Five ways New Zealand can accelerate a sustainable high-tech ecosystem

Insights from Industry Leaders

Linc Gasking
Co-­Founder, Free Range Limited
www.frf.co.nz
@askthefarm
November 28, 2013

Executive Summary

Startups and innovative high-­growth companies create a disproportionate percentage of net new jobs worldwide. Just 4% of these companies generate over 70% of all new jobs in the United States. Half of the UK’s employment growth between 2002 and 2008 came from just 6% of companies, with average annual growth in employment above 20%. These companies tend to be founded by entrepreneurs, and created within larger ecosystems.

A high-­tech ecosystem becomes sustainable when successful serial entrepreneurs (*) reinvest their knowledge, capital and connections into successive ventures. New Zealand’s relatively young ecosystem loses much of this reinvestment potential, because our local entrepreneurs and/or startups continue to relocate overseas, thus severing the recycling process.

This report discusses how leveraging New Zealand’s world-­ranked livability, coupled with a facilitative regulatory environment might reverse the trend. It presents five key learnings and recommendations:

1. Let markets make winners; some of the best startups initially look bad.
Evaluate innovation grants and high-­tech immigration on market-­determined evidence, such as investment received from pre-­qualified investors, not points and business plans.

2. Access to local software engineering teams is critical.
Intensify education quality and incentives in technical fields, such as local and international technical scholarships, subsidies, low fees, interest-­free loans, school campaigns, and loan or degree postponement while a student leaves to co-­found a company.

3. Incubators and startups need preferential procurement and pilot opportunities.
Create an online procurement marketplace, a commercialisation program, and leverage the support of large organisations with their mutual follow-­on support for small startups.

4. The distance to startups’ customers can be halved, through export assistance.
Create an electronically administered export development grant scheme, offering reimbursements for high-­tech startups.

5. A dormant pool of early-­stage capital already sits in New Zealand: sweat equity.
Simplify valuation requirements and defer tax (plus interest) of employee stock options until they are sold for cash.

The opinions and recommendations are the author’s, based on advice from approximately one hundred and fifty entrepreneurs, investors and industry experts (half were international). The report emphasizes the fundamental contribution that serial and immigrant entrepreneurs can make to accelerating New Zealand’s innovation ecosystem and economy.

Many countries are implementing aggressive policies to attract and keep high-­tech entrepreneurs, and the report provides examples, including an appendix with seven case studies of startup ecosystems.

Table 1. Global comparison of policy targeting immigrant and serial entrepreneurs



(*) Serial entrepreneurs are individuals who have sold/closed at least one firm which they had a minority or majority ownership stake in, and currently have a minority or majority ownership stake in a single independent firm. See http://isb.sagepub.com/site/Virtual_Special_Issues/Habitual_Entrepreneurs_Intro.pdf

About Free Range

Based in Wellington, Free Range’s mission is to build the capability and connectivity of startups. Linc Gasking and Joshua Feast created Free Range in May 2013 in an attempt at closing the funding gap, growing the national innovation ecosystem, and building bridges to global best practice and networks.

Linc Gasking: In 1998, then 21, Linc co-­founded Countingdown.com in Los Angeles while living in Melbourne. The site was acquired by Pop.com (DreamWorks) in 2000. In 2005 he co-­founded a Portland-­based technology incubator, entp.com, behind apps Lighthouse and Tender. In 2011 Linc co-­founded the Adventure Wellington Charitable Trust, a local community group, now with almost three thousand members. In 2012 Linc co-­founded education startup Chalkle.com in Wellington with Silvia Zuur. In 2012 they were nominated as finalists for Wellingtonians of the Year 2012 and named Absolutely Positively Wellingtonians in 2013.

Joshua Feast: In 2005, Joshua began his study of business and startups at Massachusetts Institute of Technology (MIT) as New Zealand's first Fulbright Platinum-­Triangle Scholar in Entrepreneurship. He co-­founded Cogito Corp out of a stream of research he discovered at MIT’s Media Lab, and has since built it into a multi-­million dollar business delivering analytic software that continuously senses human behavior and infers psychological state. Through Cogito, Josh works with multi-­nationals like Aetna and Humana, and works on R&D around mental resilience for DARPA, the US Dept of Defence's high-­tech funding arm.

Background to this report

In June 2013, Free Range invited Li Ka-­Shing’s Horizons Ventures to visit New Zealand and meet high-­tech startups. Horizons Ventures is one of the world’s most successful early stage startup venture capital firms, with past successes including Facebook, Siri, Spotify and Skype. Navigation app Waze was acquired by Google in 2013 for over US$1 billion, and the proceeds (around US$130 million) were donated by Mr Li to Israel’s Technion university last month.

In August 2013, Horizons Ventures toured four cities to meet eighty-­two startups. Startups were selected by Free Range, Horizons Ventures and through referral. Startup representatives or alumni from a cross-­section of New Zealand, including the ICEHOUSE, Enspiral, Southern Institute of Technology, Bizdojo, Creative HQ/Lightning Lab, Ministry of Awesome, Massey University, Otago University, Victoria University and EPIC. Six firms were selected by Horizons Ventures for a final round of pitches in September.

The pitch event was attended by the Horizons Ventures team, including Director Solina Chau. Also in attendance was Mary Meeker of Kleiner Perkins, Caulfield & Byers, dubbed by Barron’s as “Queen of the Internet”; Chamath Palihapitiya of The Social & Capital Partnership fund (formerly of Facebook); Shakil Khan (formerly of Spotify), and Nick D’Aloisio, the youngest person ever to receive venture capital (he was wired funding on his 16th birthday) and who recently exited to Yahoo! for US$30 million.

Horizons considered seventeen startups (21%) to fit their profile and be promising. One was acquired by another firm during the process, three had recently completed a round of funding, and others were not in funding mode. No funding has yet closed, but some talks are still ongoing. The results were markedly different from the Israel tour eighteen months earlier. While the format of that tour was similar, the outcome was over US$100 million of investment in over twenty startups. This contrast matched Horizons’ feedback that significant investment volume in New Zealand could still be about two years away.

Horizons Ventures invited Free Range to visit Israel and attend the Digital Life Design (DLD) 2013 conference in Tel Aviv, to learn from the local startup scene. DLD is a “global network on innovation, digitisation, science and culture which connects business, creative and social leaders, opinion-­formers and influencers for crossover conversation and inspiration.” Free Range also visited six other startup ecosystems to provide a global perspective, including Silicon Valley, San Francisco, Los Angeles, Las Vegas, Boston and Sydney.

© Free Range 2013

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