Legislation Framed to Address Investment Anomaly

The Limited Partnerships Bill, which will be enacted on 1st April 2008, looks set level the playing field for foreign investors considering participating in new ventures here in New Zealand. Whilst the legislation covers all kinds of businesses, it should especially assist higher risk technology ventures looking for investors.

According to an article by legal firm Chapman Tripp, although New Zealand already ranks highly as a safe and attractive investment destination, we have been out of step with other countries in which partnership structures are the chief vehicle for equity capital investment. Harmonising the law around such structures should streamline the investment process however.

Under a limited partnership the liability of investors (in the limited partner category) is no greater than the amount of capital they have placed to acquire equity. Upon exit the first $50,000 in capital gain is non-taxable and the balance is assessed based on each individual investor’s liability, which may vary. Unlike a company, the partnership itself is not taxed.

In a recent article I argued that we need a mix of both local and foreign investment flowing into our technology start-up ventures. Only time will tell whether or not this new legislation will be helpful. My feeling is that it will not change the fact that we are geographically distant from the leading capital markets of the world. At a time when there is a question mark over how Investment NZ has performed historically, I believe we need a fundamentally different model to attract and retain productive foreign capital, especially in the technology sector.

Angel networks are emerging as successful sources of seed capital. But very few angel investors would be looking at investing sums over $1M. So for larger projects and second tier funding we still need to be able to tap into offshore sources of capital. These are challenging times for equity investors globally. What is the best way to go about it?

Confusion Over IP Guidelines

The recently released policy on the treatment of intellectual property rights within government ICT contracts may open up downstream opportunities for New Zealand companies who provide software and services to public sector agencies. But industry commentators cannot seem to agree on whether or not it is a good thing.

A few years back a lobby group called ICTX pressed government to change the rules around onselling of intellectual property arising from publicly funded I.T. projects. ICTX cited replication of effort and confusion over copyright as barriers to further commercialisation of such technology. But now that the rules have been clarified, former ICTX members still appear disgruntled.

Others view the new guidelines as an opportunity because it opens the door to vendors retaining ownership of the technology. Under this scenario the developer effectively gets their R&D funded by a government contract, licences out the application and then has the option of pursuing further commercialisation where a wider market exists. That seems like a win-win situation.

But the State Services Commission (SSC) makes it clear that the guidelines are just that. Government agencies still get the final say on what goes into the contract. That’s fair enough, especially in the case where the technology relates to a sensitive area such as Defence, Customs or Police for example.

It is unsurprising that a diversity of views exist on this topic. The ICT sector has still not managed to solve the representation problem, with a myriad of bodies still claiming to speak on its behalf. Now that the SSC has finally responded to industry feedback it seems a little unreasonable to criticise.

Perhaps the best way to resolve the debate is to test the guidelines. Are there any technology applications currently in the pipeline that can be taken down a commercialisation pathway? Having a successful reference site already operating within a government agency is a great selling point after all.

Bookhabit Springs from Webfund Stable

“E-reading has come of age”, says Clare Tanner director of bookhabit.com a New Zealand website that assists fledgling authors to find a market for their work by employing a “long-tail” approach to demand aggregation. The new site is also a perfect exemplar for why we need much better Internet bandwidth across the Pacific to markets in the Northern Hemisphere.

The venture, which launches this week, allows authors to upload their works in pdf format and employs a graduated reward system as sales increase. Readers can view the first chapter for free but pay as little as US$2.50 if they choose to upload the entire book. The price of a book rises once it passes through certain sales thresholds.

Tanner says the site is ideal for new or unpublished authors wishing to test the market because it instantaneously exposes their work to a global audience and the author receives up to 40% of the sales revenue, compared to around 5-12% with traditional publishers. 

To promote the site there will be a book writing competition with a top prize of US$5,000 commencing on 3rd of March. The ten authors who receives most downloads will go forward to a judging panel for final assessment on merit. Tanner says that the world of publishing is like a mine “full of undiscovered gems” because only a tiny percentage of submitted works ever make it to press.

Bookhabit.com is an early spinoff project from Stefan Korn’s Webfund initiative. Korn, a Wellington based entrepreneur with a strong e-commerce background, started Webfund to aid others in realising their online dreams. Webfund evaluates web-based business ideas, matchmakes projects with investors and then helps to build and implement the ventures cost effectively.

Korn says there is no limit to the creativity out there in terms of new business ideas. Webfund provides a one-stop shop for getting new web-based ventures up and running in double quick time as well as a means for investors to participate at entry level in highly innovative new service offerings.

About Face on Brokering FDI

Economic development Minister Trevor Mallard last year announced an about face in how Investment New Zealand will operate in the future. Investment NZ is a government agency currently involved in attracting foreign direct investment (FDI) capital into the country. But a recent review of the organisation showed that it spent $60 million over four years to attract a net additional investment of only $155 million.

It is not clear from the review whether this result speaks more about the lack of “greenfields” opportunities than it does about any shortcomings in competency. However, it has been decided to refocus instead on encouraging New Zealand firms to grow through investing offshore. The theoretical net result should be more dividends returning home, exposure to new markets and networks, greater access to capital and acquisition of new technology. In principle it sounds like a great road map for adapting to a globalised world – create a few more Fonterras.

But shouldn’t we also still be facilitating new inwards investment – especially in the tech sector? Just because Investment NZ underperformed doesn’t mean we should stop engaging with offshore investors. It just means we need to find a better way to do it. And just because we are currently at about the OECD average for FDI doesn’t mean we can be complacent. Now you see what I mean when I discuss lack of economic leadership and the price of political expediency when it comes to government funded initiatives. It also underlines my point about the inappropriateness of having risk averse government agencies involved in facilitating business. Investment NZ needs to be tweaked for sure, but it doesn’t need to be completely nobbled.

What if Google Ruled the World?

The debate over Google Knol vs Wikipedia continues to rage unabated before Knol has even been launched. But the real issue is the gradual spread of Google’s tentacles.

Google have clearly signalled their intent to drive new revenue streams from owning online content. And what better way to quickly build up a rich cache of material than to invade Wikipedia’s domain? But Knol differs from Wikipedia in that the focus is on authorship, so it’s more like a blog/wiki mashup.

Wikipedia is a wonderful project, but it has always suffered from a credibility gap. With crowd-sourced content we can never be certain where the boundary between truth and folklore lies. Knol addresses that to a certain extent through the use of accredited subject matter experts. How much editorial influence will be vested in individual users is not clear at this stage.

Some commentators have already predicted a disturbing dystopian future in which “content and advertising become indistinguishable”. But in the “co-production economy” I thought we were supposed to be able to subvert and avoid vested interests and traditional media?

But there is another important principle at stake here. If Google both owns the content and controls the search hierarchy, that seems like a great deal of power to concentrate in the hands of a single corporation. Will Google rise to be the most powerful media outlet in say another ten years? In war, the victor gets to rewrite history. That’s a concern here too.

Unsurprisingly, Microsoft is again making serious overtures to Yahoo. (Microsoft’s new CFO, ex-pat New Zealander Chris Lidell, is rumoured to be driving the purchase proposal.) MS clearly needs to shore up its offering in the face of Google’s incessant assault on its patch. We will probably end up with an online content and advertising duopoly. Either way, the dim flame of unfettered “citizen journalism” and freedom from vested corporate interests is likely to be snuffed out. Webstockers might like to chew over this possibility whilst they dine out at Google’s expense this week.

Webstock Show Hits Town

Web 2.0 luminati from New Zealand and abroad roll into Wellington this week for the annual Webstock event. The festival of web design, innovation and usability has risen to such fame that Google have even come to the party with sponsorship.

As the centre of the digitally creative universe in New Zealand it is entirely appropriate that the event is hosted in the heart of Wellington city; long may it continue to do so. The fact that the workshops are already sold out is a testament to the brilliant work done by the locally based organising committee as this event goes from strength to strength. Well done people.

And if you missed out on a place, we hear that presentations will be available on the highly “user-centric” and “content-oriented” website in due course.

Webstock – 11-15th Feb, 2008 – Wellington Town Hall

Not in the Spirit of Good Customer Service

I have always been fascinated by things aeronautical and have had a long association with the local aviation industry as both a recreational and commercial pilot. I’m an unashamed plainspotter from way back and I follow developments in the global airline industry quite closely. So it was with some surprise that I read about an appalling incident in which the arrogant CEO of a U.S. airline sent a vitriolic personal email response to a customer that had complained.

I always thought that customers were stakeholders in any business, the oxygen supply that ultimately determines the difference between success or asphyxiation. Apparently not according to Ben Baldanza, CEO of Spirit Airlines in Florida. Spirit is a high growth low cost carrier that primarily serves a niche market between the U.S. and Carribean/Central America. Most of its customers are low to middle income holidaymakers and returning migrants.

Last year Baldanza was forwarded a complaint by a couple who missed a concert because their flight was delayed. The couple wanted a refund for both their flights and concert tickets. In any angry outburst Baldanza “inadvertedly” replied directly to the couple by email instead of forwarding his response to the customer service rep. He basically told them where they could shove their refund claim form. “We owe him nothing…let him tell the world how bad we are.”

That’s exactly what the complainants did, with just about every consumer advocacy and business blog in the U.S. picking up and running with the story. Bad news travels fast. I first read about this incident through an article in Air Transport World appropriately entitled “How Low Can You Go?”. Apparently Spirit Airlines prides itself on the fact that there is no receptionist to greet visitors arriving at their headquarters because this saves 2 cents per customer. It seems like the company has a lot to learn about relationship building and delivering on service.

I mention this episode because it underlines how the Web can be a twin edged sword. Sure it allows aggregation of content and customers and a hefty global reach. But it can also bite back hard when things go wrong. Corporations can no longer rely on anonymity in a connected marketplace. It doesn’t matter that James and Christine only paid 75 buckseach  for their air ticket – they are still valuable customers. Reputational capital is an important part of a company’s intangible asset base.

To be fair, the airline did offer to refund the price of the air tickets only. But why was the CEO even dealing with this complaint in the first place? Clearly not his area of expertise. If your business does not have a quality assurance programme and strategy for dealing with complaints it is fatally flawed. Oh – and by the way, Spirit Airlines made a loss of $US 49 million in 2007.

Manipulating DNA to Unlock Bio-Energy

A few months ago I wrote about the global ocean sampling project of the Venter Institute and explained how the expedition circumnavigated the world’s oceans discovering many new microbial life-forms as well as previously undiscovered proteins. By using technology developed through mapping the human genome, the institute now intends to manipulate bacterial DNA to create an organism that might one day be able to convert sunlight and ocean nutrients directly into biofuel. But Venter’s critics say it is dangerous to meddle with the building blocks of life and such work could lead to unimaginable consequences if it results in a virulent new form of bacteria.

In a recent lecture (44 mins video) at the BBC, Venter outlines his philosophy on using genomics to help satisfy the food and energy needs of humankind. The written text of his talk is also available. In my opinion genomics will be the defining technology of this century for a number of reasons. Firstly the logarithmic growth in the populations of the developing world has exceeded the carrying capacity of those regions. There is a stark choice between allowing wide scale starvation or employing technology to expand the supply of food and energy. Secondly, the genetic engineering “genie” is out of the bag already. It is far better to have this initial research being performed openly and with strict controls than by a corporation where there are conflicts of commercial risk versus ethical philosophy. Venter welcomes peer review and oversight. Finally, whether or not you agree with them, Venter and his colleagues are doing a great job of selling genomics as a safe, green and sustainable option for aiding humankind.

So is Venter a monster or a magician? And will New Zealand be able to participate in the genomics wave? As a maritime nation and with a proud record in biological research shouldn’t we be getting on board with this? It sounds like the kind of niche area New Zealand researchers could excel in. Venter is looking more and more likely to be the next Bill Gates. If our research institutions are not investing heavily in this area right now with partnerships and research projects, then we are destined to play catch-up downstream. This calls for proper public funding of the research and meaningful environmental protocols that protect whilst steamlining research project approval.

Funding Commercialisation of RS&T a Balancing Act

Throughout 2007 we heard from a number of scientists and business-people imploring the government for much greater assistance in funding research and commercialisation of technology in New Zealand. Universities and CRIs have demonstrated the economic potential through generating some modest additional revenue streams and investments from technology enterprises spun out of research projects over the last decade or so. There has been a modicum of job creation, some upskilling through technology transfer and even some export revenue as a result. All good news. But is it the stuff that “economic transformation” springs from? Perhaps not quite yet.

Mindful that resources are scarce, the “Trilateral Engagement Project” (TEP), a joint effort by FRST, NZTE and TEC, has been tasked with boot-strapping a handful of homegrown technology industries judged to have the potential to grow into high value, global enterprises. This inter-agency collaboration marks a departure from the silo mentality noted in a recent OECD report that criticised New Zealand’s innovation policy.

Having identified these key new industries, the TEP has produced an RFP seeking consultants to research the potential economic impact of each. That seems a little like putting the cart before the horse. What if the reports find that the industries concerned are untenable? Notwithstanding that point, I think it’s a great idea to focus where big economic gains are achievable and around which related industries can cluster. In the past there has been a tendency towards a shotgun approach to economic development in which it was assumed at least a few winning ideas would emerge and thrive if supported with public funds.

In fact, there is no shortage of good ideas. The real issue for the NZ tech sector is access to capital. Because global capital tends to gravitate towards the most bankable ideas, it is important to expose our intellectual property to offshore scrutiny in a sophisticated manner. There is simply insufficient seed capital in New Zealand prepared to wager on high risk technology propositions. You could literally count on one hand the number of early phase tech businesses that received substantial VC funding in NZ last year. Besides that, offshore investors tend to bring a useful network of well-connected deal-makers in their wake. Let’s address that fact openly and help our high tech businesses go global with a mix of local and foreign investment. But at the same time if public funds are to be invested in this process, we need to ensure that founders are fully committed to returning some of the economic gains back home rather than selling out for a low return.

It’s a very narrow tightrope to walk across.

Walking on the Moon

What does a white female “ghetto rap” artist, and former L.A. gang member, have in common with one of the largest rock acts of the 1980’s? Possibly very little, judging by the muted response “Fergie” received at last nights concert featuring The Police at Wellington’s Stadium.

Fergie did however impress with the sheer physicality and energy of her performance, but it was a little incongruous in such hallowed company. My young son was suitably awed by the acompanying gaggle of hip-hop dancers as they gyrated their way across the stage like newborn mosquito larvae. But that wasn’t what most of the crowd had paid 200 bucks a ticket to see. That’s a little unfair though. Like The Police thirty years before her, Fergie has cleverly managed to bridge the artistic gap between urban, ethnic musical counter-culture and white middle class pop. And through her onstage rap dialogue we are reminded why skinny white guys are driven to join rock bands. “Whatcha gonna do with that shirt full of breast”? Answer – “Gonna make you work for it, work for it!” Like I needed reminding.

I predicted that the main act would open with “Message in a Bottle” and they did not disappoint. That song was their first real chart hit in the U.K. Like much of their material, it deals with loneliness and alienation in an impersonal world and struck a chord during the grim Thatcherite era. Having already played a massive 82 gigs on this tour alone, it was not surprising that a bearded Sting was sounding a wee bit flat, his voice cracking badly at one point. Andy did little more than shuffle about the stage, but for a guy the same age as my Dad, he remains one of the world’s most talented and lyrical exponents of the lead electric guitar. Stewart stole the show by demonstrating his adeptness with all things percussive, in particular during an extended mix of “Wrapped Around Your Finger”.

Indeed, how fortunate for us devoted fans that these three skinny white guys got together three decades ago and released their first single “Roxanne” – for that is ostensibly the reason for this reunion tour. The real reason lies in the demographics of their audience, the majority of whom are dinky post-boomers with wads of disposable income. Almost all of last night’s crowd were couples in their 30s and 40s. That represents a marketing opportunity too good to miss; especially now that music sales are rapidly commoditising. The money is now in the concerts and merchandise – not the album sales.

This point is obviously completely lost on the Westpac Stadium management who book the catering stand concessions. Hot dogs, pies, doughnuts and Export Gold might work for the footy crowd but not for this audience. Where were the curries, kebabs and Heineken hidden? A lot of us went hungry in protest. Notwithstanding that minor disappointment it was a great night out under a velvety starlit sky. We were “Walking on the Moon” as we retraced our steps homeward around the illuminated bridges and boardwalks of Wellington’s gorgeous waterfront.