Dumb, meet clueless: what’s wrong (and right) about our startup ecosystem

Every month, The Moxie Sessions brings together a small group of Auckland business thinkers to discuss ways New Zealand can take advantage of the Internet and boost its competitiveness.This month we took a look at the startup ecosystem.

The World’s Fastest Indian was a great movie, but as a parable about innovation, it didn’t quite fire on all cylinders. What’s becoming clear to successful New Zealand tech startups is that tinkering alone in the garage will only get you so far. It’s what outside the shed that counts: the mentors, the investors, the interconnected community of individuals and organisations that together make up the startup ecosystem.

So how does ours look? Does the entrepreneurial seedling of 2013 stand any more chance of growing into a good-sized tree today than it did a decade ago? And if it does, will locals get to eat its fruit or will it be chopped down and shipped offshore in some sort of over-extended metaphorical log carrier?

It would be untrue to say we set out to answer precisely those questions when the Moxie Sessions assembled at Chorus’s futuristic consumer laboratory recently, but we did end up tackling a few of them.

As head honcho at The Icehouse, Andy Hamilton deals with more tech startups than most. Of the 500 or so who approach the Auckland-based incubator each year, about two thirds apply for the programme, around 50 are accepted.

Andy doesn’t see funding as the major issue for startups. “Capital is more available than ever. Finding useful investors is the hard part.” There’s clearly a shortage of something. Of the 15,000 small businesses founded each year, Andy says around 60% fail inside four years. One reason might be that almost everyone involved in a typical startup, including – critically – the investors, is usually doing it for the first time.

The “dumb money” theme cropped up more than once in the discussion. Early stage companies need more in an investor than just a chequebook. As Lance Wiggs said, “making a heap of money in real estate might qualify you to invest in a tech company, but it doesn’t necessarily qualify you to advise one.”

Another challenge is the way companies and founders tend to live inside their own bubbles. Focus on one specialisation, he says, leads to myopia and a lack of connectivity across the sector as a whole.

The final threat, according to Lance, is predators: investors with far more business experience than the founders they’re backing are tempted to make deals with very little upside for the founder and unreasonably low risk for the investor.

On the whole though, Lance is positive about the startup scene. Ten years ago, he says, Trade Me was one of only a few tech firms in town. These days, companies looking for investors are likely to already have customers and cashflow as well as a great idea.

For Zeacom founder Miles Valentine, clueless founders are as common a problem as dumb money. While there’s no shortage of technical skills, abilities like pitching and managing the fundraising process are often missing from early-stage management teams. Combine this with investors looking for an early return at the expense of growth, or worse, investors terrified that they will not get their money back, and you’ve got a recipe for, well, not much.

Like Lance, Miles says the ecosystem is immeasurably better than when he started Zeacom in 1994, and he’s a particular fan of the Kiwi Landing Pad (Zeacom moved to the USA in 1999 and “spent the first six months working out how to get an office and lease a car”). But he still sees a system with room to improve.

The evidence backs this up. Startup Genome’s recent report on the world’s top entrepreneurial cities didn’t include any from New Zealand. And the World Intellectual Property Organisation / Cornell University Global Innovation Index saw us slip this year from 13th place to 17th.

So how do we set things straight? One argument could be that, you know, it’s a journey, the progress we’ve made in the last ten years will continue, and before you know it we’ll be great at this stuff.

If we’re looking for a bit more pace, though – and everyone in the room seemed to be – then we need to look hard at the roadblocks and find ways around them.

We can’t shoot the founder. Well, not usually. So a great startup ecosystem would focus on turning founders into great business leaders, giving them the business skills they need and helping them build a strong management team.

Predator control. If standard contractual “investor protection” terms really are weighting things unfairly in favour of investors, then maybe we need to look at this. Founders need to have enough skin left in the game to motivate them to make a go of what they started. (Not everyone agreed that contracts were much of a problem, though.)

Step up, corporations. A lot of the cash in this market sits in the bank accounts of our biggest companies. In-house venture units could provide the perfect combination of money and smarts, providing the units were small and nimble enough to operate alongside startups in a useful way. It’s a two-way street, of course, with startup investments also giving corporations access to new ways to develop products and services. 

Get on board. One person in the room spoke of the pain of a board made up entirely of accountants, and while that was possibly unfair on the second most dismal profession (jokes!) it did highlight a need for diversity. Age, gender, professional background… but most importantly the right mix of skills to make a company fly.

Sharpen up the founders, smarten up the investors and focus on management as much as tech. Well, if it were that simple we’d be doing it already, but that’s no reason not to give it a crack and hopefully build a system that makes it easier for a few more of those 15,000 or so startup seedlings that pop up each year to grow into the strong, profitable businesses New Zealand so badly needs.

Vaughn Davis is principal at social media and advertising agency The Goat Farm.