Last month, another high-flying tech company you probably haven’t heard of was sold to offshore buyers.
Over a 25-year period, Auckland-based Serato became one of the world’s leading makers of audio software for DJs, engineers and musicians. It was bought by Yokohama-based audio specialist AlphaTheta in a deal likely to have been worth north of $100 million, as it required Overseas Investment Office approval.
Like retail software maker Vend (sold for $455 million) and Seequent, which makes 3D modelling software (sold for $1.46 billion), Serato’s exit is testament to the incredible value our tech companies create.
Don’t get hung up about ownership changing hands. At least some of the proceeds of those sales, and the expertise behind the companies, will support the next generation of Kiwi startups.
That’s what we’ve seen with the likes of Xero, Trade Me, and Rocket Lab, where cashed-up founders have become serial investors. The question is, how do we create more great startups with the ability to compete globally?
The government’s Startup Advisors Council was tasked with finding answers. But some recommendations in its Upstart Nation report haven’t gone down well with entrepreneurs, who have been on that startup journey.
The council suggests we aim to become a “nation of upstarts”, more than doubling the number of active startup companies to 5000 by 2030. Its top suggestion is a tax change that would remove tax on unrealised gains from employee share-option programmes.
When startups are trying to recruit top tech talent, some sweeten the deal by offering share options, which are treated as income, and taxed immediately, or sometimes when the company is sold. It’s different for the company’s investors.
They don’t pay tax on profits made from the sale of their shares in the company, because New Zealand doesn’t have a capital gains tax. A tax law change to attract more highly skilled workers to the startup sector would make sense if there was also some movement on a capital gains tax. But the council hasn’t recommended that. Why would it? Most of its members are wealthy startup founders or investors. The last thing they want to see is the proceeds of their next exit taxed. Elsewhere, the council recommends tax incentives to “promote investment in UpStarts and venture funds”.
“These tax cut ideas should never have made it to print, let alone at the top of the list,” wrote Rowan Simpson, Trade Me co-founder and serial investor, in a critique of the council’s recommendations. “We should be demonstrating how startups will contribute more tax over time, not less. Then maybe we could justify the up front investment required.”
Many countries offer grants and tax incentives to startups. High-growth, tech-driven companies are demonstrably good for the economy. Israel and the US, in particular, have made startups the engine of their economy, creating many high-value jobs in the process. That generates significant tax revenue.
But the government tips a lot of money into the sector via its Elevate venture fund, the 15% R&D tax credit and numerous other channels. Do we get a good return on the investment of our tax dollars? It’s hard to know. Critics of the council’s report argue we need better visibility into the impact startup support is having before writing more cheques.
The council wants us to see public research institutions spin out 75 startups a year and see five new startups reach $100m in revenue each year by 2030. Those are ambitious targets. But what’s the best way to get there?
Maybe the focus should be on building the domestic pipeline of tech talent so crucial to the success of startups, and enabling our research sector to spin off more companies.
Everyone agrees more viable startups would be good for the country. How we get there is a different story.
