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TIN report's Greg Shanahan on state of the New Zealand tech industry in 2018

New Zealand is facing a quiet revolution. Its tech sector is transforming the economy and society in remarkable ways as the globalisation of capital, communication and commerce invert the pyramid of advantage in our favour. So, how can we take our tech sector to even greater heights? Alongside the release of the 2018 TIN Report, here's TIN managing director Greg Shanahan with his state of the sector address.

  • Employment: TIN200 global employee numbers grew by 4,300 in 2017, pushing past the 40,000 mark for the first time.
     
  • The snowball: The size of the sector is now such that an 8 percent annual growth delivers new revenue equivalent to the size of a company like F&P Healthcare, compounding year after year.
     
  • The US gaining momentum: Rather than being dependent on just a few star performers, the understanding of how to scale fast-growth businesses is rapidly spreading. In 2017, there were 22 TIN200 (Rising Star) companies with a minimum three-year compound growth of 20 percent (3 year CAGR). Those 22 companies had combined revenues of NZ$1.4 billion with a three-year compound growth of 44 percent.
     
  • The US market remains strong: Since the US economy began to pull out of the GFC in 2013, TIN companies have been on the ascendant in the US. Growth for the past two years has been approximately 20 percent. In 2017, the US market accounted for more than half of total TIN200 growth.
     
  • Rising Tide of Local Funding: Early stage investment from local sources pushed past a record NZ$100 million in FY2017, with NZ$87 million from angel funders and a further NZ$25 million from equity crowdfunding. Combined angel and crowdfunding investment has grown at a compound rate of close to 18 percent over the past four years.
     
  • Foreign funding flood: In the past two years foreign investors have poured over NZ$200 million into New Zealand tech businesses. Over the past five years, 62 foreign investors invested in TIN-tracked companies, 56 percent of those based in North America.

  • Too much money: The world is awash with money that is searching for homes. As too much money chases too few quality deals in larger markets, opportunities in remote locations such as New Zealand become appealing. These companies tend to be the first tier of global VC firms with the capabilities to handle broadly spread global investment. New Zealand is attracting some of the best names in the business, e.g. Khosla Ventures, Sequoia Capital, Horizon Ventures, Valar Ventures.
     
  • Evidence of success:  There is growing evidence that New Zealand companies are capable not only of building world-beating products but scaling in a way that can deliver a return on investment to their shareholders. In the words of Elon Musk’s biographer, Ashlee Vance: “This country of 4.5 million people has started to churn out some awfully polished extraordinary products… They’re world class technological achievements – the work of a well-educated, creative people bent on competing on the world stage.”       
     
  • Global capital: Investing in New Zealand is becoming easier. Easier travel, communications and due diligence, supported by New Zealand’s growing reputation for transparency, ease of doing business and lack of corruption have made New Zealand an increasingly attractive option for investment. Connections between New Zealand and large markets such as the US are growing by the day as they become easier to sustain.
     
  • Being small is an advantage:  New technologies that were once only at the disposal of large well-resourced companies are now putting advanced capabilities in the hands of cash strapped startups. Amazon founder Jeff Bezos’ ‘two pizza rule’ (if a development team can’t be fed with two pizzas then it’s probably too big) applies to New Zealand companies out of economic necessity. Thanks to technology, the affordable resources to New Zealand ‘two pizza’ teams have grown exponentially to the point where more money and people creates inertia.
     
  • Capital efficiency: As a result, TIN companies are incredibly capital efficient. How is it that New Zealand is “starting to churn out some awfully polished, extraordinary products” when the private sector is accused of woeful under-spending on R&D?  The answer is the statement is highly misleading. TIN200 companies are now spending close to NZ$1 billion ($882m) every year on R&D. This figure grew by 8 percent in 2017. The 22 fast-growing “Rising Star” companies referred to earlier spent twice as much on R&D as a percentage of revenue (at 16 percent) and grew R&D staff numbers at three times the rate (at 29 percent) of other TIN companies. Beyond the figures, NZ companies often extract far more out of the money invested due to the need to achieve market leadership on much smaller budgets.
     
  • Clarity and directness: The clarity and focus behind so many globally successful New Zealand innovations is no accident. Our isolation, rich environment, small size and open diverse culture are critical enablers of this success. And we shouldn’t forget that this is our huge but intangible competitive advantage.  American Jack Matthews, who is Mediaworks Chairman, described the New Zealand difference to the New Yorker in 2017 as follows: “The difference between New Zealand and the U.S., to a large extent, is that people who disagree with each other can still talk to each other about it here. It’s a tiny little place, and there’s no anonymity. People have to actually have a degree of civility.” Social cohesion, diversity and equality are critical ingredients in a meritocracy that enables the country’s top talent to access our fastest growing tech exporters.  This is more easily achieved in smaller countries such as New Zealand.

  • Going with what you’ve got: New Zealand has a huge opportunity for technology to enable a self-determined future.  To achieve this, our focus needs to be more on what success for New Zealand may look like rather than an angst-ridden focus on current perceived shortcomings. Rather, we need to understand more intimately the advantages that we have so that we can protect and build on them.  Although 2018 promises to be another bumper year for TIN companies, there are still challenges remaining.
  • Big companies. What will it take to build more $1B revenue companies? Foreign acquirers continue to deplete our supply of larger companies, with few currently making it past the NZ$200 million revenue threshold. The number of TIN companies with revenue over NZ$200 million has been largely unchanged in the past 10 years despite a big increase in companies with revenues over NZ$50 million. In the past 18 months, there has been a surge in the number of acquisitions of some of New Zealand’s leading technology businesses, including Tru-Test Group, Scott Technology, Compac Sorting Equipment, BBC Technologies, and PowerbyProxi. With the removal of NZ ownership, a New Zealand ‘world view’ disappears and the company’s continuing presence in NZ becomes at risk.

  • Age gap: How is it that we have a growing number of businesses over NZ$50 million but so few over NZ$200 million?  One of the answers is time. New Zealand has only been deregulated since 1984. The only New Zealand-owned TIN businesses with revenues of approximately NZ$1 billion – Datacom and F&P Healthcare – were both formed approximately 50 years ago. With the vast majority of CEOs being ageing baby boomers, the challenge is to ensure that an offshore sale is not a consequence of their retirement. Succession is a major challenge that requires greater consideration.
     
  • A funding gap: We have a terrific ecosystem for funding early-stage companies but if we wish to retain our best companies in New Zealand we need to ensure they can access funds locally to continue to grow. In 2017, NZ$876 million was invested in companies by New Zealand venture capital and private equity investors. More of this needs to find its way into our most promising tech businesses. The fact that two thirds of our high-growth “Rising Star” TIN businesses are either public or VC/investor backed shows that investment is a key growth driver.
     
  • Innovation: Government support for the innovation of TIN companies in terms of R&D funding has been a critical contributing factor to their growth.  This growth creates jobs, 4,300 new jobs in 2017 alone. Not continuing to support this growth would be disastrous.
     
  • It’s not just about the technology: An oxymoron perhaps, but I believe technology per se is not inherently good or beneficial. In the techno jargon of Bitcoin, blockchain, AR, VR and AI, the discussion can lose sight of the outcome.  For New Zealand, I believe technology is an enabler of new business models that can create not only unique prosperity for the country but also a society of our choosing. New Zealand is a ‘goldilocks’ country – it’s just big enough to enjoy sophisticated western lifestyle without the scale of problems that are too large to solve.

In summary, technology has more than just the capability to deliver economic sovereignty to New Zealand. It also has the capacity to assist in eliminating social and economic disparities, addressing climate change and environmental sustainability issues and building infrastructure appropriate for our needs. In addressing these issues, New Zealand can become a global leader in every sense of the word.

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