While I was visiting Christchurch recently I joined Tait Electronics CEO Michael Chick for a guided tour through the ICT industry infrastructure initiatives that have led Canterbury to dub itself Silicon Plains. Tait Electronics is part of the Canterbury Electronics Group, a body whose six members export close to $400 million annually and contribute over $1 billion to the local economy. But CEG is just one of several Christchurch based ICT support organisations. Their software cluster, Canterbury Software, has close to 75 members.
On top of these bodies is the Canterbury ICT Cluster, a regional representation of anything that is connected to ICT –- software, electronics, service providers, educational institutions, regional development agencies and NZTE -– a localised mirror of a national infrastructure. Servicing a population of just 350,000, they have a model that could service the nation -- yet it is siloed in the South Island.
We are told that there are more than 140 industry organisations servicing our modest ICT sector. Almost all have been formed out of perceived necessity and are fuelled by goodwill. Many lose their steam when the founding members’ fire dies and the supply of voluntary input dries up. A few, such as Wellington-based ITANZ and CEG, have large corporate members who can afford the substantial level of membership dues required to fund a substantial fulltime executive team. But now we hear from Wellington that even these sources are dwindling.
The ICT industry is split between two communities of interest -- providers and users. It is the user-oriented bodies, such as Tuanz and InternetNZ that have the cash to entertain initiatives that provider-oriented ICT bodies dream about. The latest from InternetNZ is Ictus the ICT Unified Submissions secretariat, a new organisation to “provide a centralised place for ICT Industry submissions to government to be collated and unified into a single industry view.
Meanwhile, under the guidance of New Zealand Trade and Enterprise, another overarching industry body has been established -- ICT NZ. Among its members are the Canterbury ICT Cluster and InternetNZ. It aims to represent the whole ICT sector –- but it doesn’t have the breadth of organisations embodied in CEG.
Yet, despite a great deal of energy going into forming industry bodies, it has little effect overseas where it matters most to the provider community, as a quote from a Canterbury Software newsletter shows: “Perhaps the most important thing CSI facilitator James Saruchera learned on his trip to England and Germany was that almost nobody there knows about Canterbury's software industry.” Hardly surprising -- he would probably have got the same result in Auckland. I am afraid that the tyranny of distance applies as much within New Zealand as without.
Sharing knowledge and resource at a national level is an essential component in developing our ICT sector, but how can we facilitate this? Government supports the formation of industry bodies by providing funding through NZTE -- which, as a result, sees this facilitation role as its responsibility.
As a nation we are particularly poor at sharing, be it the highway or IT industry resources. We need to be far more open to forming relationships and we could use some incentive from government to help us -- maybe an ICT version of the Civil Union Bill.
The beginning of the calendar year is a good time to examine your relationships –- business or otherwise. In business we are always trying to form relationships, looking to leverage the knowledge age mantra of 1 + 1 = 3 and make something more out of our limited resources. Government should be in the same position. While not a commercial entity, it is in the business of forming relationships and bestowing its blessing upon the relationships of others -- in the form of funding, recognition or both. Why not take this activity a step further?
Many find applying for government funding a gruelling process. Yet, considering that government is giving away taxpayer dollar, there is good reason to apply a high level of diligence in the process. Dealing with venture capital firms is far more arduous -- and they want your first-born when they hand over the money.
Today, the New Zealand government is the largest provider of funds to the tech sector, through Technology NZ, NZTE and the Foundation for Research, Science and Technology. They may not to be in the business of holding, and thus having to manage, equity or debt in exchange for their funding but I believe that they could get far more leverage from their investments without the post-investment funds management issues.
I think we are missing a big opportunity in the Government funding process.
When an ICT venture receives Government funding four things have happened:
1. The company has just gone through a plan evaluation and due-diligence process that would have value to others looking to get involved in the business –- financially or otherwise.
2. The company’s technology has received endorsement and in doing so has had to clearly show the innovation inherent in its offering -- something at which ICT companies can be particularly poor.
3. The company has been required to define its business strategy and go-to-market plan – “build it and they will come” won’t cut it. This is one area in which the government’s processes appear to be improving, with focus on “research stretch” and arcane information submission formats giving way to the more pragmatic “Explain how this makes money”.
4. Best of all, you have not had to go into debt or give away anything, such as equity, in exchange for the money.
These four points are in fact assets that can be employed by the company to leverage the government’s funding contribution.
Getting government funding puts a company in great shape to get additional resources –- from capital to market partnerships. Effectively, government can be considered a lead investor and make its own contribution conditional on securing other partners, such as new investors, go-to-market partners or a technology development partner. From a finance point of view, government’s endorsement is a great time to engage new investors: the company has a good business plan to explain how it is going to be a success and the government has expended significant dollars to ensure that what you are pitching is in fact real.
Having government funding in the bag is a great time to go to others and say, “If you will help us meet Government’s conditions we will …”
Strange as it seems, the point at which you get funding is the best time to go looking for more. US venture capitalists will always look more favourably at a deal that someone else is already committed to funding. Particularly in the area of ICT, they can look at you until the cows come home deciding if you are a winner and still not able to reach a conclusion. How much easier it is if someone else decides to share the risk with you by co-investing –- it is the old 1 + 1 = 3. Regardless of what private investors think of the government’s current due-diligence process for funding, it is always going to be far safer to invest in a company someone else is backing as a winner.
One of the good things about government investment is that it is milestone driven with regular oversight of the investment and a direct relationship with the external party -- something that itself is very valuable to other investors who are not in the same geographic location as their investment.
The signs are good that government is recognising its potential role in helping companies become successful by using incentives to induce “business stretch” not just “research stretch”. Technology New Zealand is, I believe, making good progress in this area, improving both its objectives and the process. As one of the team commented to me recently, “We are here to help”. And as any parent knows, it is better to give little Johnny money in return for meeting an incentive goal than just putting the money in his hand.
As an industry we need to seek and stimulate collaboration at every opportunity. The government needs to lead the way and recognise that because it gives out a great deal of money it is in the position of being the matchmaker. At present government grant money is only achieving half of what it potentially could. Anyone looking to develop a strategic relationship with a company here should be looking to co-invest with government -- a ready-made partner to grow the pie that doesn’t require an equity share.
When given the gift of money, a company can leverage that gift outside itself –- not to do is missing a huge opportunity. Our fledgling angel investment industry would grow wings overnight if every dollar it put up could be matched by a dollar from government –- it would grow the industry far more effectively than any tax relief could. This is active financial stimulation that will make sure that our collective money is all going in the right direction.
John Blackham is a well known Auckland entrepreneur developing his own software solutions. Contact Blackham at email@example.com.
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