New Zealand's tech companies are enjoying record profits but fears are growing over the number being snapped up by overseas investors.

The annual TIN Report has revealed New Zealand's 200 largest technology companies by revenue (see table below) and several positive trends - including record profit, strong growth in the regions and increasing angel investment.

TIN (Technology Investment Network) founder Greg Shanahan, however, is concerned about the number of tech companies being sold offshore.

Eight "TIN200" companies were sold to overseas interests in the year to June.

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That number is down on the 11 sold offshore last year, but overall the past 24 months have seen a flurry of companies heading overseas, Shanahan says.

2018 saw Auckland-based wireless charging firm Power-by-Proxi sold to Apple and a second Auckland company, Grinding Gear Games, go to China's Tencent. A pricetag was not put on either deal, but both required Overseas Investment Office approval, putting them into the $100m+ bracket.

In agritech, Hamilton's BBC Technologies sold for Norway's Tomra for $67m (the Scandinavian company's second raid on NZ after buying Compac Sorting), while Simcro went to Swiss company Datamars for $100m+.

And the new financial year has started with more buyouts. A Texan investment firm has made a $40 million offer for e-commerce software company SLI Systems, while one of the largest TIN200 companies, Orion Health, is poised to sell its core business to a UK outfit.

At the smaller end of the scale, Tauranga's SwipedOn has been sold to Britain's Smartspace Software for $11m.

This year's report has found growing "angel" investment in early-stage companies. While Shanahan welcomes that trend, he says there is a gap in the market for more mature companies seeking capital - those who are looking to push on from $100m revenue to $1 billion without the need to surrender control to offshore investors.

"I'm not saying that selling businesses offshore is necessarily bad. There's no one path to economic growth and often that money is cycled back into the pool," he says.

"But we also have to have a pathway to build large, sustainable companies that can be anchors for the local tech industry."

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He sees the Super Fund as a key potential long-term backer of tech companies, able to take a patient, "multi-generational" approach.

The Super Fund has recently strayed into what some would call more public-good or politically-motivated investing by putting money into the Hobsonville Point development run by Housing NZ-owned HLC and its tilt at light rail.

There is also scope for the government, now that it has overhauled R&D, to makeover its NZVIF co-investment scheme and shift its focus from early-stage investing to more of a "Series A", B or C approach to help plug the funding gap for more established companies.

The 10 largest technology companies by revenue was stable year-on-year, bar Live Stock Improvement pushing into the top tier and Orion Health tumbling from sixth to 10th. There was no change in the top five.
The 10 largest technology companies by revenue was stable year-on-year, bar Live Stock Improvement pushing into the top tier and Orion Health tumbling from sixth to 10th. There was no change in the top five.

At the other end of the scale, total angel investment increasing by 15.7 per cent, to $75.9m in the 2017 calendar year.

However, investment was concentrated on a smaller group of companies. In 2017 there were 92 angel deals; nine fewer deals than in 2016. Average deal size has subsequently grown to $824,548, a 27.0 per cent increase. This suggests that investors are becoming more selective when choosing their investments, but they are contributing greater capital per deal as a result, Shanahan says.

TIN-tracked companies received more than $200 million in offshore investments in the past two years, including $41.2 million dollars invested in FY2018.

More money came from angel investors last year, but it was spread among fewer companies - implying investors are becoming more selective, Shanahan says.
More money came from angel investors last year, but it was spread among fewer companies - implying investors are becoming more selective, Shanahan says.

New Zealand's top technology companies enjoyed 38 per cent operating profit growth in the year to March, the new TIN Report finds.

That's the highest rate of growth since Shanahan, backed by NZTE, began ranking of our largest tech companies by revenue in 2005.

Shanahan says technology companies have reached the point where can boost profit without sacrificing growth. He hopes this year's report sees New Zealanders finally take the tech sector seriously.

Over the past few years, the success of companies like Datacom, Xero, F&P Healthcare, Rocket Lab, PushPay, Serko and Gallagher Group has seen the tech sector become one of our largest generators of export receipts.

Export revenue by sector. Source: TIN200, drawing on Stats NZ data.
Export revenue by sector. Source: TIN200, drawing on Stats NZ data.

In 2018, total TIN200 revenue increased 11 per cent to $11.1 billion while their revenue from exports jumped 12.4 per cent to $7.9b. That placed tech third in our export stakes behind dairy ($14b) and tourism ($10.8b) and well ahead of staples like meat ($6.6b) and forestry ($4.7b) in NZ's total exports of $53.7b last year, according to Stats NZ figures.

But in Shanahan's eyes, tech is just not getting the respect it deserves.

"If you read a lot of the blogs and media, there's a perception that some kind of technology is some sort of joy ride that will never make any money, that it's some sort of bubble-like phenomenon rather than mainstream business," he says.

He hopes this year's report will help open a "new chapter" in how people regard the industry.

This year's TIN Report shows that growth was also spread across all New Zealand, Shanahan says, with over half of the regions achieving revenue increases over 10 per cent. The combined Greater Auckland and Northland regions accounted for 122 of the TIN200 companies and had a particularly strong year – contributing 54.9 per cent (or $604m) of total TIN200 revenue growth.

TIN founder Greg Shanahan.
TIN founder Greg Shanahan.

The Hamilton and North Auckland/Northland regions each grew by over 16 per cent, and Otago/Southland grew by 13 per cent. The Wellington/Lower North Island region grew by more than 12 per cen to reach more than $2.3 billion of this year's total TIN200 turnover; the second-largest revenue generator after South Auckland (with $5.2 billion revenue).

Growth in the regions has partly come from homegrown talent, and partly from some companies re-locating part of their operations from expensive main centres.

Research and Development spend rose almost in line with revenue growth, rising 10.2% to just below $1 billion ($991 million). However, spending in the area still lags far behind the OECD average. The government recently announded a 12.5 per cent R&D tax break in an effort to goose things along. Shanahan said he supports the measure, which he sees as potentially more streamlined and less bureaucratic than the current grants-based system.

The 10 largest technology companies by revenue was stable year-on-year, bar Live Stock Improvement pushing into the top tier and Orion Health tumbling from sixth to 10th. There was no change in the top five.
The 10 largest technology companies by revenue was stable year-on-year, bar Live Stock Improvement pushing into the top tier and Orion Health tumbling from sixth to 10th. There was no change in the top five.

According to the TIN Report, our tech sector now employs 47,417 people globally with just over half in New Zealand (25,451). These jobs yield significantly higher wages than the national average. Shanahan says expanding tech sector employment further could be one of the keys to lifting incomes for Maori and Pasifika workers and others over-represented at the lower-end of the wage scale.