Business

Adding some scale to our start-ups

Cloudy organic wine, hors d’oeuvres of dairy-free cheese topped with mānuka honey and mini beef burgers containing meat-free patties. It's not the usual food served at gatherings of investors, entrepreneurs, tech company executives and PR types. But the food was there to make a point; it was supplied by start-up companies and the Callaghan Innovation function was all about start-ups.

There was nothing particularly innovative or hi-tech about the product Callaghan was launching but it could turn out to be a highly significant one as New Zealand tries to ramp up its tech and innovation sector.

Key speaker at the event held in Auckland’s “innovation precinct” Wynyard Quarter was Israeli professor Eugene Kandel.

Kandel is CEO of Start-Up Nation Central which operates a free online platform connecting Israeli innovators to investors and businesses around the world. Called Start-Up Finder, the site gets 70,000 visits a month, of which 50,000 come from outside Israel. It’s been described as the front door to the Israeli innovation and start-up sector.

Start-Up Nation Central, a not-for-profit organisation, has licensed (basically given) the IP behind its platform to Callaghan, which has set up a local version called Scale-Up NZ.

The Israeli platform has 7000 companies. Scale-Up NZ launched with 500 companies and is aiming to get to 2000 by the end of the year. Start-ups listed on the site are verified and curated by a team from Callaghan.

The new relationship comes as New Zealand and Israeli governments look close to signing an innovation agreement which will formalise the developing relationship.

New Zealand’s desire and need to transform its economy from one based on agricultural commodities and lowish value tourism to higher value goods and services has often led us to Israel's door.

In recent years, a good number of trade delegations with top Kiwi business leaders in tow have headed to Tel Aviv to see how a nation of fewer than 9 million people, founded in a desert just 70 years ago, has become second only to Silicon Valley in terms of its innovation ecosystem.

On that comparison, Kandel describes Israel's tech sector as “boutique hotel compared to the giant hotel that is Silicon Valley”.

Israel and New Zealand are vastly different in many ways. Much of Israel’s innovation has sprung from necessity. Its world leading micro-electronics industry was spawned after the 1967 Six-Day war when French President Charles de Gaulle imposed an embargo on Israel and deprived it of vital semi-conductors. These days its defence forces are a production line for 25-year-old experts in cyber technology and many end up in start-ups after finishing their compulsory military service.

But there are similarities too. Start-ups need capital and both countries, with their small populations, tend to be capital constrained.

In the late 1990s, Israeli companies solved the problem by listing on US stock exchanges. At one point, Israel had 190 companies listed on the NASDAQ – more than the whole of Western Europe. Recently, capital inflows have come from large multi-nationals buying shareholdings or whole companies. It’s a trend that worries Israel Inc.

"Cyber is a no-brainer for Israel but for New Zealand it is not worth it. Are you going to be competitive with a country that is being attacked millions of times every day? No."

Kandel says countries like Israel and New Zealand need to hold onto their best start-ups.

“Keeping successful companies at home is important because it is where most of the value to a country accrues.

“You need to look after the companies that add value ... give them plenty of benefits and incentives to stay in New Zealand or they will be syphoned off [by multinationals] and you will have New Zealanders succeeding but not New Zealand.”

Newsroom put it to Kandel that there was an aversion in New Zealand to “corporate welfare” and that trying to pick winners was a risky game that politicians should avoid.

"I formed my opinion after six years as head economic advisor to the Netanyahu government. We could’ve made a lot of people’s lives better but we were scared to do this for those same reasons you mention. A lot of value could’ve been created but it wasn’t because of this fear.”

Kandel says countries wanting to transform their economies need robust innovation ecosystems.

“The ecosystem needs to be able to provide everything start-up companies require, including late stage financing.

“You need to reach a size where you can be self-contained and size matters in tech.

“Smaller countries need higher percentages of their workforce to be in tech. Currently Israel is at 8 percent (270,000) but it really needs to be more like 12 percent (500,000).”

About 6 percent (120,000) of New Zealand’s workforce is involved in the tech industry.

The smallness of our tech sector is illustrated by the amounts of venture capital going into it. In 2017, according to an EY report, the sector attracted $217 million dollars with a large chunk of it going to one company – Rocket Lab.

Last year's figures will be released in May, but the contrast with Israel is eye-watering. In the first quarter of 2019, Israeli start-ups attracted US$1.5 billion of venture capital, which in itself is dwarfed by US start-ups, which pulled in $32 billion.

So does New Zealand have a hope of developing an ecosystem that allows us to dramatically grow our tech sector when we are such small players?

Kandel is not sure but offers some thoughts on how we might get there.

“You need to [focus on] the continuity of financing ... from start-up through the growth phase. It is more important than the total amount being invested in start-ups.

“I think you should concentrate on areas where you have an advantage, for instance.

"Cyber is a no-brainer for Israel but for New Zealand it is not worth it. Are you going to be competitive with a country that is being attacked millions of times every day? No.

“New Zealand has a deep level of knowledge in agri-tech that few can match and there is a growing worldwide demand in this area.”

On the finance front there are signs that things might be getting better for New Zealand start-ups seeking capital beyond early stage funding.

Local start-up incubator, The Icehouse recently announced that it is teaming up with KiwiSaver fund, Simplicity, stockbroker and investment banker First NZ Capital, and Sir Stephen Tindall’s investment group, to lift the amount of capital going into start-ups. Simplicity is committing a $100 million over five years.

Two high-profile Kiwi start-ups recently raised significant (in New Zealand terms) amounts of growth capital.

Sunfed, which makes chicken-free chicken and beef-free beef burgers, raised $10m and AskNicely, a software developer specialising in customer satisfaction surveys, raised $15m.

Australian and American venture capital companies were major players in both funding acquisitions but the founders still hold majority positions.

Kandel says the Scale-up NZ platform will help local start ups

“It will connect them to the most connected community in the world – the start-up community.

"Better connectivity in the sector also leads to a much greater level of knowledge about the ecosystem. Governments get exposed to this knowledge and it gives them a better understanding of what goes on in there; what parts are growing and what parts are declining.”

But is there any value for Israel in helping another small country such a long way from Tel Aviv?

“Our goal is to create value for the ecosystem and we believe the Israeli ecosystem can benefit from connections with other ecosystems. It helps build a bridge between challenges and solutions,” says Kandel.

“Share with us your challenges and we will connect you with people who can help.”

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