In New Zealand the sector is not encouraged. Whenever as little as $1 is about to be spent on encouraging IT, other sectors — particularly rural — call foul. Trouble is, while the government recognises New Zealand’s future is in this industry, it doesn’t know what it will be or how to get there. This situation is creating an uncomfortable hiatus. There is not only no incentive to develop IT as an industry in New Zealand; there is no incentive to learn IT — not even any recognition or promotion to make this a marginally beneficial route to take.
Statistically, students should be beating down university doors to take IT courses — the industry’s median wage is twice the national average. Overseas you can get five times that amount. Admittedly, it is difficult studying a subject when you are not quite sure what the career option will be. Study medicine and you are a doctor; study IT and you often can’t put a label on what you will be. Which is why we need to develop those entrepreneurial skills from the beginning — in our students, teachers and parents.
The last speaker at the industry open day, Gen-i CEO Garth Biggs, said: “You are about to join an industry that is very well paid, but to make real money you need to start your own business.” This message was well received by attending students, eager to get business development groups going with a mentor. Even the nerdy ones that couldn’t make eye contact were keen to hear more from the industry representatives about how to acquire basic entrepreneurial skills so that they could turn their ideas into businesses.
The whole industry is starting to align itself into an entrepreneurial mould — even those who are employed are given incentive to think beyond the square. One of the most encouraging things to come out of the open day for me was that the graduates recognised they didn’t know a thing about the real world of business, but in knowing that they also realised their lack of knowledge was an essential part of being streetsmart and that it was up to them to fill the gap.
It is a pity the government and its agencies do not take a leaf out of their book. Face it. None of us really knows what we are doing in terms of developing a knowledge economy and building New Zealand’s IT industry. Not government, not the industry, not the venture capitalists or our universities — we are all making it up as we go along because what we are creating has never been achieved before.
Problem is, old-school Kiwi battlers set much of our direction. Having achieved their life dreams, they want to hold on to what they’ve got and not take any more risk. “Live in the comfort zone and do it the way we have done it before” is what they preach, so few are prepared to take the risks the nation must take. It is all well and good for those who have made it already, but what have we got to offer our kids? A nation of doctors and lawyers will not be a saleable commodity on tomorrow’s world market.
The number one challenge for this new administration is to alter the bureaucracy to be more comfortable with risk-taking. The government’s Venture Investment Fund (VIF) is a classic case in point. It should be creating opportunities for our IT graduates, either as employees or entrepreneurs. It should be a catalyst for students to take IT subjects and maximise their earning potential. It should be giving the fund’s $100 million to those who can grow it the best and the fastest — with no sticky strings attached. Instead, we are now told it could be next year before the funds start flowing to ventures. Why?
It has been two years since the ideas that eventuated in the VIF were first put forward. The VIF took its lead from an Israeli model in which government money was used to stimulate the development of new venture capital firms that would develop their venture investment skills by backing the best high-tech companies they could find. It was on this basis that the VIF fund manager selection process started a year ago. In the meantime the focus has shifted from “give it to the best VC managers to grow the fund” to having a VIF board and management team wanting to control the individual VC fund managers. In the words of the VIF, “Our overriding objective is to align and standardise the New Zealand venture capital market with standard international practice”, which tends to assume that the VIF board and management know more about VC investing than do the VC firms themselves.
Much of the problem has stemmed from the government wanting the money it placed with VCs to be invested largely in “seed” ventures and typically consumed at the R&D stage. VCs, on the other hand, are generally investment managers who place money from wealthy individuals or institutions in high-risk companies from which they seek a high return as soon as possible. The investors are not out to create a new industry. They want investments that are closest to payback, with the route of least resistance and lowest risk. They want reliable investments, not altruistic initiatives. The government’s decision to invest in expanding the IT industry is laudable but it is being bogged down in a bureaucratic maze.
Part of the problem stems from the origins of the VIF, which was originally to be funded from capital from Crown Research Institutes. CRIs undertake taxpayer-funded research, which effectively accounts for what private companies would term “seed stage” investment. However, because the CRIs need to raise money to commercialise their output and it is their first round of “external” funding, they used the term “seed” for this stage rather than “start-up”, the normal term for such financing. The government, wanting to support CRI commercialisation, aimed the VIF initiative at this “seed” stage definition, and it has become the centre of much debate since then.
Meanwhile, the rest of us wait for something to happen while these areas of misunderstanding are ironed out; too late for our latest handful of IT graduates. They will still have to largely look offshore to recoup their student loans and continue to watch wannabe lawyers, doctors and accountants fill our lecture theatres in the knowledge that their career choice is applauded and supported by the community at large.
If New Zealand is to succeed in developing new industry, IT or otherwise, it has to promote the concept of risk-taking, well managed risk-taking, rather than managing not to take a risk.
Venture Capital 101
What you may not know about funding terminology.
Seed funding: Money required to take a venture to the point of having a saleable product. You may not have it in the box yet or sold it to a customer, but consensus is that you have a saleable product. The high-tech sector has lots of stories about companies developing products but not being able to sell them. The seed stage should sort those that will grow and those that won’t.
Start-up funding: Progresses from the point at which you say, “I believe I have a product to sell”, and finishes when you have proven that there is indeed a market for the product. You have:
1. Proven the market — you have many customers so it must work.
2. Proven distribution — you can get the product to market and make money.
Proving distribution channels is a large part of this. It is no good if it takes 1000 man-hours to deliver the product to the customer, or only the inventor can undertake delivery. Increasingly, labour is the greatest risk in any proposition.
Expansion funding: Proven product with lots of customers that needs money to grow global markets and sustainable profitability. It is a nice, simple investment. Globally, there is usually a queue of VCs looking for companies to give money for expansion, and in today’s investment climate this area is just about the only one where ventures have some hope of getting funded … but there are not too many in this position in New Zealand yet.
John Blackham can be reached at firstname.lastname@example.org.
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