Shaking the money tree

Tech investor Selwyn Pellett and Imarda CFO Claire Mitchell. Photo / Greg Bowker

Richard Branson posed for photos with him. Neil Armstrong sent him emails. And Jay Leno sent him a limo to take him on a tour of New York.

If the Christchurch-based inventor of the Martin Jetpack had to pick the set of wheels he'd really like to be seen around town in, it would probably be something like an Aston Martin. Instead, Glenn Martin gets by - just - with a 1991 Corolla.

Welcome to the not-so-glamorous world of the Kiwi entrepreneur.

In the past few years some fortunate Kiwis have managed, through good luck and good timing, to make a mint by flogging off their clever companies to new owners, as the world experienced the most extraordinary financial boom in decades.

But for every poseur who finally has their Porsche, there are many more who are only now beginning to see their fabulous ideas come to fruition, just as the money tap has been turned off.

Unfortunately for New Zealand, the latest crash in the financial markets has come at an awkward time, just as we were beginning to develop our own venture capital industry, and see some payback from years of convincing the next generation of bright young things that they can indeed take on the world and win.

It is of some consolation, of course, that the rest of the planet is going through the same pain. But some veterans of the local investment network believe much more is at stake here. Not only is New Zealand more heavily dependent on exports than many other countries, but we also have a particularly fragile and immature community of entrepreneurs.

If we don't develop a coherent national strategy for nurturing such people, they say, we risk squandering all sorts of opportunities to secure a much healthier economic future.

Glenn Martin is well aware of the challenges ahead for Martin Aircraft, the company he runs with former Excell Corporation boss Richard Lauder. Jenny Morel's No 8 Ventures has agreed to back the company until 2011. But it faces some crucial decisions before then. It recently signed a Heads of Agreement with an overseas government that would require it to produce 500 jetpacks a year. If the deal goes ahead, it's going to need a considerable amount of money to make that many machines.

Inevitably, overseas suitors have offered to help, but Martin is adamant he wants to keep the company here.

Another Christchurch-based company, Flight Experience, is in a similar position. The company, which includes mortgage broking maven Mike Pero among its backers, has developed a remarkably realistic simulator of a Boeing aircraft cockpit intended for both pilot training and public entertainment.

The company postponed its plans for a public float last year, but is still seeking capital to drive its expansion.

In fact, there is renewed gossip about several contenders for some long-overdue floats on the local sharemarket. And there are other signs of hope.

Although the large Aussie private equity funds that flooded the market with huge leveraged buyouts two or three years ago are experiencing some strife, local private equity players remain relatively upbeat and insist there is plenty of money being made in the middle and smaller end of the market.

But whether those who have already sold out for spectacular sums will be able to repeat their feats remains to be seen. In the technology sector, Rod Drury could be one of the few IT entrepreneurs to pull off two big deals - if his Xero online accounting company hits paydirt.

Some observers remain unimpressed with what Trade Me founder Sam Morgan has done with his fortune so far.

The same goes for 42 Below founder Geoff Ross. That Ross and his buddies are now investing some of their money in Dorchester Pacific, in the hope of creating a phoenix from the ashes of the finance company meltdown, is understandably hard for some people to get excited about.

Kathmandu founder Jan Cameron, meanwhile, seems to be betting on retail, building an emerging empire on both sides of the Tasman by capitalising on the woes of many of the industry's weakest players. Presumably Cameron will be hoping the empire does not live up to the name she has given it - the Dogs Breakfast Trading Company.

At her annual get-together for entrepreneurs at Waitangi last week, No 8 Ventures founder Jenny Morel was oozing her usual enthusiasm, and doing her best to play financial matchmaker among many of the 100 or so attendees.

This time last year Morel revealed she was trying to put together a new $100 million fund with expat New Zealander Andy Lark, now head of global marketing for Dell.

"If we can't attract a couple of cornerstone investors pretty much by the end of this calendar year, then I need to work out what I'm going to do for a career," she said then. "Because I'm not ready to retire."

A year on, Morel insists the new fund is still a possibility and that she is not planning to retire just yet. But she acknowledges that little investment is taking place among either angel or venture capital investors.

Those who happen to have some cash have been tempted by potentially spectacular returns on the sharemarket instead, or by private companies selling at distressed prices.

"Once you get a financial meltdown, this young, risky end of the market is completely deserted," she observes.

Like most people, however, Morel sees signs that the situation is slowly improving.

"We're certainly not in the depths of despond where we were three months ago. There are glimmers, but there are still assets getting cleared."

Even in Australia, the pension funds and institutional investors are not expecting an improvement until the middle of next year, she says.

In New Zealand, KiwiSaver is still too young to provide any meaningful investment in the local markets. Morel just hopes the many enthusiastic entrepreneurs who have come to her seeking money can keep holding on.

"There are some fantastic opportunities, so we're very, very keen to get into the market again as soon as we can."

It is particularly important that technology businesses are not left to stagnate, she notes.

"In a technology space, if you stand still for too long, you're overtaken. You've got to keep moving; you've got to keep going forward. I don't think it's an option to stay small."

Morel has noticed a big change in the ambition of Kiwi entrepreneurs in the past 10 years. These days they are far more likely to be thinking globally. But it's easy to get discouraged when no one will give you the capital you need to expand, she agrees.

"The main thing the industry needs is money. It also needs executives who think globally from day one and are prepared to go big, and of course that's always hard if they don't see the money."

That said, entrepreneurs need to get far more savvy about money, she believes.

"If we're naive about marketing, which everyone accepts we are, we're even more naive about finances."

Finances are understandably a bit of a sore point with another veteran technology investor, Peter Maire.

Maire is probably best known as the founder of Navman, which at one stage looked like being one of New Zealand's most spectacular business success stories.

The dream was shattered after the company was bought and broken up by American investors, and since then the rollercoaster ride has continued with his other businesses.

In recent months Maire has been forced to sell a significant chunk of his shares in listed quartz crystal component maker Rakon in order to prop up marine audio company Fusion Electronics. He has ended up buying out the other investors in Fusion and taking it over.

"I had to inject money in to stop it hitting the wall. The last thing I wanted to do in the world was sell any Rakon shares."

Last year, Rakon went through a difficult period as global markets shuddered. Business is now booming, he insists.

However, he was unable to save Eftpos equipment company ProvencoCadmus from receivership last month. Maire led the merger of Cadmus and Provenco in 2007 and 2008. Before the merger, he says, Provenco had been offered more than $50 million for its Melbourne-based business, Vantex. But after the global financial crisis, the price for Vantex more than halved, which made an insufficient dent in its bank debt.

"Then we just couldn't raise money. There just weren't any investors out there, so that was just a sign of the times, too."

Not that he is trying to shrug off all the blame. Maire believes it is a much more competitive world these days than it was 10 years ago.

"If I look at what we did during the Navman years - we built a business from nothing to $400 million in sales globally, and we only ever raised less than $4 million to do that. You couldn't do that today nearly as easily as we did it, because the world is a much more competitive place."

But it would certainly help if New Zealand developed a proper strategy, much like Singapore, China and Taiwan have done, he believes.

"I'm trying to push this barrel and I think I pushed it too hard on the Growth & Innovation Advisory Board, and the NZTE board, till people got sick of me saying it - but Kiwis don't get it.

"This is a world that works on integrated strategies and big picture stuff, and country strategies, and industry strategies, and we don't have a basic strategy for New Zealand."

We could also help ourselves by making sure that lessons are learned from past mistakes, says Maire.

"You spend generally the first 20 years making all these mistakes - we did it - and lots of other people I know did the same thing, too.

"It doesn't have to be that way. If we can find a better process of getting companies networking together and educated, that just works better all around - and that's the lesson that needs to be taken. But it needs to be understood by politicians and they need to act on it."

The venture capital industry is also still learning, he notes.

"I'm sure Jenny Morel can tell you, they've had some terrible disasters. But you learn by them, and that's what's terribly important. And there is some new blood coming into the industry. I think we'll see a lot more of that - a lot better, more experienced people coming in."

That said, the rest of the world is not waiting while New Zealand goes through its inevitable puberty, says Maire. "It needs to happen faster. The world is moving on."

Franceska Banga, who heads the Government's Venture Investment Fund (VIF), which has so far pumped more than $110 million of taxpayers' money into six privately run venture capital funds, acknowledges the capital constraints for fledgling companies are "mighty challenging" right now.

"Some will undoubtedly not survive as a consequence but we are also seeing many companies who are doing well and are still forging ahead."

At the end of last year VIF announced it was setting aside another $20 million in an annex fund, to provide further capital for its existing investments.

Acutely aware that a new Government is reviewing every single cent of its spending, it also commissioned a report on the state of the industry from consultancy firm LECG, which concluded that the industry will need a further 15 years of Government support before it becomes well established.

Banga was encouraged by the positive comments of Economic Development Minister Gerry Brownlee, who spoke at the annual meeting of the Venture Capital Association last month.

She is also delighted that the NZ Super Fund recently increased its exposure to emerging entrepreneurs through a $50 million investment in Direct Capital's latest private equity fund, which closed in June with just over $200 million worth of commitments.

"From our point of view that's hugely positive and a critical factor."

That said, some companies are still being forced to raise money from overseas, she notes.

"Those companies that are the most promising still seem able to raise capital but it takes longer and it has to go further, and we've still got another 12 to 18 months to see how things pan out in the wider global marketplace, because it could be testing."

Most VIF funds still have at least four years to go before they are due to be wound up, so it is too early yet to start fretting about their performance, she says.

Banga recalls three good exits recently, although none she would describe as spectacular.

"There are what they call some home runs in some of these portfolios, but they're going to have to wait a bit longer."

Serial high-tech investor Selwyn Pellett admits, however, that he is getting a bit sick of waiting for New Zealand to grow up.

Pellett's current portfolio includes New Zealand IT companies Endace, Imarda and Sway-Tech; and an Australian logistics company, Storm Distribution.

Together they employ around 160 people, with a combined revenue of about $80 million. It proves, he says, that a single entrepreneur like himself can make "a hell of a difference".

The current problem is two-fold, says Pellett. Wealthy investors are not only feeling less confident about their own financial positions, but are also struggling to realise their existing assets.

"Investors may want to invest in something and may think it's a great idea, but liquidating an existing investment is near impossible right now ... I haven't stopped putting money into companies but I'm certainly a lot more cautious than I was."

Rather than list locally, Pellett chose to float one of his investments, network monitoring and security firm Endace, on London's AIM market in 2005.

He admits he was disillusioned with the attitude of local brokers and their lack of knowledge of the high-tech sector.

He has recently been talking to brokers again, about the possible float of fleet management firm Imarda.

Despite the fact that many brokers are struggling to make ends meet at the moment, he found the experience no better this time around.

"They've told me to come back when we're bigger, but this is a $25 million company."

On the other hand, Pellett is the first to admit that New Zealand entrepreneurs can have an inflated sense of their own worth. It is all too easy to convince yourself that what you are doing is at the cutting edge, but in some cases, it's simply not true.

"You get lots of great ideas in New Zealand, but when you actually sit back and analyse them, you say: 'How would you take this product to market? What's your point of difference and why would you do it?'

"It's just so easy in New Zealand to turn up at work, sit in the office and not go around the world looking at what's going on."

Pellett's left-leaning political views are well known, but he is still frustrated by what he sees as a topsy-turvy attitude to entrepreneurship in political circles.

He would, for example, like to see NZ Trade & Enterprise run as a private company, with sales people incentivised to have a stake in the outcomes.

"We'll take monopolies and sell them off so we can be screwed, but things that should be spun off and given to private enterprise, like NZTE, stick religiously where they don't belong."

Data shows seed, start-up and early expansion investment has taken off recently, with more than $30 million invested in 33 companies in the first six months of this year - more than for all of 2008. While this is encouraging, Pellett believes too many entrepreneurs are still reliant on friends and family to develop their ideas.

"I know just between the founders of Endace, we've poured millions of dollars into investments and you look at some of the so-called organisations, and they wouldn't have put in any more. There's a lot of noise and a lot of marketing, but how many dollars are actually parted with?

"It is a desert, and people will starve and they will leave New Zealand to get the money and that's just a reality of life here."

Like Maire, Pellett would like to see more focus on the big picture from the Government, and more lessons learned from countries like Israel, Finland, Singapore and Taiwan. And don't even get him started on the proposal for a national cycle track.

"We need to figure out what's wrong with our economy and fix it there and it all trickles down. It's not the other way around - starting at the bottom and hoping it all trickles up."

He would also like to see a fundamental rethink of monetary policy, so it helps - rather than hinders - exports. And we should stop talking about Australia being our friend, he believes.

"The biggest enemy we've got is Australia, and no one realises it. It is sucking the financial resources of New Zealand and we're losing our economic sovereignty as a result. The jobs go there, the talented people go there, and the companies go there. We haven't developed the critical mentality of those countries I just mentioned, who were born in economic warfare and have had to fight to survive ever since."

Kiwis desperately need to wake up to the crucial role that exporters play in our economy, he says. "Ninety per cent of the New Zealand public have no idea of the relationship between exporters and a prosperous New Zealand."

On the bright side, there are now second-generation entrepreneurs available for mentoring, and entrepreneurs are finally starting to leverage each others' networks and collaborate.

The emphasis on cost-cutting is also seeing a more realistic attitude to salaries, particularly at management level.

"Across the board, there is just more reality," says Pellett.

"The old idea of pump it and dump it - even if that's what happens, you've got to build a sustainable business or no one's interested in buying it. That idea of being able to build something up with no revenue and dodgy customers is just gone."