Powerhouse wins some, loses one
Christchurchbased Powerhouse was set up to commercialise Kiwi-developed technology but its progress has been patchy, reports Chris Hutching.
Christchurch hydro turbine renovator HydroWorks lasted just two years before it was wound up with 34 people losing their jobs. It came within a hair’s breadth of listing on the Australian Stock Exchange before it was liquidated in mid August by its parent ‘‘incubator’’ company, Christchurch-based Powerhouse Ventures, which is 23 per cent owned by Christchurch ratepayers.
The wind-up of HydroWorks raised eyebrows in local business circles because Powerhouse was supposed to help fledgling enterprises by taking shareholdings, advising them about running business, and capital raising.
Some manufacturing workers have been redeployed and the design engineering team including ex-chief executive Andrew Rodwell hope to set up a consultancy to clinch contracts HydroWorks was bidding for.
In the wake of the HydroWorks demise, the founding director of Powerhouse, startup specialist Dr Stephen Hampson, resigned after 10 years with the company.
Insiders say Hampson fell out with Powerhouse board members who did not share his optimism over HydroWorks.
Hampson’s shock resignation cleared the way for company secretary Paul Viney to become Powerhouse chief executive, with a new Australian board chairman Russell Yardley.
So what went wrong at HydroWorks? Viney said HydroWorks hit trouble over contracts that went over cost and schedule for Melbourne’s water services company.
Viney won’t explain how the incubator model broke down – Powerhouse had its own directors on HydroWorks until they resigned last April, plus an investment manager.
Other Powerhouse directors have ducked the question, saying what goes on in the boardroom stays in the boardroom.
Powerhouse was created in 2008 with ratepayer and taxpayer funding to commercialise technology research from Canterbury and Lincoln Universities. Christchurch City Council invested $3 million and still owns 23 per cent of the company but doesn’t take any role in its management.
In October 2016 Powerhouse raised $10m from investors and listed on the Australian Stock Exchange to be closer to sources of capital for the 22 startup companies it has invested in. The valuations of its shareholdings gave its own shares a value of $1.07 each.
But soon after listing its chairman Kerry McDonald resigned, a replacement lasted just a month because he failed to declare a bankruptcy, followed by the more recent exit of Hampson.
Powerhouse’s own financial stability was undermined when it wrote off its 22 per cent investment ($7.7m) in HydroWorks and liquidated it.
That contributed to an $11m loss for Powerhouse for the year, and share price slump to 34 cents compared with $1.07 when it listed.
HydroWorks never fitted the new technology incubator model of other Powerhouse companies.
The aim of HydroWorks founders was to set up an integrated business from design to manufacturing and marketing by taking over the precision engineering division of long-standing local firm Mace Engineering.
Leasing all 20 heavy engineering machines from Mace Engineering may have been a mistake – it only needed four, and probably fewer staff.
Viney said Powerhouse gave HydroWorks emergency funding for the Melbourne water and South East Queensland hydro projects with $600,000 in November 2016 and a further $900,000 in late December 2016.
HydroWorks intended to repay the loan by raising money from investors for its own ASX listing earlier this year.
The interest rate was 4 per cent a month with each loan to be repaid within four months, plus default penalties of 10 per cent and 14 per cent a month respectively – ultimately adding up to 48 per cent, but never paid.
With the HydroWorks chapter nearly behind them, Viney and Powerhouse directors predict a return to profit by selling shares in some subsidiaries, cost controls, and focusing on Australian investment opportunities and university research.
Viney may yet have to deal with a probe by Australian authorities about how HydroWorks was valued in the Powerhouse books last year and the impression it may have given to investors.
Powerhouse only obtains revenue if subsidiaries pay dividends, when it sells their shares, or receives government grants. To obtain $1.3m in working capital, Powerhouse recently sold some of its shares in subsidiary
Invert Robotics, which makes a device that climbs around the insides of milk or wine tanks to check for defects.
A potential source of more share sales is another promising subsidiary, CropLogic, which recently listed on the ASX after raising $8m to develop its automated potato crop management systems in the US.
Other Powerhouse directors include Rick Christie, Dianne McCarthy, John Hunter and Christchurch-based John Walley who is best known as a former chief executive of the Manufacturers and Exporters Association.
The Christchurch City Council investment in Powerhouse was managed by the Canterbury Development Corporation (now part of council-owned ChristchurchNZ).
Acting CDC chief executive Tom Hooper said the creation of Powerhouse was a response to market failure at the time – lack of seed investment.
Hooper said it had produced ‘‘outstanding results’’ because it helped bring university research to the market before other funding sources became available.
‘‘We stopped active investment and have been a passive and supportive shareholder. We have no plans to restart investment,’’ Hooper said.
The city’s $3m share investment swelled to nearly $8m in late 2016 on the Powerhouse listing valuations – before falling back to about $3m as the share price of Powerhouse fell over the year.
Garry Moore who was mayor when the investment was made said he was appalled when he learned of the proposed penalty interest rate that resulted in HydroWorks being closed down by Powerhouse.
‘‘The purpose of the fund was to supply capital for emerging companies and future entrepreneurs. The goal was to walk alongside these companies and to lend a helping hand when things got difficult,’’ Moore said.
Ian Douthwaite is an expert in ‘‘angel’’ or seed funding and a mentor at the University of Canterbury Centre for Entrepreneurship. He said it was difficult to generalise about whether companies performed better when driven by a founder or professional executives.
Many founders left companies because of different views about strategy – Martin Jetpack, for example, he said.
And failures could sometimes be explained by changes in the business environment such as software company Wynyard’s collapse earlier this year, Douthwaite said.
He is part of the Canterbury Angels seed investment group set up a year ago. It has invested in four companies and had two more under due diligence including Cookie Time entrepreneur Michael Mayell’s latest venture, Nutrient Rescue.
Cantabrians were slow to risk investment money on startup ventures,’’ Douthwaite said.
Another significant source of public startup and research money, including the Powerhouse companies, is stateowned Callaghan Innovation.
Last year Callaghan’s 341 staff distributed about $85m. Some grants have raised eyebrows – $5m to long established NZX-listed Methven tap maker. Overseas owned companies have also enjoyed Callaghan funding.
Most, if not all, the Powerhouse subsidiaries, including Powerhouse, have received Callaghan funding.
‘‘The purpose of the fund was to supply capital for emerging companies and future entrepreneurs. The goal was to walk alongside these companies and to lend a helping hand when things got difficult.’’
Garry Moore, mayor at the time of Christchurch’s investment in PowerHouse