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Tim McCready

Silicon Valley investment an art, not a science says expert.

A leading American venture capitalist, Bill Reichert, believes entrepreneurs and investors have a huge opportunity in New Zealand, particularly in the areas of graphics, animation and agriculture.

Reichert, managing director of Garage Technology Ventures which is based in California’s Silicon Valley, says New Zealand has a unique and compelling advantage across a variety of sectors and is ripe for disruptive innovation.

He says New Zealand now has strong angel groups that have made good investments, and some have graduated to small venture-style funds. However, he feels angel resources could be more aggressively pooled so that capital is set aside for follow-on investment when companies go global. A beachhead adviser for New Zealand Trade and Enterprise (NZTE) Reichert travelled with SVForum chief executive officer Adiba Barney to Auckland and the other main centres, making presentations and meeting entrepreneurs, investors and business leaders.

They were supporting Callaghan Innovation’s incubator programme and providing local technology businesses with a connection in Silicon Valley. Barney believes New Zealand should leverage the success of technology companies like Xero — just as Sweden, her home country, has done with the likes of Skype, Spotify, Minecraft and Candy Crush. They have strengthened the Swedish innovation ecosytem.

She says Xero is a trailblazer and the network it has created will make the path easier for future companies to follow.

Reichert outlined his 10 investment myths New Zealand angel investors and innovators could learn from (below):

His parting advice was that the water separating New Zealand and Silicon Valley shouldn’t matter – there is also a lot of space between Silicon Valley and New York. New Zealand should recognise its strengths and successes, feel the pride and not be afraid to brag about it.

Myth 1: Invest in what you know.

If you have become an angel investor, what you used to know is unlikely to be relevant. Instead, you should be technology agnostic and consider all opportunities. Most winners are black swans – random opportunities where success seems obvious with the benefit of hindsight.

Myth 2: Focus on making money

You can’t look at a start-up company the way you look at the stock market. The margins and projections an inventor or CEO provide are almost always wrong. Focus on whether they are creating value, and in turn, a valuable company.

Myth 3: The key is good due diligence.

Investors often feel a robust due diligence process will result in a good decision. But you cannot capture the data required to show if there is inherent value in a start-up. Instead, you have to develop good intuition and use your heart to make decisions. This is not something that fits into a standard due diligence checklist.

Myth 4: Don’t let emotions cloud your decision.

Since start-ups can’t give you reliable data, you have to pay attention to your emotions. If, for whatever reason, you don’t like the founders, it doesn’t matter how amazing their business model is.

Myth 5: Build a consensus among a syndicate of investors.

Most investors look for consensus. But historical data shows the best investments are controversial. If an idea is obvious it is unlikely any particular company will dominate the industry.

Myth 6: Success comes from adding value.

Everyone working in investment likes to think they add value. The harder you have to work for an investment the less likely it is to succeed. Instead, invest in a team that has the technology and understands the market. Investors don’t build companies, entrepreneurs build companies.

Myth 7: Protect yourself from follow-on investment.

By including protective provisions for yourself, you will likely poison the company. If you think you need them because you don’t trust the entrepreneur, don’t invest in the company.

Myth 8: Valuation is important.

You can focus so much on valuation that you lose sight of what is important. So often after signing a deal investors go through a surprise at the first board meeting. They were buried in term sheets and negotiated from a presentation that is now long out of date.

Myth 9: It is cheap to start a company now.

This is true, but it is more expensive than ever to build a successful company. Anyone can start a company, which means there is a lot of competition. Growth costs money, and a flat open world doesn’t necessarily make things cheap.

Myth 10: Diversify your portfolio.

There is no point diversifying into arbitrary categories. Diversify your entire portfolio, but not your angel investments. Instead of chasing hot sectors, invest in ideas that are exciting and have an edge – things that could be the next black swan.

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Tim McCready looks at financing trends for innovators and entrepreneurs.

What does it take to turn a dream into a reality? The answer inevitably involves money, and usually quite a lot of it.

Many New Zealand businesses choose to grow organically, either by bootstrapping, where revenue is reinvested into the business for growth, or through small amounts of funding obtained from the bank, family, or friends.

However, a business built on innovation nearly always requires a significant injection of capital from a third party, and traditionally through venture capital or angel investment.

Aside from money, these sources of investment can bring additional spillover benefits to advance a business.

Angels and venture capitalists will typically invest in opportunities where they can add value using their networks, bring knowledge and a new perspective, or impart first-hand experience. When it comes to innovation, you cannot have enough of any of these.

New Zealand’s ‘no. 8 wire’ mantra is not just rhetoric. Over the last few years I’ve seen an increase in international funds and multinational organisations taking an interest in New Zealand.

They recognise us as a pool of largely untapped potential and are coming to see what we have to offer.

There is plenty of exciting innovation happening here, but it is probably fair to say that many businesses are not ‘investment ready’, and don’t present themselves in the best light to make an attractive funding proposition. There is some truth that money is hard to get. Not just from New Zealand, but anywhere.

Venture capitalists and angel investors hear about opportunities to spend their money continuously – it’s their job.

They want to see solid business opportunities and investment pitches that are professional, polished, and concise.

It is arguably for this latter point that many businesses unwittingly make the challenge more difficult than is necessary and struggle to get their foot in the door.

New Zealand Trade & Enterprise’s Better by Capital programme addresses this by explaining the capital raising process, allowing a business to identify and access the investment required to expand and internationalise.

Better by Capital partner with private sector specialists who have capital raising experience to help businesses get ‘investment ready’ and prepare a capital plan. NZTE’s capital team can then assist with their global investor networks to identify and access domestic and international sources of funding.

Callaghan Innovation, the government-backed innovation hub, provides more than $140 million in funding a year to businesses to use for their R&D projects to encourage innovation.

R&D Growth Grants provide 20 per cent public co-funding for R&D expenditure, capped at $5 million per annum. R&D Project Grants are targeted at businesses who are new to R&D where Callaghan provides funding for 30-50 per cent of R&D costs.

R&D Student Grants provide funding to cover the salary of a university student or graduate to work on an R&D project within a business for up to six months.

For early stage, high-growth businesses, Callaghan Innovation has an Incubator Support programme.

The incubators are privately owned businesses that can assist with all areas of innovation, including access to networks, market and technology validation, intellectual property assessment, access to capital, and advice on strategy and governance.

The introduction of this programme last year is the result of a push from the Government to get more innovation off the ground in high-tech sectors, which they rightly recognise as crucial to growing New Zealand’s economy beyond commodities.

Aside from the time required for the application process, government grants have few drawbacks and are a useful way for a business to make their cash go further.

R&D grants from Callaghan are non-dilutive, meaning that they don’t affect the ownership structure of the company. If your business is eligible, this funding should be at the top of your list.

Technology entrepreneur Sam Morgan has been known to criticise the government’s overzealousness when awarding grants, however he concedes that “it would be irresponsible not to try to get some”.

Not only does this help the balance sheet, but showing support from the New Zealand government and having access to extra cash for projects will undoubtedly help when talking to third parties about further investment.

It would be remiss to talk about capital raising and not mention crowdfunding. Equity crowdfunding is a relatively new method of raising capital, and is becoming an increasingly popular buzzword since a change in New Zealand’s securities legislation last year allowed it.

The Financial Markets Conduct Act allows a business to efficiently crowdfund up to $2 million without having to put together a costly and time consuming prospectus, prompting the launch of equity funding from PledgeMe, Equitise, and Snowball Effect. Donors pledge their support online, where their investment level can be of almost any size.

Crowdfunding relies on an opportunity reaching a large audience, which means it tends to work best if the project is something the mass public can get behind exciting technology or niche healthcare innovations have done particularly well on these platforms internationally.

As crowdfunding becomes more mainstream, having an opportunity that stands out and entices investors will inevitably become more challenging.

Finding funding for innovation is notoriously difficult and takes a significant amount of time.

But like so many things in business, funding is about networks, and you can’t do it alone. There are tools and services in place to help make it easier – you just need to know where to look.

Converge+UK: creative, business & technology abrasion

When I arrived in the UK from New Zealand I was chatting with two friends who had also recently relocated – Peter Thomson and Klaus Bravenboer, about the types of business events being held in London. We were surprised that the events we had been to tended to be very sector-specific, and that innovation, collaboration and access to capital in London didn’t seem as far ahead of New Zealand as we had expected.

We recognised that the most exciting part of working in start-ups is when people from different backgrounds come together to make something exciting happen. Aristotle was exactly right: ‘The whole is more than the sum of its parts’ (we prefer the term ‘creative abrasion’,  proposed by a little known book from the 1980’s with the same name, which postulated that genuinely new ideas emerge from the debate, disagreements and diversity that only happens when really opposing viewpoints collide).

Off the back of this conversation we created a non-profit organisation – “Converge+UK”.

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Converge+UK runs events that bring together disparate groups of people from creative, business, and technology sectors.

For the first event we partnered with Google and hosted at Google Campus. Continuing to run our events in London start-up incubators we have also held Converge+UK events in the Innovation Warehouse and at Wayra.

Over time we have refined the event to include:

  •  Three blocks of “5in5“ presentations – five slides, one minute per slide. Five minutes is enough to cover five key points of a topic, and one minute per slide is a good length for storytelling and
  • Two group exercises before breaks
  • Plenty of networking opportunities between blocks of speakers

Bringing designers, developers, entrepreneurs, scientists, angels, corporates and industry leaders together has provided the opportunity to produce remarkable solutions to extremely disparate problems. Group exercises we have run include discussing how LOCOG (the London Organising Committee of the Olympic and Paralympic Games) could have better dealt with the problem of empty sponsor seats in the Olympic stadium, and how we could use ‘creative abrasion’ to better educate the community about the problem with payday loans – an increasing problem in the UK.

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To find out more about Converge+UK, visit our website, follow us on Twitter, connect with us on facebook, or sign up to come along to our next event at Meetup.com.

“There were just so many meetups in London that it’s overwhelming, there’s something on every night, but it’s impossible to know which events are worth going to and even when you find a good event, it’s all people from the same discipline. It’s like partying in a giant echo chamber. I wanted to start something that bought people together in new ways.”

– Klaus Bravenboer

“There is a rebel spirit to most entrepreneurs that is somehow lacking in the events and support for innovation in the UK.”

– Peter Thomson

“Innovation is now so important to every sector. In every industry from supermarkets to social networks, if you don’t constantly delight your customers then two guys in a garage somewhere are coming for you.”

– Tim McCready

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Overcoming barriers to a trade deal with Japan (University of Auckland)

The recent visit to Japan by a group of young New Zealand farmers is exactly the sort of initiative needed to lay the groundwork for a trade deal between the two countries, says the director of the New Zealand Asia Institute, Professor Hugh Whittaker.

The trip, organised by the Japan East Network of Exchange for Students and Youths (JENESYS), followed bilateral talks between the New Zealand Foreign Affairs Minister, Murray McCully, and his counterpart Hirofumi Nakasone, and included official briefings and visits to dairy factories and livestock centres.

Among the 50-strong group was University of Auckland alumnus Tim McCready, a business development consultant at New Zealand Trade and Enterprise.

“Japan will always play an important role in the global economy. The things I have learned about the country and culture will change the way I think about, and conduct business with Japan forever,” McCready says.

It is the third such visit aimed at introducing a new generation of New Zealanders to the Japanese way of doing business and along with meetings in 2008 and 2009 of the Japan New Zealand Business Partnership Forum is evidence of a reawakening interest in Japan, which in recent years has been overshadowed by the spectacular economic rise of China. Professor Whittaker says the visits are also an effective way of overcoming obstacles to a bilateral trade deal with our third-largest trading partner.

“New Zealand’s position on the proposed free trade deal with Japan is that we are complementary not competitors, and that we are too small to upset things in Japan. If you want to try out the process for FTAs with developed countries and de-bug it, you are best to do that with a country the size of New Zealand. Japan sees it somewhat differently. If it gives ground to New Zealand, there will be pressure to do the same to bigger countries,” Whittaker says.

Nevertheless, with China and South Korea aggressively signing FTAs, pressure is growing for Japan to do the same to avoid becoming more isolated.

“That would necessitate a willingness within Japan to start implementing measures in the agricultural sector which would introduce market forces,” Whittaker says.

“The issue is not merely opening Japan to foreign agricultural goods, but increasing the marketisation of agricultural activity in the country.”

That process has been slowed by the strong presence of agricultural cooperatives, which are useful in upgrading agriculture and redistributing wealth, but which have become less innovative.

Distribution of wealth is a key issue, says Whittaker.

“Electoral boundaries don’t reflect the country’s urbanisation, so the rural vote is overweighted. The political structures have served to redistribute the results of urban activity to rural areas. Japanese politics is often portrayed as ‘immobilist’, and there is structural misallocation of funds, but there is also a legitimate debate about what is a just society and how much (urban-rural) inequality should be tolerated or encouraged through increased marketisation.”

Actually, Japan’s agricultural sector has great potential for reinvigoration without destroying the fabric of rural society, says Whittaker.

“As a ‘grassroots’ exchange, New Zealand’s agricultural mission is an astute move. If we can demonstrate through these visits that the two countries can complement each other rather than being caught up in a zero-sum game, then it can produce a groundswell for change.”

Bioscience Enterprise: Mixing business with science (University of Auckland)

A programme that fuses business and science is showing business-savvy scientists how to commercialise bioscience innovations and create opportunities in the international market.

One of these business-science professionals is Tim McCready, an alumnus of The University of Auckland who now works for New Zealand Trade and Enterprise (NZTE) as a business development consultant.

“I’ve always enjoyed science and seeing the transformative effect it can have on people’s lives. At the same time, a lot of exciting research falls by the wayside because of a lack of business acumen in the industry,” he says.

Deciding to do something about this gap after finishing his Bachelor of Science, McCready joined the inaugural year of the Master of Bioscience Enterprise (MBioEnt) programme in 2006. The bioscience commercialisation degree is taught conjointly by the Business School, the School of Biological Sciences and the Law School.

“I chose a masters degree focused on business because I wanted to have an impact on the innovative science coming from New Zealand, the financial contribution it can give to the New Zealand economy and the difference it makes to lives worldwide,” McCready says.

He did papers on research commercialisation, finance, accounting, marketing, law and intellectual property, followed by a thesis project in the final year.

“I learned that scientists often have little understanding of the steps involved in commercialisation because their interest, understandably, is in research. At the same time, business people with no understanding of science can’t appreciate the length of time, the amount of risk, and the enormous cost involved in commercialising human therapeutics.”

McCready’s comments are echoed by Geoff Whitcher, director of the Business School’s Centre for Entrepreneurial Learning, who believes the MBioEnt is producing scientists with a strong business sense that will be a great help to New Zealand.

“Having an understanding of the science and commercial realities means they can help New Zealand companies to expand their international activities by taking new biotech products into export markets, thus helping New Zealand earn much-needed overseas funds,” Whitcher says.

While working on his thesis, McCready did an internship in the biotechnology team at NZTE. After finishing with first class honours he stayed with the organisation and recently shifted to Investment New Zealand, a division of NZTE focused on attracting investment to New Zealand and helping companies make strategic investments offshore.

This work has taken him to the United States three times in the past year to help New Zealand biotechnology and natural health product companies access the North American market.

Now McCready is working on a project with Living Cell Technologies (LCT), a company that breeds pathogen-free pigs from remote sub-Antarctic islands for its cell-based products to treat insulin-dependent diabetes and neurodegenerative diseases.

The LCT-Investment New Zealand project is looking into global market opportunities for high quality by-products taken from unused pig tissue, which could be used for other medical applications.

“LCT’s pig herds are uniquely free from viruses, bacteria and parasites so they are effectively the cleanest pigs in the world,” says McCready.

“This project is particularly exciting because LCT is one of New Zealand’s premier biotechnology companies making use of the country’s competitive advantage in animal health status.”