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State of the sector: Technology

A new New Zealand is emerging so quickly that it is challenging common understanding of what our economy is about
and making obsolete the outdated myths, common around the barbecue, about what we’re good at and where we are heading as
a country.

The technology sector is alive and growing quickly, achieving scale and attracting investment in ways previously not thought possible. In fact, the technology sector already has the scale and momentum that we hoped for at the start of the millennium, which some saw only as a pipe dream.

The TIN100 Report is an annual benchmark of our 200 largest tech exporters, by revenue, in the areas of ICT, high-tech manufacturing and biotechnology. This year, these 200 technology companies will hit combined revenues of close to $10 billion and employ 40,000 people globally (note: 40,000 people are employed by the dairy sector in New Zealand). 

These companies are on a slingshot trajectory from the lows of the global financial crisis that only seems to be gathering pace. And, with the existing momentum, it is likely that technology exports, currently around $7 billion, will surpass dairy exports within three to five years. 

Yet the negative myths that we have all heard still persist, such as:

“Kiwis are good at inventing but not commercialising.”

“New Zealand companies don’t invest enough in R&D.”

“New Zealand companies don’t know how to scale.”

“Australia is a graveyard for failed New Zealand companies who tried to enter that market.”

“Kiwis are no good at selling.”

And, perhaps the most cringeworthy, and my personal favourite: “We are punching above our weight”.

The reality is the size of our economy and our outward facing global orientation gives us the advantages of timing and speed, crucial in a fight for ascendancy against much larger, structurally inflexible companies and economies.

Increasingly, success demands that TIN100 companies are market leaders and price makers with the ability to protect margins should the New Zealand dollar move against them. Innovation is at the core of both market leadership and margin protection. Equally, these companies are migrating to business models that generate recurring revenue and strong cash flows – critical when the proverbial hits the fan – but also critical to greater scalability. Companies like Fisher & Paykel Healthcare, Orion Health and Xero are perfect examples.

The convergence of high investment in innovation and rapid scalability is not limited to these companies. Last year in the TIN100 report, we isolated 23 companies (“Rising Stars”) who had a minimum three year compound annual growth rate (CAGR) of 20 percent. These companies had combined revenues of approximately $900 million and an annual growth rate in 2015 of nearly 40 percent. On average, they were spending double the percentage of revenue on R&D of other TIN100 companies.

The importance of R&D for these companies is not a discerning choice but instead recognised as an essential component of survival and growth, and an expectation of funders who are investing in them. A cluster of companies with revenues of $1 billion that sustain a 40 percent growth rate will be transformative for the TIN100 group of companies and the economy. But already the TIN100 profile is one of a growing stable of large companies.

Within two years, the TIN100 will have three companies with revenues over NZ$1 billion. This year we expect to have eight companies with revenues over $200 million. There is a rapidly growing depth of experienced talent circulating the growing number of large, high-growth tech businesses.

The Darwinian requirements for rapid growth, great execution, pioneering solutions and ample funding are creating a new culture of ambition and leadership previously not the hallmark of New Zealand’s historically restrained Anglo culture.

And while Australia may have been a graveyard for some New Zealand businesses, the strength of the Australian economy during the GFC was a vital bulwark for New Zealand against the extremes of the GFC aftershocks. Australia remains the number one market for TIN100 companies.

All of this may have bypassed some of us, but it certainly has not gone unnoticed by international investors. Today, approximately 25 of the leading US private equity and venture capital firms have investments in New Zealand technology businesses, a naively optimistic scenario just five years ago.

New Zealand is increasingly a place where talent wants to reside in a global war for talent. Similarly, capital flows are rapidly becoming global or geographically agnostic in search of better deal flow outside the US, where valuations have become too high as too much money chased too few quality deals. The bold ambitions of US pioneers like Elon Musk  with SpaceX and Tesla have, at their core, an approach to cost saving and efficiencies, a “leanness” that has long been a hallmark of our innovation.

And, lastly, New Zealand is NOT punching above its weight, but is assuming a position richly deserved by the strengths it brings to innovation, business culture, speed, cost efficiency and scaling up, in a world where the rules are rapidly changing in our favour.

Sir Paul Callaghan imagined 100 inspired entrepreneurs transforming our economy. Maybe 200 are starting to get the job done. 

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