a result of the various networks that have been built up. Peter is a big part of that. It certainly gets you on the radar.”

More importantly, says Morgan, Thiel and the executives at Valar highlight New Zealand’s lack of expertise. “We are of this deluded view in New Zealand that we have all the best ideas and all that we’re lacking is the capital. Actually we don’t have the management and we certainly don’t have a monopoly on ideas,” he says. “We don’t know what good sales people look like and we don’t know what really good executives and directors look like.”

Morgan believes New Zealand should continue to encourage the type of investing Valar has begun. “If we had 100 Peter Thiels here that would move the needle.” He recognises Thiel has “interesting kind of views on society and politics and government’ but isn’t too bothered. “I’m not part of that club. But we don’t want to say that we don’t want people here who have views that differ from ourselves,” say Morgan. “We don’t want a polarised society, but you need a bit of everything otherwise you become a society that is less interesting.”

What about Thiel wanting less government? “Sure but that’s not his role. We have laws and institutions to protect against that. It’s the role of government and policy to make sure the playing field is appropriate. We clearly don’t want be overrun by people with guns and bibles.”

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Tauranga entrepreneurs ‘silent’

First published in the New Zealand Herald on Wednesday May 2, 2012

Tauranga-based Enterprise Angels has made its third investment in a Wellington IT company and is looking at other start-up businesses outside the region.

With more than $4 million to invest, Enterprise Angels is wondering what all the Western Bay entrepreneurs are doing.

“First and foremost we’d like to invest in Bay companies, but we don’t have opportunities – there’s still a deafening silence from local entrepreneurs,” said Bill Murphy, executive director of Enterprise Angels.

Since November, Enterprise Angels has grown its membership to 55, making it the second largest angel investor group in New Zealand behind ICE Angels in Auckland.

Nearly every month, Enterprise Angels receives presentations from young and ambitious companies in a Dragons’ Den atmosphere.

Frances Manwaring and Marie-Claire Andrews, of SmartShow, presented in February and eight of the Enterprise Angels investors decided to pledge $90,000 to be used for product development and marketing overseas.

SmartShow was looking to raise a total of $350,000 and, after an earlier raising of $275,000, the Wellington-based IT company was suddenly oversubscribed with the Enterprise Angels investment.

“The people are important when it comes to investing in companies and the two ladies were high energy, talented and very focused,” said Mr Murphy.

SmartShow has produced a smartphone application for events, exhibitions and conferences. ShowGizmo automatically generates QR codes that are scanned by iPhones (and numeric codes tapped into BlackBerry phones) as people walk into the exhibition.

The phone then collects and stores event information, including exhibitor profiles, contact details, brochures and prizes that can be downloaded later. It saves taking away a bagful of paper.

SmartShow’s customers are the event organisers who pay a fee to use the ShowGizmo.

On the same day as SmartShow, Caldera Health from Auckland and Super Recovery from Nelson presented. Caldera has developed a new diagnostic programme for detecting prostate cancer and Super Recovery has made a natural product from a blackcurrant derivative that is fed to horses to aid their recovery after racing.

A month later, BioBrew from Rotorua, Kahne from Auckland and Dunedin’s Lifetime Health Diary presented, and some Enterprise Angels investors will be in discussions with these companies – particularly since two of them are in their areas of strength; agritech.

BioBrew, which has been operating for three years, makes fresh, living microbial brews that are fed to cows to help their digestion.

Kahne has radio frequency instruments that are inserted into the stomach and rear of the cows to measure their fertility. The instruments send information to the farmers to modify the cows’ feed and choose the best time to get them pregnant.

Lifetime Health Diary has developed an online diary, used by doctors and patients, to track people’s health over 10 years. Trials are being conducted by Southland District Health Board and companies in the United States.

Earlier, Enterprise Angels made large investments in Te Puna-based Reunion Food Co, which produces the natural Heilala Vanilla products, and the Havelock North Fruit Co, which has exclusive marketing rights for a small, sweet-flavoured apple called Rockit and is packaged in tennis ball-type tubes.

After sending through its latest financial results, Mr Murphy said Heilala Vanilla had exceeded its sales and profit targets for the past year and was making a strong sales push into Australia.

Last November, Enterprise Angels signed a partnership agreement with the New Zealand Venture Investment Fund which will match private or angel investment up to $500,000 per company through its seed co-investment fund (Scif), which has $40 million available.

Enterprise Angels is also looking to launch a Sidecar Fund of about $1 million so investors can make more small investments and build up a portfolio of companies.

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Innovation nation? Searching for the plan to boost R&D

First published in the New Zealand Herald on Friday March 30, 2012

R&D – everyone knows we need more of it, so where’s the plan? asks Chris Barton.

The tropical downpour swamps gutters along Halsey St beside Auckland’s Viaduct Basin, turning the deserted industrial zone a bleaker grey. Guests arriving at the North Sails building on Pakenham St West, shoes sodden, shake out umbrellas and climb the stairs.

Stormy weather for research and development (R&D). The 150 or so attendees cram into Nextspace’s converted loft. The atmosphere is convivial – wine, canapés and humidity – the air conditioning unit working overtime.

The event is to show off Nextspace’s new premises and Visual City, its 3D digital imaging for town planning. It’s also a showcase for knowledge-driven innovation -the major vehicle for economic growth that New Zealand needs to get on board. Successive governments have been banging on about the idea for more than a decade. Remember the Knowledge Wave? Chief scientific adviser to the Prime Minister Sir Peter Gluckman is upbeat.

“It is the symbolism behind this move that excites me,” he says. “There is now a real determination to genuinely transform Auckland into an innovative city.”Nextspace is billed as the first tenant in the “Wynyard Innovation Precinct” – a block of land bounded by Pakenham West, Beaumont, Halsey and Madden streets.

The $9.2 million project, part of the Auckland Council’s Long Term (2012-22) Plan, calls for “a major innovation precinct that will create, attract and grow world-class research, talent and technology based ventures.”

A gathering place for geeks to develop their brilliant ideas on cheap rents. Why? Well, there’s always the hope that one of them will be a Mark Zuckerberg sitting on the next big thing. Or that maybe collectively they’ll generate enough new business to bring significant growth to Auckland’s economy. If it works, the innovation precinct is supposed to generate some 2250 jobs in the area, creating direct gross domestic product (GDP) of $303.2 million. At full capacity it’s supposed to create nearly 4300 jobs Auckland-wide and $612 million in GDP.

On paper it looks good. But start-up companies can’t afford the rents such a desirable central city location commands, so about $7.1 million is needed to create 30,000m2 of office space and cover the rental subsidy. The plan involves refurbishing the Lysaght and Total Marine Services buildings on the corner of Halsey and Pakenham streets. Waterfront Auckland and Auckland Tourism, Events and Economic Development would pick up the tab and are working with the Ministry of Science and Innovation (MSI).

Build it and they will come, apparently.

The idea that technology parks, hubs or precincts can generate economic growth isn’t new. It’s based on “cluster theory” developed by Harvard Business School’s Michael Porter and the idea that it must be possible to mimic San Francisco’s Silicon Valley. Governments all over the world have spent up large trying to do just that. Most fail, but that doesn’t seem to stop them trying.

Gluckman argues that none of this promised economic growth is going to happen unless a real innovation “ecosystem” develops in Auckland.

He cites Waterloo, part of Canada’s “Technology Triangle”. With a population of 500,000, the region has developed into the second largest generator of start-up companies – 250 a year – in North America and is home to numerous research-intensive multinationals and other companies.

Gluckman says the business community, leadership, the university and government support created the ecosystem. The key component, he says, is Communitech, a network of 40 groups that support tech companies in the region.

“The physical headquarters is a refurbished building right in the middle of town – exactly like what might be envisaged for Wynyard Quarter,” he says describing a building with meeting spaces and offices for about 50 start-ups, plus a mix of other technology companies and service providers.

What Gluckman rather glosses over is the importance of three key economic drivers. The region’s technology boom began about 50 years ago at the University of Waterloo, which is now one of the world’s leading computer-programming schools. Waterloo is also home to BlackBerry pioneer Research in Motion. And Canada’s Technology Triangle offers a massive range of R&D tax incentives.

No such luck for us. The word du jour, “innovation”, is very much centre stage in Economic Development Minister Steven Joyce’s new uber Ministry of Business Innovation and Employment (BIE), but R&D tax breaks are definitely off the table.

“I’m against anything that categorises spending which isn’t actually R&D,” says Joyce. “I’m aware of the potential for that to become a bit of a rort which is why we changed it and instead went for direct funding.”

He’s talking about the 15 per cent tax credit for R&D activities introduced by Labour in 2007 and repealed by National in 2009. It was intended to address New Zealand’s low levels of R&D investment relative to other countries in the Organisation for Economic Co-operation and Development (OECD).

New Zealand business spent just 0.54 per cent of GDP on R&D in 2010, compared with the OECD average of 1.5 per cent. Overall R&D expenditure, including government, was 1.30 per cent in 2010 compared with the OECD average of 2.33 per cent. Our government R&D expenditure ranked 25th out of 34 OECD countries in 2007, dropping to 28th in 2010.

At the time, the Manufacturers and Exporters Association described the repeal of the R&D tax credit as “a huge disappointment for those in the productive economy”. The government replaced the tax credit with Technology Transfer Vouchers and Technology Development Grants.

For those lucky enough to get them, such grants can provide much the same benefits as a tax credit. In 2010 Christchurch-based Tait Radio Communicationswas one of the first recipients – getting 20 per cent of eligible R&D expenditure reimbursed. Tait, which invests up to 12 per cent of revenue each year in R&D, received the maximum benefit of $7.2 million over three years. Chief marketing officer James Kyd says the support enables Tait to get solutions to market faster – in this case its P25 digital radios and network equipment. The downside is that it requires the government to pick winners rather than using a more broad brush policy in which all companies can participate.

So what other mechanisms might Joyce use to lift R&D investment? Even after almost four years in government, the minister insists it’s too early to say. Joyce does, however, give an idea of the direction he’s likely to pursue when he describes what innovation means to him. “Innovation is pretty core to every business, so if you want to have competitive businesses and pay people more, the ability to be innovative, the ability to introduce new ideas to develop systems and services which are valued in the market place is crucial.”

In short, innovation that pays its way. But as some like Eric Ries, entrepreneur and author of The Lean Startup, point out, the word innovation is so overused it has become almost meaningless. The McGuinness Institute, a think tank, makes the same point in Science Embraced: Government-funded Science under the Microscope. “Innovation is currently a fashionable word, rather as productivity was in the 1970s. Whereas the latter was about improving throughput, innovation is about anything that improves on an old idea.”

McGuinness says the term “innovation” in both the name of the recently formed Ministry of Science and Innovation (MSI) and its vision – “to create a high-performing science and innovation system – is problematic. “Innovation should not drive science unless it can be defined, because if we cannot define it we cannot measure it, and if we cannot measure it we cannot manage it.”

Take Air New Zealand, which has won accolades for its innovative approach to everything from technical engineering, to seating arrangements, ticketing deals, chef-designed menus, customer service and marketing. “These are clearly all innovations, but are they all science?” asks McGuiness. “Science is too important to be confused with other aspects of enterprise.”

The loss of a focus on science is a widespread concern, with many pointing to the dropping of the word “science” in the name of the new ministry. Those concerns began with the dropping of the word “research” in last year’s merger of the Ministry of Research, Science and Technology (MoRST) and the Foundation for Research Science and Technology (FRST) into the Ministry of Science and Innovation.

“I’m concerned about the Marsden Fund, whether its importance will be realised in this new ministry which has obviously been set up to have a very business facing focus,” says Professor Shaun Hendy, deputy director of the MacDiarmid Institute at Wellington’s Victoria University and also an Industrial Research scientist. “Marsden priorities are much longer term than most businesses will be interested in. We would be really concerned if there was influence from the business sector about the types of science that got funded by the Marsden Fund.”

The $47 million fund provides contestable research funding for investigator-initiated “blue skies” research which is not subject to the government’s socio-economic priorities. Hendy says the new ministry shows a desire for science in New Zealand to focus on the short-term bottom line. “We know that more scientific research is needed to grow industry, manufacturing and exports. But large components of the science system are concerned with the broader view, such as environmental and health science research – areas that do not often deliver an immediate payoff but which can be immensely valuable over longer time frames.”

Professor Peter Hunter, Director of the Auckland Bioengineering Institute at The University of Auckland, expresses similar concerns. “We do not adequately fund basic science – without which there are no ideas to feed the innovation pipeline,” he says, nothing that just 8 per cent of applications to the Marsden Fund and the Health Research Fund get funded. “Many excellent ideas with potential economic, health or social benefit outcomes therefore go unsupported.”

He points out that New Zealand’s total public spending on R&D is about half of what it is in most small, advanced economies. “For New Zealand to be really serious about pulling its economy up on the basis of science and technology, it needs to double its investment in comparison to other countries.”

Another who has concerns about the new ministry’s name is Dunedin-basedAnimation Research chief executive Ian Taylor. “I fear the government has removed the word ‘science’ because they think it comes under the word ‘innovation’ and it doesn’t.” Taylor says innovation is essentially “doing something today better than you did yesterday”.

But that’s quite different from the process that led to the formation of Animation Research in 1989 – the result of a joint venture between television production company Taylormade Productions and the Computer Science division of the University of Otago. It set out to explore the commercial possibilities of harnessing a 3D ray-tracing renderer developed by the university. The outcome has been an array of 3D animated graphics that transformed sports coverage, beginning with the America’s Cup Challenge in San Diego.

Taylor, who is on the MSI’s Innovation Board, says the number one criterion for government investment in innovation should be creating high value jobs in New Zealand for talented 18-25 year olds. “I think priority should be placed on companies that are really committed to staying here.”

Taylor also sees a need to reduce red tape in applying for government funding – especially in the early stages of development. “We need to develop a funding area that is not risk averse. ”

Taylor speaks from direct experience. In the early development of Virtual Spectator for the America’s Cup, the company’s first $100,000 of funding came not from New Zealand but from Louis Vuitton’s Bruno Trouble. “It was a Frenchman on his boat on the Seine in Paris who said: ‘I love it. How much do you need and when do you want it?”‘ That’s the sort of agility Taylor says is needed to give New Zealand technology companies a leg up. What he’d like to see is a part of the new ministry, with a relatively small amount of startup funding at its disposal, given the authority and the power to be innovative.

Joyce is quick to allay concerns about the place of science in the new ministry and its business friendly stance. The Minister of Science and Innovation portfolio will not change. The ministry’s new name, BIE, is a working title and he’s considering whether there should be changes. There is “every likelihood” a key branch of the new ministry would be science and innovation “that wouldn’t look unlike the current MSI”. There are no plans to change the Marsden Fund.

Joyce maintains there has been a significant increase in government funding for R&D, rising from $912 million in 2008 to $1.117 billion in 2010, counting all R&D across all government departments.

The figures come from Statistics New Zealand’s biennial survey that asks researchers where their funding comes from. Research funding allocations in 2010 by department produce a slightly lower – $1.069 billion – total: comprising $664m from Vote Science and Innovation; $280m from Vote Education (Tertiary); and $125m from other government budgets (including $30m from the Ministry of Agriculture and Fisheries’ Primary Growth Partnership).

The significant change for the $773.7 million Science and Innovation budget for 2011-12 is the way in which the funds are now allocated by industry – biological, energy, environment, hazards and infrastructure etc – and core funding of $215 million for the eight Crown Research Institutes. What it means is the universities – whose relationship with the CRIs has been described as being like the Cold War – are bidding for a smaller chunk of the funding pie.

Joyce is also seeking Budget approval for two additional R&D projects. The “grand science challenges”, costing $60 million over four years, would involve multi-disciplinary groups researching problems of national significance.

The new ministry also wants $80 million capital and $20-$30 million a year in operating funding from the Future Investment Fund for the restructuring of Industrial Research. The plan, still in the design phase, is to create an Advanced Technology Institute in Auckland, Wellington and Christchurch focussing on high-tech manufacturing and services. The Auckland Council would like IRL’s Auckland head office to be in the Wynyard Innovation Precinct. Joyce isn’t opposed to the idea.

Joyce also wants to allay concerns that the new ministry’s innovation policy is focussed on short term returns. “The reality is you have got to have a strong science ecosystem to do these things and that means actually having a longer term view,” he says. “I completely understand the importance of the investment in basic science to ensure we have a good grounding for the rest to flow.”

Will it? Joyce clearly has a busy work programme ahead to build his innovation ecosystem. But some fundamentals – funding and a mechanism to increase our woeful level of R&D investment – still appear to be missing. It’s also not clear whether enough is being done to nurture young talent and whether the new business-facing ministry is paying enough attention to the engines of innovation, our universities.

“Our universities are funded at around half the income per student of Australian universities and at about one tenth that of the world’s top research universities,” says Hunter.

The real problem, however, may be expectation. “We need to accept that economic return on investment in R&D does not happen overnight,” he says. A good example is Fisher and Paykel Healthcare, which has taken three decades to reach annual operating revenue of $500 million since it started developing respiratory humidifiers in the 1970s.

“You can see things slowly improving. Our high technology exports are growing and you can see collaboration in New Zealand is increasing. They’re just not happening at rate they could,” says Hendy. Our biggest problem, he says, is one of scale. “As a country of 4 million people we don’t make best use of connections between people to put ideas together. We need to think like a city of four million people.”

Back at Nextspace, there’s an elephant in the room. The company was formed as a result of a “Spillover Agreement” attached to an interest-free $14 million government loan to 3D graphics company Right Hemisphere in 2006. The idea was to develop a New Zealand graphics software hub, but last year Right Hemisphere was bought by German software giant SAP. It’s a further reminder that creating economic benefits from technology takes time, picking winners isn’t easy, and that there is always a larger animal in the innovation ecosystem that can take those benefits offshore.

NZ spending on R&D (2010)

  • Govt (excluding higher education): $629m, 0.34 per cent of GDP
  • Higher Education: $802m, 0.43 per cent of GDP
  • Business: $1.01b, 0.54 per cent of GDP
  • Total: $2.44b, 1.3 per cent of GDP

THE RETURN

  • $7 billion: 2011 revenues of the Technology Investment Network 100 companies
  • $5 billion: 2011 exports by Technology Investment Network 100 companies

GETTING HELP

  • Technology Development Grants: for firms that conduct significant amounts of R&D. Grants cover 20 per cent of project costs to a maximum of $2.4m. Grants are for three years and are not tied to a particular project.
  • TechNZ Project and TechNZ Capability: Provide 1:1 matching funding for defined projects and capability development.
  • Technology Transfer Vouchers: To give firms access to research organisations. Provides 50 per cent matching funding, with a minimum total contract value of $60,000.

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Billionaire backs tech firms

First published in the New Zealand Herald on Friday March 23, 2012

The Government has joined with Facebook billionaire Peter Thiel to create a $40 million venture capital fund aimed at getting Kiwi tech firms exporting.

While the cash is good news, industry insiders say the real prize is Thiel throwing his weight behind New Zealand.

Crown-owned New Zealand Venture Investment Fund (NZVIF) announced yesterday it had joined with Thiel’s local investment vehicle, Valar Ventures, to form the new fund.

Thiel himself has sunk $15 million into the new fund, while NZVIF and other private investors put in $20 million and $5 million respectively.

Although NZVIF has fronted half the money, Valar Ventures will manage the fund’s investment decisions.

Thiel, who co-founded e-commerce service PayPal and was an early investor in Facebook, said yesterday New Zealand had attractive investment propositions.

“Over the last several years, New Zealand has been nurturing more early-stage tech companies. I’m delighted that the Government’s [NZVIF] is partnering with Valar Ventures to enable more of them to expand and compete on the global level,” the Californian resident said.

Andy Hamilton, chief executive of business incubator The Icehouse, said Thiel’s establishment of a New Zealand-based fund was a “significant milestone” for the local technology industry.

“Why this is so good, without the co-investment side, is because you have an incredibly high-profile international investor choosing to invest here,” Hamilton said.

“In most places in America they say ‘you’ve got to get here and we’ll look at you’. Now what Thiel has said is that he’s prepared to invest in companies in New Zealand to help them get up to America.”

NZVIF chief executive Franceska Banga said Thiel would provide the fund with important links to the US market.

“Peter Thiel is one of the world’s most successful technology investors. He and his team bring a considerable track record of expertise and resources. For young New Zealand technology companies, Valar Ventures’ presence in the New Zealand market is a significant opportunity,” she said.

Economic Development Minister Steven Joyce said Thiel’s backing was a “positive sign of confidence in [New Zealand’s] innovation and entrepreneurship”.

Thiel has a net worth of US$1.5 billion, according to Forbes.

Although the 44-year-old’s love affair with New Zealand began with an adventure tourism trip to Queenstown 19 years ago, his first local investment, through Valar Ventures, was a $4 million injection into accounting software firm Xero in October 2010.

Valar also put an undisclosed amount last January into Pacific Fibre, the company planning to build a second submarine internet cable to Australia and the US.

Last August Thiel invested in Booktrack, the brainchild of New Zealand brothers Mark and Paul Cameron, which adds music and other ambient audio to novels or short stories being read on tablet devices like the iPad.

It is understood Valar’s existing investments in New Zealand companies have been transferred into the new capital vehicle.

Xero chief executive Rod Drury said the new fund was a “huge endorsement” for New Zealand which showed American investors were broadening their horizons and looking for opportunities outside the US.

“I think the big thing that is happening is that traditionally US investors only invested in places they could drive to … [now] hedge funds are looking more outside the US to find interesting companies and I think they’ve been pleasantly surprised.”

Investment plan

  • The Valar Ventures fund aims to help New Zealand tech companies expand into overseas markets.
  • Peter Thiel has invested $15 million, NZVIF has put in $20 million and other local investors $5 million.
  • Thiel’s investment vehicle will manage the fund’s investment decisions.

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