The $100 million milestone

Aggressive growth targets have been set for 'hot sectors' like Information Technology. PETER GRIFFIN examines progress.

If Silicon Valley's history is personified by the evolution of single-garage start-ups into multi-million-dollar IT enterprises, New Zealand by comparison has barely got the roller-door up yet.

Despite the success stories in recent years - the $45 million sale of Marshal Software to United States investors in December, Symantec's US$27.5 million ($49.9 million) purchase of Binary Research's Ghost software and development team in 1998, a slew of big contracts signed in overseas markets - the local IT industry retains its cottage-industry feel. After all, New Zealand is but a dot on the face of the global IT and communications industry.

The vast majority of our tech companies - some 7500 of them - turn over less that $5 million a year. Only 171 generate revenue above that level, with about 75 per cent of the ICT sector's contribution to GDP coming from just 84 companies. Telecom alone, our largest listed company, accounts for 2.2 per cent of GDP.

Those statistics make the Government ICT Taskforce's target of the industry producing 100 new companies turning over $100 million a year by 2012 seem quite a tall order.

So how will it be pulled off?

Well, the taskforce has not got to the specifics yet - no sweeping tax breaks or deep-pocketed funding schemes announced. Just some general, common-sense pointers outlined in a report put out late last year.

Many in the IT sector think the target is too ambitious.

Peter Maire, the chief executive of IT success story Navman, thinks it infinitely possible. "Look, that's only US$52 million in revenue. That's a small US company."

A developer of GPS (global positioning system) devices, Navman will turn over $140 million this year. In 1997 its revenue for the year was closer to $3 million.

Building devices that could equal or better anything being built in other parts of the world was key to Navman making a mark overseas, says Maire.

But Maire spent seven years perfecting the key element of Navman's success - how to commercialise its products. "[New Zealand] has tonnes of people with brilliant ideas, what they lack is the ability to commercialise those ideas."

The secret, he says, lies in putting people in New Zealand companies that have experience in bringing products to market on an international level.

"Places like Taiwan and Singapore don't have the same amount of people with that creative mindset, but they understand the disciplines required to commercialise."

That type of experience, says Maire, also needs to be injected into the education system, with the lecturers and teachers attached to business degrees and courses able to draw on experience of having been through the commercialisation process themselves.

And he says the Government has to make "some hard decisions" about the companies it chooses to support.

"We should start with 500 companies, filter out the ones with the best chances of success and focus on them."

That's a strategy supported by ICT Taskforce member Murray McNae. The chief executive of Sun Microsystems distributor Solnet - a $100 million company in its own right - McNae advocates giving companies that have proved themselves, the "next leg up".

"We won't ignore the start-ups, but if we grow those $3 million to $10 million companies, that will show the rest of the industry what's achievable."

McNae would also like to see it easier for New Zealand companies to set themselves up overseas, one of the most expensive moves for every export-oriented company.

Fisher and Paykel Healthcare, which last year reported a record profit of more than $62 million on revenue of nearly $215 million, did exactly that in its bid to sell home-grown healthcare equipment on the world market.

Chief executive Michael Daniell says that despite the fact that parent company Fisher & Paykel was winning business all over the world and had distribution networks in place, the healthcare division was "starting from scratch" in establishing channels for its own products.

The company hit the $100 million mark in revenue about five years ago, after two decades of steady growth.

"But it wasn't until we opened an office in the US that we started to make any progress in that market," he says.

The key to turning a $10 million company into a $100 million company, says Daniell, is simply doing the same thing but on a larger scale - and having the organisation in place to support it. "It's more products into more places with a greater range of products."

Research and development funding has always been crucial to Fisher & Paykel Healthcare's development.

"We were fortunate in being under the wing of a large, successful public company. There were also pretty favourable direct export incentives back then too."

But Daniell does not think that simply handing out more Government funding to companies is the right answer. He points out that there is a fair amount of activity going on in New Zealand with Industry New Zealand and Foundation for Research, Science and Technology (FoRST) funding available and a growing community of tech incubators dotted around the country.

The perspective is, not surprisingly, different at the other end of the spectrum - inhabited by the start-ups and IT companies that are yet to climb out of the red.

Geoffrey Handley, the managing director of mobile phone software developer The Hyperfactory, argues that there should be more in the way of tax-breaks, research and development incentives.

Having spent a large part of his working life in Asia, Handley points to Hong Kong's Cyberport project, similar large-scale hi-tech incubators in Singapore and Dubai, and tax-breaks for foreign investment in Queensland.

Up for a major industry award from the GSM Association in Cannes today, The Hyperfactory's main chance of international success and $100million-plus revenues comes from relationships forged with multinationals involved in NZ.

A developer for cellphone giant Vodafone, The Hyperfactory has already exported applications to Vodafone Australia. Similar deals with other Vodafone operations boasting larger subscriber bases would give The Hyperfactory the revenue growth New Zealand cannot provide and lend credibility to the company's wares.

"You don't have to knock on too many doors when [Vodafone's] pushing your stuff," Handley explains.

But the strongest link The Hyperfactory has forged is with the Radio Network, which owns many of the country's radio stations. Handley's team developed SMS-based software that allows cellphone users to text-message DJs to request songs, enter competitions or place "shout-outs" to their listening friends.

What could be more appealing to youth than mixing texting and pop music?

Majority-owned by Clear Channel, one of the world's largest broadcasting companies, Radio Network deals could be The Hyperfactory's ticket into Australia and even the diverse US radio market.

"We have the advantage in that the US is a good eight to 12 months behind in the text-message-based stuff we're doing," says Handley. "We can deliver what they can't."

IT industry veteran Rick Ellis would also like to see more support from the Government in the form of investment incentives - to encourage foreign companies to invest in the ICT sector in New Zealand.

The local managing director of IT services heavyweight EDS, Ellis slams the policy-level encouragement.

"The level of incentives available in New Zealand is frankly pathetic compared with even cities around the globe," says Ellis, who led the New Zealand division of Wang in the early 90s and went on to manage TVNZ and serve as an independent director on the board of software start-up Straightedge.*

In the EDS top job since October, Ellis says he is now in a unique position to open some doors for New Zealand IT companies that can use his position to access EDS executives in Texas and a larger network of business contacts.

It is something Ellis believes the country managers of all the multinational IT companies in New Zealand should be doing more.

"Breaking down the door in Australia and the US is hard-yard stuff ... But I've got a constant stream of EDS people coming through here and they're amazed at how developed New Zealand's industry is and how cheap it is to do business here."

He hopes the merger of Trade New Zealand and Industry New Zealand will sharpen the Government's focus on investment incentives.

Slightly further along the path to $100 million is Plato Clinical Systems. An Auckland company that makes software allowing doctors to assemble and sift through patients' clinical records, Plato grew out of the basement of a Parnell house to become a major software exporter.

Last year the company hit the big time, sealing around $10 million worth of deals in the US, with clients including the military and some of the country's biggest hospitals.

Chief executive Paul Ryan also believes the ICT Taskforce's goal is easily achievable and expects Plato to reach the $100 million target well before 2012.

Although Plato was able to strike deals with several hospitals in Britain directly, cracking the US involved striking deals with local software distributors and opening an office in Los Angeles.

Getting the right people on board was crucial. While developers were engineering software for existing customers, Ryan hired a Stanford University graduate to scout out gaps in the US health software market, which pointed Plato in the direction of those big deals.

It also made a big investment in hiring chief operating officer Robert Bell, talent that Ryan admits at the time was probably too big for the scale of the company, but will prove valuable as it tries to keep pace with growing demand for its software.

"Our problem now is delivering on the work already in the pipeline," says Ryan. "We've so much work on that orders placed now, we won't get to until next April."

But not all those in the tech sector will rely heavily on exports to achieve the goal of nine-figure revenues.

Local IT servicer and call-centre operator Datacom will generate around $270 million in revenue this year, says managing director Frank Stephenson.

Only $50 million of that will come from overseas - mainly Australia and Asia.

Once again, that overseas expansion grew out of customer links developed here - with the likes of Microsoft and P&O, in Datacom's case.

Stephenson says the Australian operation will continue to grow much faster than the New Zealand business - he reckons about 50 per cent this year.

But Datacom's bread-and-butter business will always be what it does locally. While tempted by overseas opportunities, Stephenson is cautious about the resources needed to expand quickly in an overseas market.

"In the end there's no monopoly on brains or talent. You have to have product and to sell it you have to back it up. The marketing costs associated with something like software can be huge."

With $900 million in ICT exports generated in 2001, meeting the ICT Taskforce's 10-year targets would boost export income for the sector to $16 billion by 2012 - a respectable export industry by any measure.

While neither the Government nor the industry's luminaries have come up with a step-by-step plan to build New Zealand into an export-driven tech hub, the multi-billion dollar vision is in place. And the clock is ticking.

WORLD-CLASS PRODUCTS

It all starts with a great idea. Luckily Kiwis are the imaginative type. Whether it's the BrailleNote, PulseData's data input device for the blind that has grabbed 65 per cent of the US market, or Right Hemisphere's 3D software used in the popular Sims game, a product that can sell on a shelf in Walmart alongside wares from Texas to Taiwan is essential. Big ideas from New Zealanders have been successfully commercialised, but many of the best see the light of day and little else.

ADEQUATE FUNDING

Sadly, there is never enough cash to go around, but investment fuels innovation. Here the Government plays a part, although many would argue that the process of applying for funding is time-consuming and arduous. Fisher & Paykel Healthcare, The Hyperfactory and Navman have all picked up funding from the Government for various projects. And NZ companies can make their funding resources go a long way. With the new capital market proving a failure as a means for small companies to list and secure public investment, private equity, venture capital and angel investment are the other main routes for funding. Most new ventures pitch for all three.

THE RIGHT PEOPLE

Recruiting the people who will successfully lead the company and commercialise the product is a crucial ingredient. Many companies in the ICT sector are bringing in talent from overseas to plug gaps in management and technology expertise. Education will change that, but it will be a slow process. Every successful United States IT company has its brilliant visionary - a Larry Ellison, Bill Gates or Steve Jobs. But the techos, management and marketing types are just as important in bringing the idea to market.

A ROUTE TO MARKET

Distribution deals, partnerships, revenue-sharing relationships all play a big part in the overseas strategies of export-oriented ICT companies - they have to. Few NZ companies can realistically go to market alone overseas. Many ride on the coat tails of multinationals.

MARKETING, MARKETING, MARKETING

If it plays its card right, NZ could develop a top-notch name for itself in the same way Israel has for software development and Japan has for electronics. Pushing the country as a centre of excellence is key. Often the NZ company's name will never appear publicly as its product is wrapped up in the brand of a partner with pulling power in other markets - fine as long as the revenue keeps rising.

A MEASURE OF LUCK

Just about every IT company has its own, usually centring around relationships made that were later used to clinch deals. Past and present executives of big-name companies such as Apple Computer, Hewlett Packard, Grid Systems, IBM, Nortel Networks and Sun Microsystems act as mentors and sit on the boards of emerging tech companies due largely to personal relationships that have been forged - chance meetings in LAX, paths that crossed at business conferences. Luck is the biggest variable, but it is what makes business interesting.

* CORRECTION: In the original version of this report, we incorrectly stated that Straightedge was a "defunct" software startup. The company is still successfully operating. Straightedge Ltd, a company shell used to launch the company on the new capital market, is in liquidation.