Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Debate over R&D support worth having

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Global success of Kiwi tech companies proves enormous payoff waiting when we strike it right.

Steven Joyce debated the funding issue very publicly on Twitter.
Steven Joyce debated the funding issue very publicly on Twitter.

The New Zealand technology sector is in a very good place right now. No really.

With all the scrapping about public funding policy that's been going on it would be easy not to notice that.

And while the debate rages about the sale of yet another smart Kiwi tech company to foreign shareholders, the local sector has quietly achieved a remarkable result in the leading regional stocktake of the industry.

Forty-five New Zealand companies featured in the latest Deloitte Technology Fast 500 for Asia Pacific. That's the list of the 500 fastest growing tech companies.

Kiwi firms make up nearly 10 per cent of the list in a region that includes China, Japan, South Korea and India and Taiwan.

We had seven in the top 100. Transport technology and services company EROAD made the top 10, with revenue growth of 2746 per cent. It was the only company from an English-speaking country to make the top 10.

Which is another way of saying we even beat Australia. Well, sort of - overall they had 60 companies on the list.

Taiwan had the best representation on the list with 130 companies; China had 103.

It's a shame there were too many Kiwi firms on it to name here, as they all deserve recognition. Most of them aren't well known. The list includes 2degrees, Xero and Powershop and a sprinkling of other consumer brands. But they are all great hopes for New Zealand business.

The full list of Kiwi firms is tagged to the original news story which you can read at businessherald.co.nz.

It's impressive to consider that these companies are achieving this kind of phenomenal growth in an economy with GDP growth of less than 2 per cent. Some of our Asian neighbours have a lot more economic action going on and a heck of a lot more available capital - including both private and state funding.

So, getting back to that funding issue, it's not that there is anything wrong with the robust debate about policy. All the better when it's spiced up by a Cabinet Minister debating it very publicly on Twitter as Steven Joyce did last week.

Auckland-based Endace is the latest local tech stock (listed on London's AIM index) to be subject to a takeover offer and most likely we'll see it sold off to a bigger US firm for $156 million.

It has received about $10 million in taxpayer funding since it was founded in 2001. The perennial issue of whether taxpayers are getting a good deal from a funding system that seems to build companies up for foreign sale was highlighted by one Endace's co-founders, Selwyn Pellett.

Pellett, who largely sold out of Endace in 2010, got a swift Twitter rebuke from Joyce. One suspects Joyce was really more annoyed by the media coverage of what he sees as a success story being overshadowed by the political debate.

It was a good spat anyway and put the focus on how we should structure our support for tech companies to maximise taxpayer benefit when they succeed.

There's a bit of traditional politics in that debate. Those on the right tend to be less hung up on ownership - believing that if we create the right business environment then tech companies will want to be based in New Zealand regardless of where their shareholders are based. On the left, there is more support for Government taking a direct equity stake or, as Pellet has suggested, a less direct interest via financial instruments like convertible notes.

Both strategies have risks and merits.

Plenty of tech start-ups fail and that makes state investment risky. But more hands-off policies do leave us at the mercy of the global market. Despite our best efforts, we can't stop companies upping sticks and moving to cheaper locations if they want to.

We are doing something right, though. Starting with the earliest focus on agri-tech, New Zealand has a long history of being smart about public funding of R&D - on both sides of the House.

But the policy debate sometimes gets too much attention in the context of the wider New Zealand technology story.

Good on Government, past and present, for the funding it does.

But it isn't the Government that can take credit for the brilliant and hard-working scientists and entrepreneurs that drive these companies.

These are the people who have the skills to transform our economy and create wealth. It's important to support them but, ultimately, most of them would be doing what they do regardless of the shape of public policy.

The sector last year generated more than $5 billion in export revenue, about $7 billion in overall revenue, according to the Technology Network. That's not bad and it's more than most people realise. But it could be doubled quickly if just one of those smart companies was to make it at a truly global scale. If the idea of a Kiwi Facebook sounds far-fetched, consider how ludicrous the scale of Peter Jackson's success would have sounded if you'd suggested it 20 years ago.

If NZ wants to be a wealthier nation, we're going to need another industry to rival dairy and tourism as an export earner. Realistically, we need to either strike it big in oil and minerals or become a tech centre of global significance.

In both cases, there's an element of playing the odds. You need plenty of viable prospects as the strike rate is low.

Right now, Xero is our best hope in the tech space. It's a well-positioned player in a fast-growing, almost revolutionary, shift in business behaviour - the online accounting space. The market likes it so much that its shares have almost trebled in value this year and it now has a market capitalisation of $890 million despite never having turned a profit.

Its founder, Rod Drury, is committed to a NZ base and staying on the NZX and so success would bring with it big gains for the wider local sector in much the same way as Peter Jackson's did for the film industry. But it's a volatile industry with no guarantees. Whatever happens next with Xero, it's exciting to be reminded just how many young tech companies are waiting in the wings.

- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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