IT companies advised to cut apron strings

By PETER GRIFFIN

New Zealand should follow Israel's example by pouring its efforts into research and development-hungry start-up companies that eventually move overseas, rather than trying to attract multinationals or keeping companies in New Zealand.

That is the prescription of a group of visiting second-year Masters of Business Administration (MBA) students from the Massachusetts Institute of Technology's Sloan Business School.

Their other advice for those seeking overseas markets is to "sell direct".

The students say they have found that some New Zealand IT company managers do not even know what price international distributors put on their products.

"We think New Zealand should follow the Israeli model," said Justin Steinman, a supply-chain software specialist who worked at Accenture before joining start-up Tilion and then moving to Novell.

"You build companies here and when they get to a certain size, export them to the United States market, where there's the capital available to let them grow."

Steinman and his colleagues argue that New Zealand's ICT strategy is in a state of "paralysis analysis", with no firm vision one way or another.

The students have spent a few weeks assigned to the HiGrowth Project, which aims to support the ICT Taskforce's aim of building 100 $100 million companies by 2012.

Other teams were assigned directly to companies such as ABB New Zealand, Prolificx, Pulsecor, EpiTherm and Interactive Technologies. The goal next year is to bring 10 teams of students down from MIT, where an MBA degree costs US$20,000 ($29,800) a year.

The students worked "pro-bono" but their flights are paid for. They were based at the e-centre on Massey University's Albany campus.

Of New Zealand's IT companies, they see global potential in graphics company Right Hemisphere, dental software maker Software of Excellence and wireless player 4RF.

Alex Coisman, a veteran of two start-ups and General Electric, said US venture capitalists did not care where products were developed, as shown by the many US companies with R&D labs in India and China.

But the right management and marketing brains had to be in place to take the products to market in the US or elsewhere.

"It's critical to keep research and development here, and the Kiwi dollar allows you to be cost-competitive," said Steinman, adding that entrepreneurs had to accept that they might lose control of their companies in their bid for global success.

"Intellectual property is important but it doesn't matter unless you can take it to market," said Coisman.

"A better-funded company in Silicon Valley will reverse engineer it and sell it."

He is sceptical of going to great lengths to attract multinational ICT giants to New Zealand and in keeping IT companies headquartered here.

"Ireland did that, but it was on the back of hundreds of millions of euros in investment."

So what part should Government funding play?

It should be put into research and development, the part of the cycle New Zealanders were good at, said Coisman.

"The Government should be spending money on university research and on incubating ideas," said Steinman, who points to Technion, the Israel Institute of Technology, as a good model for a Government-funded ideas incubator.

The HiGrowth Project's executive director, Catherine Calarco, said the "100 by 100" project was making progress as potential $100 million candidates were identified and strategies developed to get their message across to overseas investors and potential partners.

The students regard the goal of the ICT Taskforce as "ambitious".

"Even if you get halfway there that's a smashing success," said Coisman.

Their paper will go to companies in the HiGrowth Project and parts of it will be reprinted in pamphlets.

The path to riches

* New Zealand should follow the Israeli example, building start-ups and then exporting them to overseas markets.

* The Government should put funding predominantly into R&D.

* Losing control and majority ownership of a business is a fact of life.

* Selling direct is favourable to starting third-party distribution networks.