We need more frontier firms driving world-class exporting to future-proof our economy and create opportunities and hope for the next generation. We have to do this, and we can.
As an entrepreneur and early tech start-up employee myself, with the Australian success story Canva and now a mentor to start-ups in many fields, I see a few simple but important solutions for our shortlist of impediments.
By overcoming these we can create a culture of entrepreneurship and a vibrant start-up ecosystem adding a new engine to our economy, and make New Zealand a lucrative global hub for business development and growth, with little start-up cost at the taxpayer level.
Incentivise ESOPs
Equity is critical in the start-up economy, and the employee share option plan (ESOP) is a common vehicle used by start-ups because it enables employees and other business partners to own part of the company they work for.
It is designed to complement salaries and other benefits and is generally locked in until a liquidity event is triggered, which may be years down the track.
In the present New Zealand context, equity is taxed as if it were salary. That’s an impediment to start-up founders, investors, and early-stage employees who often forgo some of their salary in exchange for shares.
Our tax system notably diverges from Australia’s in this regard — there, equity is not treated as salary for tax purposes. We can easily tweak our system and apply tax only at the stage that shareholders cash in and liquidate their holdings.
That would remove a handbrake and allow even more of our entrepreneurs, investors, and the general public to be part of a venture — something that is world class and solves problems at a global scale.
The economy ultimately benefits in several ways, from the growth and maturity of the start-up, the ultimate realisation of its value, and attraction of foreign expertise with substantial scaling experience.
Such a change could significantly enhance New Zealand’s appeal as a preferred home base for talent that has “been there done that” around global tech scaling.
Take a lead from Kiwi founders
At present, the place to be for ambitious founders is Silicon Valley.
One of the founders I mentor through Phase One Ventures is Min-Kyu Jung, a former lawyer who co-founded Latch, an app that automates the writing of legal contracts.
He is focused exclusively on the US market and moved to San Francisco several months ago.
He told me: “Ninety per cent of founders should move to the Bay Area, which is the best place for most founders, especially those in the AI space like us. It gives access to people and capital and has a culture conducive to forming successful start-ups.”
Turn tax trails into innovation highways
Kiwis are understandably sensitive to changing the tax regime, but, apart from the aforementioned change, there is a simple but significant fix that can benefit our national economy and generate huge potential for capital raising and investment in tech, without imposing any cost on the taxpayer.
An existing tax on foreign investment funds, known as the FIF tax, which amounts to 5 per cent per annum on unrealised gains on all investments held outside New Zealand in a given financial year, could be tweaked to add simple exemptions that do not penalise investors or stymie international interest in locally based start-ups.
If we want to attract highly skilled people, including expatriates, the FIF tax settings need to change because it effectively penalises those holding foreign investments and acts as a disincentive to live and work in New Zealand.
Creating a thriving start-up climate that attracts start-up capital to New Zealand and allows founders to build their globally facing companies here means lowering barriers to enterprise and investment. Then, as you can see from the sheer scale of Silicon Valley’s value, the economic returns to the state are that much greater. Investment begets investment and growth generates growth.
Learn from regional success stories
As an early leader at Canva, Australia’s biggest start-up success story by a factor of 10 in market capitalisation terms, I can attest to the effectiveness of the model when structured and supported correctly. It is one of those frontier firms I mentioned, and proof start-ups can offer the most legitimate accelerated pathway to build these firms.
Melanie Perkins, CEO and co-founder of Canva, spent years developing a high school yearbook design (Fusion Books) that prepared the ground for what was ultimately Canva.
She had done the legwork, had vision and grit, and knew what it took to grow a company 5 per cent week on week, which is what a start-up aims to do.
The story of Canva at the top line is a $1.4 billion liquidity event, one of the largest secondary sales ever — but for those who were part of it, it is also a legacy of incredible fairness to employees and quality of service to customers.
Liquidity events such as this offer a significant cash injection back into the economy, with early investors liquidating a portion of their portfolio and often reinvesting it into the tech and start-up ecosystem.
It is crucial to New Zealand’s tech ecosystem, too, and one that should be instructive for our investor appetite and Government policy.
Canva has been valued between $29 billion and $46 billion, and as a business it went from child to adult in just eight years.
It proves what can happen when a group of entrepreneurs come together, form a vision, and take advantage of what technology and the internet allow — as long as we set the right conditions.
Mahesh Muralidhar is a founder, entrepreneur, philanthropist, speaker, investor, and CEO of Phase One Ventures, a community for early-stage start-ups and venture capital funds. He stood for the National Party in Auckland Central in the 2023 general election.
