Selwyn Pellet: It's a complicated affair

Selwyn Pellett. Photo / Jason Dorday

We need to get out of our primary product viewpoint, says Selwyn Pellett

Just adding more science, research or development will not improve the innovation rate or export success of New Zealand companies. Innovation is a complicated beast and happens all over the value chain. Though in our primary industries such innovation may come from a centralised organisation like Fonterra, in collaboration with CRIs and Universities, this model does not translate well anywhere else.

The Fonterra example has commonality of use (food), raw material inputs, processing, distribution methods and the need for scale to achieve efficiencies and price points. The outputs of our dairy industry are sold largely as commodity products (milk powder) where price and food safety (brand image) are the defining factors for success. Yes, there is ample room to innovate around this model, but it is the antithesis of the world in which technology innovation thrives.

In the multibillion-dollar export industry driven by technology innovation, none of the above factors are seen. No commonality of use, raw materials, processing and production, distribution, or the same needs for scale. The outputs range from games loaded on laptops pre-delivery on a license fee basis (weightless), to large scale, high-efficacy power converters (high physical content) for industrial charging of mission critical telecommunications equipment. There is zero commonality in the innovation paths of these two products from a technology, manufacturing, distribution or sales and marketing perspective. This preamble is simply to make the point our primary product exporting has entrenched itself into the way we see everything, from tax policies, to subsidies, to exchange rate management to our thinking on innovation.

Over a three-week period in 2001, Endace shifted focus from a test and measurement company which provided accurate measurement of packet delay over the internet, to a network surveillance company with the ability to see and capture everything in the internet. The catalyst was September 11. The product already had one feature desired by lawful intercept companies hunting the web for terrorists; 100 per cent header capture under any conditions with minimal CPU usage.

The second desired feature was 100 per cent packet capture including payload and CPU availability to do some analyses of captured data.

Innovation took place with identification of opportunity, commercial expertise to tie down and fund first order (NZ$1 million) and ability to get engineers to burn midnight oil, take risks and to deliver modified hardware, firmware and software in three weeks.

How does NZ measure up

The Innovation Value Chain (see graphic, below) is a generic example of a technology innovation path. It identifies areas where New Zealand is currently okay and areas of weakness.

Ideas (7/10): New Zealanders are never short of ideas. However, based on my experience as a seed investor many ideas are developed in a vacuum with insufficient knowledge of the problem - potential technologies that could solve it or support solving the problem.

Market Research / Validation (5/10): For any company to succeed there must be an end customer with a problem that can be solved at a price the customer is prepared to pay, that is more that the cost of solving it. As basic as this is, many founders and entrepreneurs fail to do this analysis correctly. Everything works on a spread sheet but that seldom translates to the real world.

Proof of concept (8/10): My experience of NZ companies is they are great at building one-offs in a relatively short time. The design techniques may not be great, the concept product or service reliable or elegant, but it usually meets the objective needs of proof of concept and within budget.Weaknesses are aesthetics, ergonomics and user experience.

Design for Manufacturability (3/10): This is an area of generic weakness in NZ. In the electronics area a lack of local knowledge related to volume manufacturing and proximity to end manufacturer means simple design issues cause costs in manufacturing procesess which may also become reliability issues.

Physical Manufacturing (5/10): New Zealand does struggle in this area. It has macro-economic settings that drive up the exchange and interest rates, lifting all value-added costs in US dollar terms (the currency of technology) and preventing the manufacturer from investing in further automation. Debt exposure with highly variable interest and exchange rates means very modest and short term investment profile is typical.

Build Sustainable Distribution (3/10): Sadly, or chill it, wrap in mutton cloth and ship it FOB (Free On Board) permeates our DNA, blinding us to the need to be closer to the end customer.

Sales (5/10): Companies leave money on the table through lack of experience, knowledge of competitors, only third tier hires available, and the inability to leverage location and security of supply - all our products are foreign in export markets.

Entrepreneurial Visions and Drive (2/10): We need more entrepreneurs. Having tried on multiple occasions to select and train entrepreneurs I know this is no small task. Successful profiling needs to be developed to help. However, I can attest to the value of accelerated learning on appropriately skilled and profiled candidates who have delivered and gained my trust for future investments.

Selwyn Pellett is a serial hi-tech investor and founding shareholder in Endace.