Technological change is happening so fast that corporates are struggling to innovate quickly enough to keep up.
Technological change is happening so fast that corporates are struggling to innovate quickly enough to keep up.
Some of New Zealand’s biggest companies are lending their muscle to help start-up businesses get off the ground, reports Fiona Rotherham
After Kiwi entrepreneur Phil Thomson read about Westpac-backed corporate venture fund Reinventure Group, he approached it for money to help expand his start-up company, Auror, into Australia.
He and Tom Batterbury co-founded the crime-prevention software company, recently named by the Deloitte Fast50 as the Auckland region's rising star, with growth of more than 300 per cent a year.
Thomson's chutzpah paid off. Reinventure co-founder Danny Gilligan can't remember how Thomson hustled his way into his diary, but within 20 minutes of the pitch, he knew Auror was too good to pass up. The Australian-based fund invested $400,000 last year for a 11.91 per cent stake, part of a $1 million fund-raising round.
Reinventure is one example of the global resurgence in corporate venturing over the past five years, particularly in the US, where half of last year's venture-capital deals included corporate money, according to the Global Corporate Venturing organisation.
Corporate venturing takes different forms. Some corporates take an equity stake in a small company, often through an internal fund set up to invest in high-growth companies.
They can also invest indirectly, through other funds, or back sector-focused accelerators. Some deals involve no cash, such as a strategic alliance with a start-up to co-develop a product or service that benefits both.
This sort of investment has suffered from booms and busts, and corporate venturing last had a resurgence in 2000 during the dotcom bubble.
At the time, companies such as Fletcher Challenge and Carter Holt Harvey set up funds to spin out internally generated intellectual property. They lasted a while before spluttering to an end, typically when the chief executive backing the project left the building.
Now, such investment is starting to gain traction again in New Zealand, in different guises.
Photo / Nick Reed
Spark chief executive Simon Moutter is wooing other Kiwi corporates to co-invest in a new multimillion-dollar fund, given that capital for early-stage companies needing to raise relatively big dollars is thin on the ground.
Moutter returned from a June trip to Israel - the "Start-up Nation" - with a sense of "wow, to make a big difference there has to be a lot more money in the ecosystem".
He says most New Zealand corporates aren't in a position to risk throwing "huge pots of money" into venture capital, but he's had a warm reception from a select group of companies that, like Spark, are mostly domestically focused businesses with high cashflow. An update on the fund's progress is expected before Christmas.
"We've put a lot of work into it and worked with the current funding community to figure out the best way to structure it and where it will fit in the system so it is large scale and additive, not just large scale and snuff everything else out."
Spark set up a venture unit, Spark Ventures, in 2013 to grow internal ideas and to invest in external ideas and take them to market. Former boss of the venture unit, Rod Snodgrass, says other corporates are also "diving into the pool".
"We've probably swum to the end and are working out where to next," he says. "They all have different methods, they don't have to do it the same way we have."
We've probably swum to the end and are working out where to next.
One example is Auckland-based electricity and gas distributor Vector. It paid a fee to join the board of Hawaii-based Energy Excelerator, which is helping solve the world's energy challenges.
Vector chief executive Simon Mackenzie says the company gains access to new technology and the chance to potentially partner with the accelerator's start-ups. It is working with two companies on proofs of concept that it could bring to New Zealand and also directly invest in. "We'll say yay or nay in the next six months."
On a recent visit, Joshua Siegel, of US company Rubicon Venture Capital Partners, said creating a New Zealand corporate venture capital regime would help grow start-ups and give them access to larger proof-of-concept solutions. "Otherwise, it's going to take them a lot longer to grow."
But Siegel warns that corporate funding can be a double-edged sword for the start-ups and angel investors if the bigger company becomes the number one customer, deterring competitors from buying the product. "If something goes wrong with the relationship, the company will die, so it's a bit of a chess game and founders and angels have to be careful."
Kiwibank recognises change is forcing the financial industry to work in a more open and collaborative way. Photo / NZ Herald
The Reinventure fund is structured differently to most corporate ventures, with Westpac the largest limited partner, while Gilligan and co-founder Simon Cant run it independently.
Traditional corporate venturing is about increasing returns for the corporate rather than for the start-ups they invest in, which is why it's better to have decisions made at arm's length, Gilligan says.
Auror's Thomson says corporate venture backing offered more than just money. It has gained access to Westpac's small business customers while expanding across Australia. Having the Westpac brand behind it helps gain the trust of enterprises that would otherwise shun dealing with a small Kiwi company, he says.
Another side benefit for the first-time entrepreneurs has been insights gleaned from other successful serial business founders in the fund's portfolio.
Thomson is now eyeing North America for its crime-reporting software, which identifies repeat shoplifters. That global ambition is one reason Gilligan invested in the fast-growing start-up. "It's under-rated," he says. "What these guys are doing could potentially change society."
Fonterra: Disrupt or be disrupted
The thinking behind dairy giant Fonterra's internal innovation programme, Disrupt, was that if it wanted to be a truly global industry leader, it had to innovate to grow.
Judith Swales, appointed in July as chief operating officer of Fonterra's Velocity transformation programme and Disrupt, says the co-operative needs a new technology platform to deliver new products and to change the way it operates.
"You can't run a programme like this like a government department," she says. "You have to be organised differently or we're not going to get where we need to grow."
Chief executive Theo Spierings conceived the Disrupt programme, trialled this year in New Zealand, Australia and China. Some 700 staff signed up for it in February, and 110 ideas were whittled down to 11 which went through a three-day "hackathon" event in Shanghai. In early October, the final judging round selected four ideas - though what they are is being kept confidential.
You can't run a programme like this is a Govt department.
Two have been folded back within the business for further development and two - from China and New Zealand - are being kept as separate entities that could evolve into corporate spinouts.
Swales says it's important that the start-ups "don't get sucked into the big engine, Fonterra, and keep their minds really focused and unfettered by current processes".
They'll have to make a business case for further funding as they hit key performance indicators.
Disrupt has cost around $2 million so far and will be extended in February to cover the entire group.
Staff taking part this year got "fired up about having the opportunity to be an entrepreneur" and Swales says continuing Disrupt will help spread that mindset throughout the business, so staff see opportunities to introduce new thinking and processes within existing operations rather than just on new ideas.
Fonterra has invested $1 billion in innovation over the past decade, much of that in research and development, which Swales says is now under review as part of an overall innovation strategy she's developing.
Kiwibank: Banking on fintech
Financial technology - fintech for short - has boomed worldwide since the 2008 global financial crisis. In the past year alone, fintech start-up numbers have jumped 75 per cent, with an estimated US$9.3 billion in funding raised since 2015, sparking talk of a potential bubble.
It's both a threat and an opportunity for the traditional banking industry, which has the funds and the customers, while start-ups have the disruptive technology.
Collaboration and partnership is the impetus behind Kiwibank's funding - with Xero and Callaghan Innovation - of New Zealand's first fintech accelerator.
The accelerator will tap into Creative HQ's Wellington-based Lightning Lab acceleration programme, taking eight digital start-ups through a 14-week mentor-intensive programme based on a successful model developed by US-based TechStars, which takes 6 per cent equity in each start-up.
Kiwibank head of strategy Simon Hay says the bank's involvement recognises that dramatic change is forcing the financial industry to work in a more open and collaborative way than it has traditionally. The bank can include its own teams in the accelerator to learn how to make its internal corporate structures more innovative.
Funding the accelerator is a long-term payoff, one that gives the bank low-risk exposure to innovative processes and capability, he says.
ASB Bank: Venturing forth
The ASB set up separately run unit, ASB Business Ventures, in October 2015 to co-create new products internally and bring others to market that would help New Zealand businesses perform better. Financial technology is booming, and the bank needed to connect to where innovation was happening.
Last month it held the first meeting of Venturers with ASB, a community of business owners, currently numbering 110, who discuss challenges and potentially collaborate on innovative ideas.
ASB Business Ventures boss David Bell says the unit was set up as "close to a start-up as could be", so it could relate to their pain points rather than the big corporate approach. "If we acted like a bank with them we could squash and kill them," he says.
It has three ways of working with small companies: co-creating products or services that benefit the bank's customers; partnering on going to market; or co-funding. It can be one, two or all three, he says, and Australian parent Commonwealth Bank is considering copying the model.
The bank provides cash to help fund product development without taking an equity stake. Bell thinks it's too early for that sort of pressure, which can create corporate expectations around returns rather than what's best for a start-up's growth.
Our view is how can we take people who have some money and scale them really quickly.
"We're not here to invest in a small company to try to get a venture capital return," he says. "Our view is how can we take people who have some money and scale them really quickly." Equity investment is probably longer term, once it works out how best to do it, he says.
It has so far backed three ideas, plus a soon-to-be-launched internal project that's still hush-hush. Ranqx, which has former ASB boss Sir Ralph Norris as chairman and investor, was the first foray. Ranqx has developed customer-feedback and business-performance software and the ventures team helped polish and scale up the product.
In return for significant funding and introductions to banks in Australia, Britain and Singapore, and other partners, ASB has been "gifted" user licences it can give to business customers.
It also backed payroll mobile app Simply Payroll, founded by serial entrepreneur Asantha Wijeyeratne and with Perpetual Guardian founder Andrew Barnes as chairman and an investor. ASB provided development money and digital connectivity to its platform to enable the start-up to make real-time salary payments at scale.
"He did a deal with us on that connectivity because we wanted to check how we would ... connect to fintech quickly and cheaply," Bell says.
The other start-up it has backed is Figured, an online farm-accounting software company that partners on Xero's platform.
Bell admits the bank's appetite for risk, inherent with start-ups, is relatively low. "It's around taking small bite-sized chunks, going after them and proving them correctly and dropping them if they don't work and stopping the project early."
Phitek: The rollercoaster ride
Auckland audio technology company Phitek has had its shares of ups and downs. Five years ago the former Kiwi tech darling had racked up $34.5 million of cumulative losses and shareholders had to choose between folding or giving it one last shot.
Among other major changes, the consumer headphone business was sold off while it focused on selling noise-cancelling audio connectors and other inflight electronic-entertainment products, including a magnetic jack that helps save airlines millions of dollars in maintenance.
This financial year, net profit more than doubled to $3.9m, its fifth consecutive year of profitability. Revenue rose 32 per cent to $22.6m. It has also developed a WiFi system complementary to existing technology that needs funding to take to market. The board will decide by March on Phitek's capital structure, with a sharemarket listing in the offing.
An early investor was TMT Ventures, an A$100m tech-focused fund set up in 2000 and backed by Telecom, Alcatel Lucent and Ericsson. The fund is managed by venture-capital firm Direct Capital, which won't say what return the corporate backers earned. Phitek is the sole remaining investment.
Direct Capital investment director Gavin Lonergan says the corporate venture fund suffered the same woes as offshore models - the 10-year structure outlasted the corporate strategy and the executives backing it. The only way to manage the Phitek investment is to do what's right for the company, rather than make decisions based on winding up the fund, he says.
