Tips from the best – Raising capital in Los Angeles (NZ INC)

Tim McCready

Panel discussion: Investor Guidance for Raising Money in Los Angeles

  • Mr Bruce Stein, Principal, Westridge Consulting, LLC
  • Mr Robert Perille, Partner, Shamrock Capital Advisors
  • Mr Craig Cooper CCP, LLC
  • Chance Barnett, CEO, Crowdfunder
  • Moderator: Mr Mitchell Berman, Managing Partner Zen Media Entertainment Group

People in the private equity space are miserable at the moment because they are finding valuations at a record high. That means that there really couldn’t be a better time than now for venture funding – for the entrepreneur. There is no shortage of capital in Los Angeles or the United States, but there is a shortage of really good ideas.

Investing used to just happen in boardrooms. Now it can happen online. The floodgates have opened for people to advertise – it is an entirely new industry and crowdfunding allows you to get yourself in front of potentially thousands of investors. Last year saw $14B in crowdfunding. The estimate for 2015 is $34B. Crowdfunding doesn’t have to come at the expense of angel and VC funding. There are a host of investors that are using the internet to find funding opportunities.

Investors are now looking for those businesses that have had some traction. That may mean they have established themselves, have customers, or are experiencing some kind of growth. They don’t have to be profitable but it has to be a profitable business model that makes sense.

Investors like to invest in people that have an unfair advantage. It could be that you have a PhD in a very specific area that no one else would ever know about.

Richard Branson is very candid about not taking much credit for his wins – he chalks some of them up to being in the right place at the right time. In saying that, the team is critical to any investor. An investment decision is generally made 80 percent on the team and 20 percent on an idea. A great team can make a mediocre idea work – but a bad team will kill a fabulous idea.

To get the attention of an investor, try to teach them something. If you are solely pitching for investment, your pitch may or may not be heard. But if you teach someone something, they will take notice of you.

When you are pitching, make sure you are able to deliver it so that someone can understand the core idea immediately. You don’t want to ask someone to delve deeply into a topic area they don’t understand. You will get a false negative if your presentation material is poor. Equally, flooding a pitch with keywords like ‘big data’ will never count for anything if it isn’t clear what your business does.

LA investors will be looking for something that is not a provincial application. This is a risk coming from New Zealand. Your product must be immediately globally applicable. If you don’t have a platform to leverage and build on then you will have a very difficult time to gain the attention of the investment community.

Be persistent and resilient. At seed and early stage it is hard to differentiate people from one another. Investors hear a lot of pitches all the time and they tend to blur together. It is a very competitive market. A big mistake is to not be persistent in follow up. More people lose opportunities because they fail to follow up until someone says no. It is a huge differentiator if you’re kindly persistent to the investor. It demonstrates resilience and that you are more organised than most other people are.

NZ INC. traveled with the Auckland business delegation to the tripartite summit in Los Angeles. Representatives from 43 Auckland businesses took part in the inaugural Tripartite Economic Alliance Summit in Los Angeles. This follows the signing in November 2014 of an alliance designed to boost economic co-operation between Auckland, Guangzhou and Los Angeles. Len Brown and councillors Bill Cashmore and Denise Krum led the delegation. Auckland Council organised it with the support of Auckland Tourism, Events and Economic Development (ATEED), NZTE and MFAT.

Media contact at Auckland Council: Glyn Jones 021 475897
ATEED (Auckland Tourism Events & Economic Development)
NZTE (New Zealand Trade & Enterprise)

Living and working in Los Angeles – the reality (NZ INC)

Tim McCready

Through no fault of their own, New Zealand (and even different parts of America) have a cartoonish view of cities in the United States. People tend to think of Los Angeles solely as Hollywood and made up of “fake” people. New Zealand companies – particularly those involved in technology, think of San Francisco or Silicon Valley as their default launchpad.

The United States is a very large country – a market of markets – and it is very important to consider that it may be Austin, Seattle, or Los Angeles could offer the best opportunity.

The reality is that Hollywood is highly visible, but makes up only a fraction of LA’s economy. The vast majority of marketing money for Los Angeles goes into tourism. The tourism dollar for the city is so valuable that it has made it difficult for the start-up community to shine.

LA is the third largest tech ecosystem in the United States (behind Los Angeles and New York), but it is the fastest growing. 12% of early-stage start-ups are located in Los Angeles, and there is now a large number of companies including Snapchat ($10B), SpaceX ($5B), Beats ($3B and aquired by Apple) and Oculus ($2B and acquired by Facebook) that were built in Los Angeles.

Los Angeles is the largest manufacturing centre in the United States, and a hub for aerospace, logistics, clean technology and innovation. Los Angeles port is the largest seaport in the western hemisphere. Southern California graduates the most engineers in the United States from some of the most prominent schools, including USC, UC San Diego, UC Santa Barbara, UCLA and others.

Los Angeles Mayor, Eric Garcetti, describes Los Angeles as ‘the western capital of North America, the northern capital of Latin America, and the eastern capital of the Pacific Rim’.

Despite all of this, there is no denying that Los Angeles is the creative capital of the United States, specialising in video content. One in seven people in LA are employed in a creative field. It is the number one metro area for art, design and media employment, and the creative industry provides more than $140B of annual economic impact to the city.

Video and content start-ups are succeeding in Los Angeles. Maker is the number one producer and distributor of online video, with 6.5 billion monthly views and 450 million subscribers. DeviantArt is the leading artist social network, and Mitu Networks is the largest online Latino video network.

New Zealand’s fastest growing export is IP. It grows at 10-15% each year, and has done so since the GFC. The United States is our number one intellectual property export market. Venture Capital companies in New Zealand do not have the scale of connectedness as capital that comes from the United States. It is important to think about the people behind capital – the right objective shouldn’t be to raise $5-10 million. The right objective is to find the capital provider that can help your business grow in line with its strategic objectives.

The stereotype about Los Angeles traffic is largely true, but if you can base your office near the people you want to attract for work, it is very easy to have a choice about where you base yourself. There is no one tech hub. Pasadena, Silicon Beach, USC, UCLA, Santa Monica all have significant human capital, infrastructure, and co-working spaces.

Los Angeles can offer a great lifestyle. LA is a city of cities – it offers a beach lifestyle, Hollywood, an urban downtown experience, hiking, and ski fields close by. Los Angeles has 300 days of sunshine every year and is offers more affordable living compared to other tech centres like San Francisco or New York City.

Without forgetting that California is currently facing one of the most severe droughts on record, a water metaphor was used to describe the nuances of Los Angeles which stuck with me. “New York is a river, Los Angeles is a lake”.

If you step outside in New York you will naturally go somewhere, because the city itself will take you and it is simple to navigate. In Los Angeles, to get anywhere you have to actively swim there, or you risk never getting anywhere at all. It’s a city that increasingly unfolds as you spend more time there.

But that’s what makes it so exciting.

NZ INC. traveled with the Auckland business delegation to the tripartite summit in Los Angeles. Representatives from 43 Auckland businesses took part in the inaugural Tripartite Economic Alliance Summit in Los Angeles. This follows the signing in November 2014 of an alliance designed to boost economic co-operation between Auckland, Guangzhou and Los Angeles. Len Brown and councillors Bill Cashmore and Denise Krum led the delegation. Auckland Council organised it with the support of Auckland Tourism, Events and Economic Development (ATEED), NZTE and MFAT.

Media contact at Auckland Council: Glyn Jones 021 475897
ATEED (Auckland Tourism Events & Economic Development)
NZTE (New Zealand Trade & Enterprise)

From Soju to Sauvignon blanc – Korean FTA (NZ INC)

Tim McCready

When the New Zealand – Korea free trade agreement signed in March enters into force, tariffs will be eliminated on 48% of current goods. New Zealand’s exports to Korea current attract $229 million every year in duties.

In the first year alone the free trade agreement will save an estimated $65 million in duties, and within 15 years of establishment the remaining tariffs will be largely eliminated. The industries that will see the most benefit are those exporting dairy, red meat, kiwifruit and wine.

The current tariff on wine exports to Korea is 15%, and this will be wiped immediately as the agreement enters into force. This tariff concession will provide a good boost to exporters, but despite the removal of tariffs, exporting wine to Korea remains a challenge for New Zealand.

This is largely due to the tax and distribution system. When wine arrives in Korea, a liquor tax of 30% is applied, along with an education tax of 10%. This is even before it hits the distribution networks, a value-added tax of 10%, and retailer markups.

Korea produces and consumes a large amount of liquor locally. Beer and Soju make up 86% of locally produced alcohol. Wine makes up approximately 20% of imported alcohol. Wine is considered to be a luxury product and is consumed by only a small fraction of the population. Red wine is dominating wine imports at 71%, but white wine is beginning to gain more traction.

With the removal of tariffs, New Zealand wine producers will now be placed on an equal playing field with major international competitors in the market including the US, EU, Chile and Australia. However, the rest of the taxes that make up the total cost of wine are payable whether a free trade agreement is in place or not.

The combination of taxes, high distribution costs and mark-ups can make New Zealand wine significantly more expensive in Korea than in many other countries. And because New Zealand wine is typically sold as a premium product, and tax is applied as a percentage of price rather than a cost per unit, this can increase the markup on a bottle of New Zealand wine significantly when compared to budget brands of wine. This differs to Japan where tax is applied per bottle, and education tax doesn’t exist.

In the year ending June 2014, South Korea accounted for just $2 million of New Zealand’s $1.3 billion wine export business globally. That said, New Zealand wine is increasingly becoming of more interest to South Korea. Until 2001, only one New Zealand winery had a presence in the Korean market. The number grew to 38 in just six years. Demand for New Zealand wine is growing as consumers become more aware and curious to try white wine.

But we still have a way to go.

I visited three cities during my visit to Korea, and one thing that surprised me is that I was frequently asked if New Zealand produced any alcohol. High-end restaurants had New Zealand wine on their wine list, but my experience demonstrated that the average consumer was largely unaware of our ranking in the wine world.

The free trade agreement will undoubtedly be great for New Zealand’s dairy, meat and horticultural industries. But the wine industry will be one to watch. Chile had a noticeable boost in wine exports after their free trade agreement was signed with Korea, and it is likely that New Zealand will see a similar lift.

But it could be that the free trade agreement gives New Zealand the impetus it needs to boost the recognition and acceptance of our wine brands in Korea. And if that occurs, the benefit of the free trade agreement would vastly exceed any reduction in tariffs.