Roadblocks to the knowledge economy

Wednesday 6th September 2000

Why does New Zealand have so few knowledge economy entrepreneurs? Because we thwart them at almost every step. ROD ORAM identifies the biggest roadblocks to innovation, entrepreneurship and change.

The Hauraki Gulf. You're easing your hulking, prized fizz-boat through tricky waters around the back of Kawau Island. Wind's coming up, sea's all a-chop. You've got one eye ahead, one on the instruments. Thank goodness for those quality, New Zealand-made instruments. Cheap, too. If those fail you know you'll rip the bottom out of your boat. But would your own guts wrench if you knew the secret behind the low price - that the chips driving the displays were off-the-shelf products made for the sort of gauche novelty phones your neighbour bought a decade ago and you just couldn't bring yourself to use?

Turns out, these Hitachi microprocessors are utterly reliable whether driving a shoe phone or a high-tech marine instrument made by Talon, one of Auckland's electronics successes. Spotting the chip's potential was a piece of typical Kiwi ingenuity, the sort of clever stroke that has overseas visitors wondering just what other No. 8 wire tricks New Zealanders have up their sleeves - but which so often never make it out of the garage. For Talon, the four-bit chip gave the company its first big-selling digital marine instruments in the US.

"We used the chip to break a price barrier," says Peter Maire, Talon's founder. "Competitors had hardware solutions which were five times more complicated."

Yet the breakthrough took nothing more magical than lateral thinking. Thirteen years ago, Talon was scouring the world's chip manufacturers looking for a microprocessor to drive some new instruments. It found a low-end chip from Hitachi which had bags of power to handle data and drive displays but was hugely under used in its main application - telephones. The chip was to remain the brains of some of Talon's instruments for the next decade.

Innovation remains Talon's watchword across its business, from product design and manufacture to sales and marketing through some of the world's leading electronics companies. Sales for the Auckland-based company, which makes instruments such as GPS (global positioning system) navigation equipment for boats and cars, have risen from $3.5 million to $30 million over the past three years.

Yet - and here we strike what I've found is a refrain in New Zealand business - business could be so much better for Talon. "We have a demand factor five times what we can deliver," says Maire. But he can't maximise the potential of his business because of constraints typical to all innovative New Zealand companies. The biggest is a shortage of skilled people, but the list runs the gamut of woes, from a lack of technology, seed capital, senior management expertise and affordable professional services to entrepreneurial drive, overseas partnerships and business-friendly government.

Stillborn ideas and stunted companies are a national trait. Yet we need many more and bigger Talons if we are to earn enough to meet our trade deficit - nearly 8% of gross domestic product. We're coming from way behind. Only 16% of New Zealand's exports are high-tech manufactured goods compared with an OECD average of 63%. Public sector spending on R&D is reasonably chunky at 0.63% of GDP against the OECD's 0.7% but private sector R&D is dismal at 0.34% against the OECD's 1.2%.

"We have wonderful islands of excellence in New Zealand," says Larry Podmore, science and technology adviser to the Canter-bury Development Corporation. But we are woefully inadequate about networking people, ideas and resources across the economy. "It's all about how networked your innovation systems are. That's the key driver."

"We've come a long way in the past few years," says Allan Morton, champion of incubators, NZInc and other industry initiatives and managing director of Software Images, an Auckland CD manufacturer. "At last, we're on the radar of politicians and the public at large ... Now I want to see some runs on the board ... to move on from graduating students who jump on the plane and leave the country, to graduating companies." Getting runs on the board means overcoming the roadblocks to success New Zealand is becoming notorious for. Here are six of the worst.

Roadblock 1
Too few heroes

When Keith Watson - a former Hewlett-Packard vice-president in charge of a $US17 billion commercial division - quit to return home to New Zealand last year, he was disappointed. He came back like every other Kiwi, for family and lifestyle, but also to fund Internet opportunities through his new vehicle, zzinc.com. The shift came with a monetary trade-off (he knew that). What he didn't expect was business disappointment. "Nothing operates with ease here. It's a cultural problem ... a tradesmen mentality. You have to call people two or three times to get something done. It's incredibly frustrating."

Part of Watson's disappointment is the "wired to failure" attitude New Zealanders seem accustomed to. And it goes both ways: in the same way that scything tall poppies is a national sport, a low self-confidence is deeply embedded in the national psyche, says Gael McDonald, dean of Unitec's business faculty. "Too many people assume everybody else abroad must be doing things better than we are. We're risk averse, worry about looking stupid and have a low tolerance of failure. As a small, egalitarian community we are uncomfortable about people who are out of the box."

One such person is John Williams, who turned Marton-based software firm PEC into an internationally successful builder of retail sales systems - particularly for petrol stations - and security and access systems. "New Zealanders can't believe they're world class, but they are. Products made here have, by definition, to be the best. The New Zealand and Australian markets are the hardest in the world. They're small, very open and new technology comes in quickly. The further you get away from New Zealand the easier business becomes."

Roadblock 2
Wrong kind of innovation

Does simply bending a piece of No. 8 wire around a tractor muffler make you an innovator? Actually, it probably makes you a pragmatist. Try your hand at the highly scientific Unlimited Innovation Test (see "Just UIT") to see if you fit the bill. As a nation, we congratulate ourselves on being innovative. But take the praise with a pinch of salt, warns John Manning, who, as head of government agency Technology New Zealand, helped hundreds of companies upgrade their technology before he switched to the private sector to run Parade Hydraulic Engineers in Wellington. "I don't see any evidence that we're better or worse [at innovation] than anybody else. All around the world you can find clever people. Scientifically and technologically we don't stand out."

One measure of enthusiasm for the task was the large number of applicants in the Great New Zealand Business Venture, a competition organised by management consultants McKinsey and sponsored by 18 of the country's largest corporates. The game, running through several rounds until October, was conceived as a way to turn ideas into sound business plans. Contestants receive mentoring along the way, and the best are rewarded with big prize money and a chance to strut their stuff to venture capitalists.

Some 1450 people expressed an interest in competing, with 420 of those entering phase one, says Bridget Wickham, chief executive of the business venture. They are "tremendously interesting and exciting people" with a good cross-section of age, sectors and employment. Many are self-employed people looking for ways to re-orient or expand their businesses. Winners of round one included Project DIL's medical diagnostic software, Biotours International's high-end ecotourism, JJ Project's New Zealand version of a global fast food concept and Online Games' interactive Internet sports game.

Tellingly, only 10% of the entrants were from universities and Crown Research Institutes, the very public-funded organisations that should be huge idea generators. That is only half the rate seen, for example, when McKinsey ran the competition in Sweden. In another damning indictment of the dinosaurs, only 4% of the applicants were from the agricultural sector, even though it generates some 35% of our exports.

Roadblock 3
Bad business people

It's one thing to make a better possum trap, but actually, what other country has a possum problem? We love the initial buzz of an idea but we're weak on follow-through. The fatal flaw showed up in the Great New Zealand Business Venture, judging by the limited skills of many entrants. There was, says Wickham, a "very high degree of enthusiasm for new business but also a corresponding lack of knowledge and economic literacy about building a business ... about the progression from concept to company."

Don't think venture capitalists are your saviour here, so early in the game. They share Wickham's dismay. "People lack skills to get ideas out to the market to commercially exploit them," says Stephen McPhail, a principal of Wellington-based venture capitalists Morel & Co. "This is a gross generalisation, but the vast majority of pro-posals we see have a technology focus rather than a market focus. I don't have an easy solution to that but perhaps it's for successful companies to recycle their skills and experience."

Other countries have business angels but they are in short supply here (see "What angels look like"). Lots of private capital is looking for New Zealand investments - Ross George of investment house Direct Capital reckons there's about $1 billion of it lying fallow - but very few wannabe investors have the skills or will accept the risks angels take on.

"Angel money is still very much a gap in New Zealand," says Wendie Hall, managing director of Caltech Capital Partners, one of the country's leading venture capital firms. "It will probably be a gap for about two years until venture capital gets some runs on the board and the money feeds back."

But once an embryonic company has credibility, life starts to look better, thanks to the upsurge in New Zealand's venture capital sector. Hall reckons money available has zoomed from zero to $500 million in the past five years. However, "the ratio of capital to size of economy is still well below other developed economies".

Moreover, the investments are small. Typical first-round venture finance in New Zealand runs to around $3 million to $5 million, compared with $NZ10 million to $NZ20 million in the US. This reflects our small economy and the inability of young companies here to usefully deploy more money. For any new

company with international ambitions, the stunted start-up is a serious handicap.

Roadblock 4
Poor tech transfer

If you thought it was hard to find a good business plan, the struggle is nothing compared to the fourth hurdle: making the technologists, scientists and engineers (the very heart of the knowledge economy) understand and embrace their commercial potential. The gravest flaw is the seriously dysfunctional interface between business and government-funded researchers who should be, judging by their big budgets, the powerhouses of the nation's innovation. A growing critical chorus says we're getting nowhere near enough commercial bang from tax bucks spent on Crown Research Institutes and university scientists.

"For every dollar I spend on R&D I get $10 of sales a year for three years," says an electronics manufacturer. "The CRIs get $245 million a year from the Public Good Science Fund. I doubt they make $3 of sales - and even that is mostly in one-off fees - for every dollar they got from taxpayers like me. Why shouldn't I be really pissed off by that? I'd shut down the CRIs and chase them into real life. I'd take all the money and put it directly into industry. It would make the scientists fantastically productive. We can get an awesome engineer for $60 an hour all up. CRIs charge $120 and they take too long to do projects."

Says venture capitalist Hall: "We need to see more out of CRIs. They have a lot of projects that don't turn into investment opportunities for venture capital. We'd like to see better packaging of their ideas. In the past five years we've seen at best 10 opportunities to invest in ideas from CRIs out of 400 to 500 opportunities we've looked at overall."

The CRIs roundly reject the criticism. They say they are driving hard to be more commercial and productive so they can wean themselves from government funding. For some, tax dollars have already dropped below half their income. But behind these tensions between sectors is a growing debate over the role of CRIs.

Historically, CRIs were departments within ministries. They under-took work with a public benefit such as geological or

environmental studies as well as work for industry, which had a commercial benefit. They tended to charge the latter at cost rather than on the basis of the future value to the company commercialising it.

Since they became stand-alone organisations eight years ago, the CRIs have had to meet three basic requirements from government: to fulfil their public good research, to commercialise and to operate to the benefit of New Zealand. But the commercialisation is causing growing strains which will get far worse in the coming months as sources say an agricultural CRI is tipped to launch itself into a bold, corporate and international future. At the heart of the debate is the issue of who should reap the rewards of the CRIs' work: the CRIs themselves? Their corporate customers? Or downstream investors?

"Do we take New Zealand's comparative advantage and develop it into a competitive advantage, selling our technology to large users as a second arm to our business?" says Andy West, chief executive of the Institute of Geological and Nuclear Sciences and president of the Association of Crown Research Institutes.

"Or do we have a bunch of entrepreneurs from CRIs and universities developing firms and flicking them on to US investors? But why should we package up ideas for venture capitalists to sell off abroad?"

In other words, who owns the intellectual property generated by tax funds and who should exploit it? There is no simple answer. CRIs and universities need to retain some ownership so their scientists can receive financial incentives for producing commercially valuable work. At the same time, industry believes it should have more access to better research done with its tax dollars.

"CRIs still live very sheltered lives," says Manning, the former head of Technology New Zealand. "They are competing against the companies they're supposed to be helping."

Meantime, entrepreneurs face another problem: the talent war.

Roadblock 5
Too little talent

In almost every industry good business is meeting a "supply" crunch. "The huge limitation we have is human resources," says Maire of Talon. "Clever engineers are becoming a scarce commodity. The real golden ones, the real powerhouses, are those who can understand all aspects of a product. But they're getting harder to find because of the loss of the country's manufacturing base since the 1980s."

There is no shortage of evidence of talent squeeze.

Growing or importing talent are the two ways to solve the shortage - both are medium- to long-term strategies with problems. Morton, of Software Images, says the education sector has "kicked in faster than the political sector" on the knowledge economy but politicians are still sending the wrong signals to students and institutions through the tax-funded system's emphasis on bums on seats. We need to better orient the education system to the needs of the knowledge economy, as have, for example, Finland and Ireland, he says.

The lack of such focus means "we have a disastrous tertiary education system", says PEC's Williams. "It is where the tourism industry was 20 years ago, with institutions fighting each other. If our tertiary education system is not in the world's top 25 within five years we might as well pack up."

Immigration is potentially a shorter-term fix but it needs better targeting of candidates and a big cultural shift by New Zealanders to make society and workplaces more welcoming. But first, New Zealand has to rev up. Evidence from Waikato University migration specialist Richard Bedford shows trans-Tasman migration (the most important in terms of numbers) is purely a function of economic growth. Like night follows day, when the economy slows, we exit for Aussie, when the economy flies, we return in droves (for more on this, see "Pain means drain", Unlimited, June 1999). What's more, New Zealand has to become a great place not just to live but to do business. "The challenge now is to get good-quality people to come back to New Zealand," says Software Images boss Morton.

Roadblock 6
Poor networking

The problem of tech transfer transcends the research arena. It goes right to the heart of the weakness of New Zealand innovation. "There's a real inability to get synergistic relationships in New Zealand," says McDonald of Unitec. "There are not enough people in the domain to get that sort of sharing or with the experience to go out and get it abroad."

As a nation we're beginning to wake up to that. Incubators, innovation centres, associations, alliances and a slew of other initiatives have suddenly sprung to life over the past 18 months or so. But there's a long, long haul ahead before New Zealand buzzes with entrepreneurial zeal. And it's politicians who are most out of the loop. That's a blessing in some respects, such as minimal meddling, but a curse when it comes to the crunch.

"We've no real business or economic agenda here," says Watson, the Hewlett-Packard returnee. "Without one, there's too much uncertainty across the economy. You can't align resources so you can't execute well."

Perhaps Talon should send some digital instruments to Wellington before the Great Helmspeople rip the bottom out of the economy.

Rod Oram, former Business Herald editor, is an Auckland-based freelance writer and a visiting fellow at the New Zealand Centre for Innovation and Entrepreneurship at Unitec. oram@clear.net.nz

Just UIT

Fancy yourself a Bill Gates?

Try the Unlimited Innovation Test first

How to score: for questions 2 to 14, rank your answers one to five, with one for strongly disagree and five for strongly agree. For the first question, give yourself one point for every five uses up to a maximum of 25 uses

and five points. Then for every subsequent use, deduct one point from your score because you are not an entrepreneur, you're just nuts.

1. I can think of X number of uses for a brick.

2. I use my brains more than most people do.

3. I like chaos better than order.

4. You couldn't pay me enough to make me stick in a dead boring job.

5. I always find more than three answers to a problem.

6. I find new ways to use things other than bricks.

7. I love being in control of people and events.

8. I'm more self-assertive than other people.

9. Once I sink my teeth into a problem, I never give up.

10. I don't like people telling me I can't do something

11. I don't like people telling me how to do my job.

12. I trust my hunches.

13. I don't skulk around the office when I make a mistake.

14. I could persuade an Eskimo to buy a swimsuit.

What your score means

66 - 70 points: Plan on IPOing by 2002.

60 - 64 points: Get yourself an angel.

55 - 59 points: Make sure your boss is nice to you.

40 - 54 points: Make sure you're nice to your boss.

25 - 39 points: Don't give up your government job.

14 - 24 points: Quick! Memorise the Winz phone number.

What angels look like

And what they do for their wings

Apparently they're easy to spot, these so-called business angels. Just ask Kevin Hindle, director of entrepreneurial research at Swinburne University of Technology in Melbourne. He's contributing to a multinational study of the species which so far has them portrayed thus: almost all of them are wealthy, late-middle-aged men who either rose to the top of companies or ran their own. A large percentage have university degrees and all have deep knowledge they can apply to help run the companies they invest in.

Their expectations vary. Australian angels want a return in three years, while Canadians hang in for five and the Japanese are willing to wait an average of seven. Seeking a payback of anywhere from 30% to 100% a year is not unusual because angels need big success to cover their failures.

Typically, angels find investments near to home so they can keep an eye on them and lend a hand.

They rely on their business contacts and friends for leads on candidates. Sometimes they advertise. In the US and some other countries, angel networks, support groups and facilitators have evolved to swap ideas and expertise.

Yet angels reject a much lower percentage of deals than venture capitalists. One California study had a rejection rate of only seven in 10, suggesting the investors take a close look only at people and companies they have some knowledge of. Yet in booming economies there is no shortage of them either. The rough rule of thumb in the US is $US10 of angel money is available for every $US1 of venture capital money.

Not a lot is known about angels in New Zealand.

One of the rare studies was of the original 26 investors in Pacific Lithium undertaken by Alan Willis, a former BNZ banker, as part of his studies at Massey University. He found they had, on average, net assets of around $500,000, were highly qualified, had a keen interest in technology and had led entrepreneurial companies. They were also very low-keyed. "Angels are not public people," he says. "They are usually very quiet and private."

Rod Oram

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