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Time to be bold and break the mould

Time to be bold and break the mould

Have the quality of Kiwi innovation and new business opportunities deteriorated so dramatically that, despite the best efforts of Industry New Zealand and others, they are no longer worthy of investment?

In the dying days of the election campaign the New Zealand Herald tried to focus our attention on the maxim that Bill Clinton used to win office, “It’s the economy, stupid”. Its thrust is correct. Without economic growth the debate about other election issues, like law and order, education and health, is merely about carving up a cake that is becoming progressively smaller. The key issue is how to make the cake larger. The Labour government, in its Growth and Innovation Strategy, acknowledged that the agricultural sector alone will not provide us with the size of cake we aspire to and identified the high-tech sector as offering the best opportunity for future growth. But betting on the New Zealand high-tech sector is a long shot, especially as just about every other developed country has made it a top industry development priority and — despite all the rhetoric — there is little sign of the seismic shifts in our allocation of resources needed to make the aspiration a reality.

It will take bold action on the part of government to provide the environment in which the ingredients for our high-tech cake are readily available. The VIF funding initiative is a start, but a very small component. The three ingredients required to create new high-tech businesses are well known:* Money-making ideas. * Skills to turn the ideas into successful businesses. * Money with which the businesses can pay for the skills.The important factor is to have the three ingredients available at the same time. It is embedded in the psyche of most Kiwis that we are a people with good ideas. While this view might be subjective, we can make a strong case that we are indeed an innovative nation. But what of the other two ingredients?For years commercialisation skills, offshore marketing capability and experienced management have been seen as the main ingredient missing from our cake mix. Venture capitalists like to back teams with proven capability in successful baking.In the previous issue of CIO I floated the idea of venture development partnerships as a vehicle for the country’s most experienced entrepreneurs to apply their skills to helping grow high-tech businesses. The column garnered positive feedback and could become a reality, provided we have the third ingredient in place — money.For Kiwi start-ups the funding picture is bleak. In the world of venture capital it is drier than the Kalahari Desert. At the same time that Kiwi investment dollars are fuelling the property market, anecdotal evidence suggests no VC investment has gone into software companies for nearly a year. When a VC colleague recently asked me how many deals had been done this year I suggested they would be fewer than the fingers of one hand. The rhetorical response was, “As many as that?”We are told there is plenty of potential venture capital looking for investment — up to $2 billion, according to Treasury last year. So why isn’t investors’ money going into ICT ventures? Have these suddenly become bad investments? Have the quality of Kiwi innovation and new business opportunities deteriorated so dramatically in the past year that, despite the best efforts of Industry New Zealand and others to boost the industry, they are no longer worthy of investment? The problem is circular. Without commercialisation skills ICT ventures are viewed as too high risk for investors. Yet without investor capital, ventures cannot acquire the skills they need. The VDP concept has the potential to solve this problem but again the missing ingredient is centred on money.The basis for the VDP concept is having experienced entrepreneurs invest their time in business ventures in exchange for equity rather than salaries since most ventures lack the funds to pay for the level of management skill that they bring. Having equity in the venture ensures the entrepreneur’s focus in helping to make the company a success. What prevents this model from working is an inability for entrepreneurs to convert their equity into cash when they have fulfilled their role. They need a way to liquidate all or part of the equity they build up. Being able to do this via listing on a reputable stock exchange such as the Nasdaq market or being acquired by another company looks light years away to someone investing time in a venture.It is in this area that the opportunity exists to spur dramatic growth in the high-tech sector — provided the government is prepared to act boldly and support a local solution (to what is a global problem) rather than looking offshore for the answer. The answer to this really could be quite simple — a mechanism in the middle that profits from everyone bringing the money and the venture together, promoting a flow of investment capital into high-tech ventures and enabling VDP entrepreneurs to make money.This mechanism? Introduce competition to the stock exchange. Create a market of markets — a marketplace of stock-trading companies (each focused on specific market sectors such as software and communications) attracting investors based on their track record of offering successful investments. The NZSE currently has no competition — it is not performing because it doesn’t really have to. Not only is it the only show in town, it supports an arcane infrastructure, dependent upon the mumbo jumbo that surrounds the buying and selling of stock and a high level of investment required by a company to list in the first place.It is really quite remarkable that at the heart of our capitalist system — the trading of capital itself — lies a moribund government-legislated monopoly that inhibits free market competition and effectively holds our future development to ransom. It is a system somewhat reminiscent of a communist regime. If you buy fruit from your local greengrocer and the product is rotten you will give your custom to another trader. The competition helps maintain a quality product. Why is the trading of shares any different? The reality is that it is not. The NZSE model has evolved from an era in which people had to meet in order to trade and the shares were backed by hard assets for which rigorous documentation was required to ensure the transfer of ownership.In today’s world, where businesses are based on intellectual assets and anyone can trade over the internet at a minimal transaction cost, there is a need for a new type of trading mechanism. Recent events in the US with the measurement of “new economy” company performance and the earlier dot-com fiasco attest to this.Today you and I (CIO readers) cannot invest in ICT start-up ventures even if we want to. We are not allowed to. You are allowed to gamble away as much as you like on the horses or at the casino but not in start-up ventures, unless they go through the expensive and largely irrelevant vetting process associated with a public listing.Buying stock should be as easy as buying anything online and with just as many risks — in other words, few. The reason stock exchanges are today being punished by investors is because they have not been held accountable for selling “rotten” stock. A greengrocer that sells rotten fruit won’t be in business long — nor would a boutique stock exchange that promotes bad investments. And as greengrocers know about fruit, so market vendors trading in software stocks would be seen as the acknowledged experts in that field. It should also be possible to rate the risk of an investment throughout its life and factor that into the value of the listed stock allowing “mom and pop” investors to readily evaluate their options.To become successful, share traders would build relationships with the VDPs that groom ventures for listing. Just as a grocer depends on its growers for top-quality fruit, the boutique share traders would compete to list ventures reaching maturity. There is no reason why markets can’t become competitive, commercial and self-regulating businesses. Creating the environment to create such new financial mechanisms requires a bold move on the part of government, but when one considers that the whole venture capital model that we are now copying from the US is less than 40 years old, why shouldn’t New Zealand be innovative in the way it fuels its new economic growth? We don’t have to copy someone else. We have a proven ability to create world-leading institutions. Why not do it again?In the future IP-based world, the key resource (people) is a global commodity and while we may talk of dramatically increasing the number of technology graduates, our ability to retain them in New Zealand is at present highly doubtful. They will go to countries with businesses that can pay for their skills. If we are to compete with other nations in this field we must to do more than just try to catch up with them — we need really bold thinking so that we can leapfrog them.John Blackham can be reached at ajb@xsol.com.

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