PIVOT POINT

Idealog - - THE REPORT - Greg Shana­han is the founder and man­ag­ing di­rec­tor of the Tech­nol­ogy In­vest­ment Net­work (TIN). It pub­lishes the an­nual TIN100 Re­port in Oc­to­ber. It also co-pub­lishes the an­nual In­vestor’s Guide to the NZ Tech Sec­tor in part­ner­ship with MBIE.

New Zealand is go­ing through a once-in-a-gen­er­a­tion eco­nomic trans­for­ma­tion as our tech in­dus­try soars. So why is it grow­ing so fast? Why do the for­eign­ers love us so much? And can we pre­serve our unique­ness in the face of in­ter­na­tional pres­sure? TIN Net­work’ s

Greg Shana­han gives his state of the sec­tor ad­dress. De­spite be­ing a sig­nif­i­cant econ­omy and a coun­try of in­flu­ence, New Zealand has only re­cently be­come part of the world­view of our ma­jor trad­ing part­ners. And this isn’t just due to the at­trac­tive­ness of our coun­try as a des­ti­na­tion, but be­cause of the so­phis­ti­ca­tion of the Kiwi tech­nol­ogy now be­ing taken to the world.

Our days as a spec­ta­tor are over and the num­bers we’re see­ing from the tech­nol­ogy sec­tor are in­creas­ingly paint­ing a pic­ture of eco­nomic growth that is poised to con­tinue for the fore­see­able fu­ture. Con­sider the fol­low­ing:

I T’S BI G

In 2016, the TIN200, New Zealand’s 200 lead­ing tech­nol­ogy ex­porters, grew rev­enues by over

$1 bil­lion for the first time.

I T’S ACCELERATING

The $1 bil­lion in­crease in rev­enues rep­re­sented a mas­sive 1 2 per­cent growth in rev­enue – up from seven per­cent the pre­vi­ous year and five per­cent the year be­fore that.

I T’S SPREAD­ING

The num­ber of hyper-growth com­pa­nies (TIN’s Ris­ing Stars) is ex­pand­ing and achiev­ing crit­i­cal mass. In 2016 there were 27 TIN200 com­pa­nies with a three-year com­pound growth of more than 20 per­cent ( 30 per­cent for smaller com­pa­nies) vs. 23 the pre­vi­ous year. Their com­bined rev­enues were just un­der $ 1 bil­lion, grow­ing by 41 per­cent on the pre­vi­ous year; i .e. dou­bling in size ev­ery two years!

THEY’RE BI G

For the first time i n 2016 a se­cond TIN200 com­pany – Dat­a­com – achieved rev­enues of over $ 1 bil­lion, j oin­ing Fisher & Paykel Ap­pli­ances. By the end of the cur­rent fi­nan­cial year, F& P Health­care could well be­come the third.

I T’S EVERY­WHERE

For TIN200 com­pa­nies, dou­bledigit growth was uni­ver­sal across all size cat­e­gories and in al­most ev­ery re­gion of the coun­try.

I T’S OVER­SEAS

TIN200 North Amer­i­can, Eu­ro­pean and Asian mar­kets all grew by dou­ble dig­its in 2016. North Amer­ica ac­counted for over 40 per­cent of the growth in 2015/2016. If sus­tained in the 2016/2017 year, North Amer­ica will over­take Aus­tralia as the TIN200’s largest mar­ket.

THEY’RE I NVESTING

TIN200 com­pa­nies grew R&D spend by 16 per­cent to over $800 mil­lion last year. This spend will likely pass $1 bil­lion this year.

I T’S MUSHROOMING

Over the past 17 years New Zealand has in­vested heav­ily in its na­tional in­no­va­tion ecosys­tem. Be­cause of this, New Zealand now en­joys a deep net­work of fund­ing mech­a­nisms, in­cu­ba­tors, col­lab­o­ra­tive spa­ces and ter­tiary train­ing ini­tia­tives de­signed to foster an in­no­va­tion econ­omy. This net­work con­tin­ues to grow, ex­pand­ing into provin­cial ar­eas such as Taranaki and Hawkes Bay.

I T’S APPEALLING

Since 2000 the num­ber of pri­vate eq­uity firms glob­ally has more than tripled. Ac­cord­ing to The Econ­o­mist, 620 pri­vate eq­uity firms were founded glob­ally in 2015 alone. As com­pe­ti­tion for deals in­ten­si­fies glob­ally, more money is find­ing its way to New Zealand. This is sup­port­ing the strong growth of lo­cal in­vest­ments in our tech­nol­ogy sec­tor. In 2016: • An­gel In­vest­ment rose by

19 per­cent to $69 mil­lion • VC In­vest­ment rose by

47 per­cent to $92 mil­lion • Pri­vate Eq­uity firms raised over $1 bil­lion – more than dou­ble the pre­vi­ous record • In­vest­ment from for­eign ven­ture cap­i­tal firms rose by 239 per­cent to $173 mil­lion (FY2016/17)

UNCERTAINTY I S OUR FRIEND

In the Post-Trump, Post-Brexit world, New Zealand is gain­ing the at­ten­tion of a small num­ber of elite top-tier pri­vate eq­uity firms. Over 40 global pri­vate eq­uity/ven­ture cap­i­tal firms now have in­vest­ment in New Zealand tech ven­tures. Over 50 per­cent of these have made in­vest­ments in the past three years. They rep­re­sent both old fam­ily money with names such as Carnegie, Hearst and Mur­doch, com­bined with Sil­i­con Val­ley and Asia’s new money tech in­vestors, in­clud­ing Peter Thiel, Vinod Khosla, Mark Zucker­berg and Baidu Cap­i­tal (China’s Google). The par­al­lel for­eign in­ter­est in Kiwi prop­erty is get­ting se­ri­ous at­ten­tion in US me­dia. A story in The New Yorker that painted New Zealand as some­thing of a bolt­hole for ti­tans of Sil­i­con Val­ley con­cerned about the im­mi­nent col­lapse of so­ci­ety pointed out that in the “the first 10 months of 2016 for­eign­ers bought nearly 1,400 square miles of New Zealand, more than quadru­ple what they bought in the same pe­riod the pre­vi­ous year” and in the first week af­ter Don­ald Trump’s elec­tion, “13,401 Amer­i­cans reg­is­tered with New Zealand’s im­mi­gra­tion author­i­ties, the first of­fi­cial step to­ward seek­ing res­i­dency – more than 17 times the usual rate”.

IT’S A COHESIVE PAR­ADISE

So why the in­ter­est? As judged by a host of global busi­ness bench­mark­ing sur­veys, New Zealand is recog­nised as the num­ber one coun­try across a range of mea­sures in­clud­ing trans­parency, ease of start­ing a busi­ness and do­ing busi­ness and pro­tect­ing mi­nor­ity in­ter­ests. Be­yond these met­rics is New Zealand’s small size, de­sir­abil­ity as a place to live, di­ver­sity of pop­u­la­tion and gen­eral eq­uity of eco­nomic op­por­tu­nity. With­out

the en­trenched so­cial di­vi­sions of larger economies, smaller economies have com­pet­i­tive ad­van­tages in terms of in­no­va­tion.

“In this next cen­tury or two it is a huge li­a­bil­ity to be a big coun­try,” said Salim Is­mail at a Sin­gu­lar­ity Univer­sity TINTalk in July 2015. “[Big coun­tries] have fun­da­men­tal struc­tural is­sues… so there’s an enor­mous op­por­tu­nity for smaller adapt­able, flex­i­ble coun­tries”

Be­cause of the above rea­sons New Zealand is in­creas­ingly a place where tal­ent wants to in­vest, re­side and com­pete on the global stage. As Me­di­aWorks’ Amer­i­can chair­man Jack Matthews told The New Yorker: “The dif­fer­ence be­tween New Zealand and the US to a large ex­tent, is that peo­ple who dis­agree with each other can still talk to each other.”

For ex­am­ple, in the white­hot sec­tors of FinTech and Dig­i­tal Me­dia, TIN200 rev­enue growth was 31 per­cent and 24 per­cent re­spec­tively, as­sisted by in­vest­ment and part­ner­ships with Asian and US col­lab­o­ra­tors.

Ash­lee Vance, au­thor of Elon Musk: Tesla, SpaceX and the Quest for a Fan­tas­tic Fu­ture, vis­ited some of the coun­try’s best in­no­va­tors for a Bloomberg show called Hello World in 2016. And, as he sum­marised: This coun­try of 4.5 mil­lion peo­ple has started to churn out some aw­fully pol­ished, ex­tra­or­di­nary prod­ucts …They’re world class tech­ni­cal achieve­ments; the work of a welle­d­u­cated cre­ative peo­ple bent on com­pet­ing on the world stage.”

I T’S NOT STOP­PING

This year TIN200 rev­enue will likely sur­pass $10 bil­lion for the first time with ex­ports head­ing to­wards $8 bil­lion. The ac­cel­er­a­tion in breadth and mo­men­tum of growth, cou­pled with the rapid in­crease of in­vest­ment funds in the tech­nol­ogy sec­tor bodes well for con­tin­ued ac­cel­er­a­tion. Busi­nesses are broadly em­brac­ing mar­ket lead­er­ship, ef­fi­cient busi­ness mod­els and strate­gies for up-scal­ing. North­ern Hemi­sphere growth is only just touch­ing the sides of its po­ten­tial and show­ing lit­tle sign of abat­ing. The same can be said for off­shore in­vest­ment.

The mas­sive op­por­tu­ni­ties in the high-growth mar­kets of health­care, FinTech and dig­i­tal me­dia will con­tinue to fuel TIN200 in­vest­ment and growth.

Short of cat­a­strophic global tur­moil, the big­gest chal­lenge may be our abil­ity to sup­port that growth.

As New Zealand is wit­ness­ing a once-in-agen­er­a­tion trans­for­ma­tion we need to be mind­ful of pre­serv­ing the unique­ness that sus­tains our com­pet­i­tive ad­van­tages. We need to re­tain the en­vi­ron­men­tal, so­cial and eco­nomic virtues that make New Zealand unique while in­ten­si­fy­ing our abil­ity to com­pete.

Suc­cess will help se­cure long-term pros­per­ity and fur­ther en­hance our grow­ing global rep­u­ta­tion as a hot­bed for in­no­va­tion.

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