Politicians may not be able to pick winners, but perhaps they can incubate them
In 2006, the Labour government gave a US$8 million five-year interest-free loan to Right Hemisphere, a private enterprise employing only a few dozen people. Eyebrows were quickly raised. “Sounds great,” David MacGregor wrote on the Idealog blog. “Especially if you’re Right Hemisphere … is it fair that one company should be singled out for special favour by cabinet? Does it set a precedent where the taxpayer becomes venture capitalist in high-risk ventures?”
So far, no similar deals have been struck. But now that we’re short a bob or billion, can Right Hemisphere president Mark Thomas justify our largesse, and does he recommend we repeat it?
“It is making a huge difference,” he tells me when we meet at Right Hemisphere’s swish HQ in the Millennium Centre on Auckland’s Great South Road. “We are growing, we’re hiring people. We are able to grow our market share and through that we have a bright future. That money has got us over the hump.”
He estimates the firm would otherwise be six to 12 months behind in product line, development, and its sales and marketing strategy. “Without the recession that would be okay, but with the recession, we could be really struggling,” he says. “$12 million may sound like a lot of money, but not when you are dealing with a company with a lot of highly-paid people.”
IT pay at this level hovers around $80,000 a year. The government investment—around NZ$12 million—would be enough to pay the company’s 40 or so permanent New Zealand staff for nearly four years. That’s an expensive employment scheme, but there’s more to the deal than that.
First, those 40 jobs are still here. A condition of the investment was that R&D remains based in New Zealand.
Second, Right Hemisphere promised to help create a mini business sector based on its 3D visualisation software through its catalyser company, Nextspace. Sure enough, today there are several smaller firms stuck like remora fish to Right Hemisphere.
They include Revisia, which creates walkthroughs and training resources for heavy industry, the Urban Voyage design studio and ‘virtual construction consultants’ Predefine. Another dozen or so are lined up for support.
Nextspace provides Right Hemisphere software at knock-down prices to research centres and universities across the country. Says Nextspace chief executive Gavin Lennox: “In the last 12 months we have provided technology with a list price of $6 million to these establishments at a 97.5 percent discount. That’s enough to cover the cost of the interest on the loan in itself.” And Nextspace has just secured a deal to integrate Right Hemisphere’s software into products sold by EMC, one of the world’s largest document management companies.
Thomas is serious about meeting his national commitments, but for him this is a global game and $12 million is just table stakes to play with the big boys.
He says: “There are assumptions about what a success is in New Zealand, that a turnover of $10–15 million is big, which in global terms is nonsense.”
His company’s worldwide competitors benefit from significantly more government support than Right Hemisphere receives, he says, and by the time our government got interested Right Hemisphere was not some dot-com bedroom startup. It had its HQ in California, funding from iconic Silicon Valley venture capitalist Sequoia Capital, and was already making a splash offshore with clients like Lockheed Martin, Northrop Grumman and General Dynamics.
Right Hemisphere’s turnover has come close to doubling since then, so maybe the government should have grabbed a share in the firm and its success or set in a trigger point at which it would start paying some interest. But it’s too easy to argue that since the company is succeeding it didn’t need our help, or that if it had bombed it would not have deserved it.
At the time of the loan there was a lot of chat about the government ‘picking winners’. Thomas argues our money was in pretty good company, since Sequioa, whose investments include such small fry as Google, Yahoo, Apple, Oracle and YouTube, had already swung in behind the firm. He believes gaining export success and high quality investors the way Right Hemisphere did in its early days must be key qualifications for any firm hoping to benefit from a similar deal in the future.
Whether it pays off more in the long run than other uses of this money is still open to question. The doomsayers might say it’s time for the economy to head for the hill farms, but Right Hemisphere is growing and hiring.
Without this deal the company may have been forced to flog its intellectual property to a foreign bidder, or stagnate—a situation we are all too familiar with.