New Zealand, the nation that stole our America’s Cup yacht race when we weren’t paying attention, now wants to snatch a few ideas on how our venture capital system works. New Zealanders, or Kiwis, produce timber, dairy products and wool like mad, but they never developed anything beyond a modest manufacturing base.
New Zealanders never manufactured cars, planes or motherboards, and other Western economies have passed them by. Government officials and business thinkers now want to compete more effectively in the global market by developing what they call a “knowledge-based economy.”
“It’s the big buzz in New Zealand right now,” says Simon Aimer, executive director of Rubicon Ltd., a NZ$300 million ($123.7 million) publicly listed capital management company. “They’ve discovered venture capital, and they think it’s for want of VC that the economy has not been doing well.”
When New Zealand’s last budget passed, the government pledged NZ$100 million to spark VC activity through the Venture Investment Fund (VIF). Legislators called on the architects of Israel’s similar device, Yozma, to help them design the initiative and later took cues from Australia’s Innovation Investment Fund in the final planning stages.
Previous to this initiative, most estimates on the overall size of the VC market in New Zealand ranged from NZ$800 million to NZ$3 billion, depending on who’s counting and the inclusiveness of the definition.
“It [the VIF]’s really giving legitimacy to what venture capital is all about,” says Neville Jordan, entrepreneur and chairman of Endeavour Capital Ltd.
Starting later this year, the VIF will select different local fund managers to direct each of an undetermined number of subordinate funds to be seeded by its capital. Government funding will match half the capital the local managers attract from investors, including international VC funds if all goes according to plan. Kiwis think the most direct opportunity for foreign VCs to participate in the domestic market is through partnerships and investments in New Zealand venture funds.
Besides being resource-based, the New Zealand economy also depends on small to medium enterprises, but Kiwis have yet to grow many companies beyond local markets.
“New Zealand society is innately entrepreneurial,” says Pete Hodgson, the Minister of Research, Science and Technology, a cabinet post. “It doesn’t really understand that, but it is. I find it interesting that despite the entrepreneurial spirit, the ability to commercialize it has been lacking.”
New Zealand companies sell to a domestic market of about 3.5 million people, which expands to maybe 25 million if they get ambitious in the surrounding Australasian region. In general, Kiwis have not had much experience competing globally beyond that range, and they need international investors for help commercializing their technology.
For example, the most mature biotech firm in New Zealand, Genesis Research & Development Corp., leans on its U.S. partners in its attempt to commercialize its drug technology. The newly public company put a therapeutic psoriasis vaccine in Phase II clinical tests in cooperation with Corixa Corp. and sold downstream licensing rights to international pharmaceutical companies.
Stephen Hall, head of corporate services of Genesis, finds U.S. partners helpful in running the clinical trials, negotiating with the FDA and lining up distribution partners, but Kiwis still supply the research.
“If you can cure a disease in New Zealand, there’s a good chance you will cure the disease in the U.S. and Europe,” says Jerry Balter, New Yorker and director of New Zealand Seed Fund.
Kiwis seek American help on commercializing non-biological technology as well. Jeff Dittus, an American based in Philadelphia and the chief executive of IT Capital Ltd., a publicly traded New Zealand venture fund, shifted its software development company Virtual Spectator Ltd. and hardware company Deep Video Imaging Ltd. to the U.S. and handed over the companies’ business development and marketing operations.
Following the Money
Next to the distance from international markets (“For most Americans, it’s like going to the moon,” says one VC), VCs cited the lack of experienced, local management as the biggest weakness in the VC area.
The VC industry in New Zealand deserves the emerging market label, but otherwise the country is very advanced. Politically and culturally, New Zealand resembles the U.S. and other Western economies. The country boasts a strong education system, with more students in tertiary institutions per capita than any other country this year.
Unfortunately, the most ambitious Kiwis often leave the country for higher salaries and bigger markets abroad, before returning later in life. Indeed, almost all New Zealanders contacted for this story had worked abroad.
Two new organizations hope to capitalize on the expatriate network. University of California Professor David Teece organized the tentatively-named Society of Silicon Valley Kiwis, a professional organization of displaced New Zealanders. Among other functions, Teece says this list represents a group of experienced Kiwis who can be recruited home for management positions. At a recent government-sponsored conference, Teece developed the idea with Stephen Tindall, probably New Zealand’s most successful contemporary entrepreneur and founder of the Warehouse Ltd. (their version of Wal-Mart).
Further down the West Coast, Guy Manson and others are forming the complementary, ANZA Technology Network. Manson chairs the group of expatriate Australians and New Zealanders working in U.S. technology companies; he intends the network to facilitate the transition for Australasian companies and executives transplanting to the U.S.
Balter says Americans would consider most New Zealand venture activity to be angel investing, involving sums of money that won’t get the companies terribly far.
Dittus finds “almost no series B money in New Zealand,” but the early rounds find plenty of support. By series B, the typical company has developed its product, proven the model locally and probably put its toe in an international market. Still, it needs the capital to support expansion into that market. Dittus’s two recently transplanted start-ups are at this point, seeking further capital to complete their marketing plans.
What They’re Selling
With the VIF, government officials hope foreign investors will bridge the funding gap in the growth cycle and supply know-how in kind. Hodgson even says the professional skills are more valuable than the money. The Kiwis don’t expect many firms to open a New Zealand office, but with a growing local VC community, they think international VCs will want to partner with domestic funds.
“If I was a smart American VC [wanting to invest in New Zealand], I would partner with a local firm and take advantage of later-stage deals,” Dittus says.
New Zealand’s history favors certain industries. With its sophisticated agri-science background, New Zealand has spawned a disproportionate number of biotech companies, particularly in non-human research. New Zealand companies also focus on products where distance is not a factor.
With the favorable exchange rate and modest labor expenses, New Zealand research and development is considerably less expensive than U.S. efforts. It’s not the biggest bargain out there, but it may be the best English-speaking R&D deal.
Line for line, Jordan says New Zealand companies produce software code at 40% of the cost of U.S. companies. Other VCs estimate biotech R&D costs around one-third of the equivalent R&D in the U.S.
“I find I can move faster on the ground there as compared to the U.S.,” Teece says. New Zealand also boasts fewer regulatory restrictions on R&D, allowing unrestricted biotech experimentation and unregulated cross-ownership of media companies, for example.
New Zealand law allows intellectual property to be depreciated and R&D costs to be deducted. New Zealand has no capital gains taxes and a very minimal payroll tax of around 2%. Once the model for free-trade economics, foreign investment carries no tax penalties.
Despite its isolation, multinational companies, such as cellular companies, jockey for position in New Zealand, a prime test market. With only 3.5 million people in the market, companies can run marketing campaigns to saturation and challenge equipment with relatively little expense. Companies can expand their market fairly easily by tapping into the rest of Australasia.
Products test well, because the population matches the culture of North America and Europe, and Kiwis are early adopters. By 1995, Kiwis were using smart cards for phone calls, debit cards for purchases and getting caught speeding by radar-operated cameras.
A new high capacity cable links New Zealand with the U.S. West Coast, digitally bridging the physical divide. Amid all these modern conveniences and technological advances, economically the country still lags.
Venture-backed companies do not necessarily line up to join the thinly-traded New Zealand stock exchange. Historically, trade sales to multinationals claimed most venture graduates.
Multinationals could easily slip New Zealand technology into their international distribution network, or they could easily establish a presence in the New Zealand market by acquiring a similar domestic company.
Some companies list on the New Zealand share market and cross-list elsewhere, and others float directly on the Australian exchange. However, the Nasdaq is still most coveted exit.
New Zealand VCs hope an American connection will facilitate international distribution and access to capital markets. New Zealanders understand VC is important to their economy, because another statistic plays into their buzz about the economy. In the past 50 years, the country’s relative wealth fell from third in the world to 20-something, despite improvements in core business practices.