New Zealand's brightest technology growth companies appear immunised against an epidemic sweeping through the global industry.
The disease is real enough. Fifteen years after the dotcom boom imploded, Silicon Valley investors worry a second tech bubble is about to burst.
A number of sizeable companies - many operating in the social media sphere - previously had stratospheric valuations that don't stand up to conventional financial analysis. Wise heads know that if promoters have to resort to phrases like "this time it is different" or "a new economic paradigm" when justifying a company's high valuation, trouble will surely follow.
When investors in one technology sector sneeze, everyone in the industry catches a cold. Technology stocks across the board have been volatile for the past two months. Last week Amazon, one of the world's largest online retailers, lost 10 per cent of its value in a single day. Bearish sentiment is global with the price of locally listed companies like Xero and Wynyard Group rising and falling in line with the overseas markets.
The current volatility makes it a tough time for young technology companies to find the money they need to grow. On the other hand, it's a good time for companies, like New Zealand-based online accounting challenger Xero, which already had substantial funding in place.
In October 2013, Xero raised NZ$180 million of fresh capital. The money came from US and New Zealand investors including existing Xero shareholders Matrix Capital Management and Peter Thiel's Valar Ventures.
Xero CEO Rod Drury says: "This year's market volatility validates our strategy of raising capital ahead of our needs last year. We're now seeing the difference between those companies who have already been funding with those who haven't."
Having this war chest gives Xero an edge over its rivals at a strategic moment. "If you've got funding in place, there's less likelihood of your competitors being able to get the money they need to grow," Drury says. "And that gives us a window of opportunity." He says now would not be a good time if you needed to raise money.
Point of sale specialist Vend is in a similar position. Earlier this year it closed a NZ$25 million funding round co-lead by Peter Thiel's Valar Ventures and Australia's Square Peg Capital. This followed the NZ$8 million Vend raised in 2013 and NZ$3 million raised in 2011 and 2012.
Crime-fighting software developer Wynyard Group took a different route to build its capital. "Wynyard raised NZ$65 million at IPO and a further NZ$35 million through a placement earlier this year to give us fuel in the tank to attack the much larger deals we are seeing in the US market and build partner channels to market earlier," says CEO Craig Richardson.
Mark Ryan from Snakk Media, which raised more than NZ$6 million locally earlier this year - see sidebar - says building financial reserves early is a smart move.
"It doesn't feel like it's a long time since the global financial crisis. If you didn't have money under the mattress when that hit, your entire business would have been on winter rations."
Investor Lance Wiggs says the fast-growing New Zealand technology companies have something their US counterparts don't: "They all have revenue. That makes them quite different from the likes of Facebook or Twitter that may measure users in billions but make relatively little money from them."
Wiggs says the New Zealanders are focused on building long-term sustainable businesses. In contrast a company like Twitter is good at gaining customers, but it could all be gone tomorrow. Social media firms run the risk of killing the business when they try to earn revenue.
He says another difference between New Zealand and the US is that local companies are much more conservatively valued.
Last year Wiggs tried and failed to set up a public investment fund to finance early stage technology companies in New Zealand. Wiggs' Punakaiki Fund was looking for $20 million, but only managed to raise $3.3 million. Since then Wiggs has set up a private fund. "We just went out to investors and raised $1.5 million of private money, I've already invested that."
Rod Drury says there's a flight to quality when markets are volatile. "People look closer at business models. We have the customer numbers, but we also have the revenue growth."
Drury says in the past investors have underestimated the power of the software-as-a-service (SaaS) model. In the past software was sold as a product for a one-off fee and maybe additional upgrade revenue. SaaS companies like Xero collect monthly subscription fees. Drury says that money just keeps on coming in every month.
Xero is using its cash to build the business as it aims to dominate what is essentially a mature market for small to medium-sized company accounting in the US. The company has already done this in New Zealand and Australia.
When Xero arrived on the scene seven years ago, the idea of selling accounting software as a service was radical. The company won business locally coming from left field with a new value proposition for customers. It needs to keep up that momentum as it tackles the US.
Drury says that means attracting the best talent in an incredibly mobile market and continuing to build the best relationships. He talks of a cycle: "You get the best capital to get the best talent, this means you can get the best deals, which then means you have access to the best capital."
In March when Vend announced its latest capital raising, CEO Vaughn Rowsell said the money was earmarked to fund growth. He wrote in his company blog: "We'll be using this money to expand our presence in North America and Europe, beef up our awesome team so we can continue to delight our retailers with new features they'll love and amazing customer support, and continue to build relationships with resellers and partners from all over the world."
Like Xero, Vend is chasing a mass market; both need to bulk up and sell high volumes through partners. Wynyard Group has a different business model. CEO Craig Richardson says: "Wynyard helps prevent and solve serious crimes. We have built a market leading advance crime analytics platform helping solve growing problems for large government agencies and corporates. We are in a position to shape this new market it as it grows and there are no dominant players. Wynyard has a high-value rather than volume business model where there is significant price upside and customers are contracted for 3 to 10 years."
Wynyard has only been operating for two years, yet research analysts like Gartner and Chartis already rate the company as a market leader. Richardson says: "Our end game is to build a highly profitable company with lifetime customers. While the US sector is important to Wynyard, the opportunity is global."
Drury says most tech people will understand the current downturn on the markets is a short-term thing. "Our business fundamentals haven't changed. The weird thing is, it doesn't really matter to us what the stock market does. It doesn't bother us on the way up, it doesn't threaten us on the way down."
Likewise Wynyard's Richardson is sanguine about the tech stock downturn. "The $900 billion trans-national crime problem Wynyard helps solve and the $21.7 million revenue booked in 2013 helping the world's leading government agencies and corporates indicate Wynyard is a real business with a compelling value proposition and robust business model. Our share price is up more than 100 per cent since listing. We have sufficient capital to execute our growth plan. The only headlines I'm interested in at the moment are the ones I know our products have helped our customers create."
Though local share prices are linked to global markets, for the most part New Zealand's young technology companies are immune from the deep-rooted problems facing American technology stocks. Unlike their international counterparts, they have conservative valuations more closely linked to their revenue generation than their ability to create publicity.