Seizing the opportunity to develop a world leading NZ tech ecosystem.

Tim Wixon, Head of Technology Industry at BNZ shares his opinion and observations on some of the missed opportunities to grow the New Zealand economy.

Most people would agree that the technology industry is a key growth sector for New Zealand (and the world). It’s also a leading focus for us at BNZ, where we work with over 1,400 tech businesses across New Zealand.

Over the last 15 years the global technology economy has grown almost three times faster than other industries. It’s no coincidence that most of the largest listed companies are tech. Greg Shanahan from the Technology Investment Network (TIN) has been tracking the progress of New Zealand tech exporters for over twenty years. The 200 companies he follows (the TIN 200) contributed $12.7b to our GDP in 2020 up 8.3% from the previous year. $9.4b of that was exports, which were up 10.6% in 2020. If our tech exports continue at 10% for another 10 years, they would contribute $24.4b to our economy, easily our largest export.

It gets even better for us in New Zealand as tech growth doesn’t (on the whole) rely on tourism, mining or milking sheds. It is high margin and has little waste, pollution or the need for raw materials for the most part. Plus, New Zealand is good at tech. Better than good, even. We tend to have a knack for solving problems in a different way to others and in many cases, our solutions are world leading. It’s a huge export opportunity for New Zealand.

Tech business models tend to be attractive too: Develop unique products and services; own and protect the intellectual property and intangible assets; and sell to the world many times over without the disadvantage of geographical distance from customer markets.

There are great New Zealand companies who already sell their tech to the world (several of which are already household names) and the list of world class New Zealand tech companies is much longer than you may think. What’s exciting for New Zealand is that these companies and many others are already growing talent, mindsets and value (including capital) that will likely go into the next generation of innovative start-ups. 

So, are we actively doing enough to ensure the tech industry is a cornerstone of our economy?

Other nations are more actively building their ecosystems. Attracting talent, attracting capital and access to global markets is highly competitive. Conducive policy settings, an aligned strategy and leadership from government are key.

Building an ecosystem

It’s fair to say, banks and the tech industry have not traditionally gone hand in hand. We are still learning how best to make a positive impact. As a banker, I have found the tech industry ecosystem to be incredibly welcoming, collaborative and frankly, full of bright, vibrant and inspiring personalities – most with a sense that the tech industry is becoming something special in New Zealand.

Yet, with amazing talent and the best will in the world, the ecosystem can be fragmented and often relies on serendipity – we could and should be doing more to connect the dots.

We have universities, schools, incubators, accelerators, government agencies, corporates, crown research agencies, lawyers, accountants, associations, consultants, angels, venture capitalists, banks, private equity organisations and others all doing great work in their own space. Just not always together and there are obvious gaps in our ecosystem that could be filled.

As part of a BNZ tech industry delegation last year to North America, we visited Toronto Global, a single organisation representing the Ontario and Canadian governments seeking to provide the right environment for tech businesses to grow. Their government has a strong vision for the tech industry in Canada and everyone in the ecosystem has clarity of the part they play.

The Canadian government aligns with the private sector by being actively involved in the R&D space, backed by supportive policy across immigration, education and infrastructure.  This alignment helps their tech companies get started and provides a supportive environment for tech industry employees to work and live.

Personally, I was amazed by the incentives to support R&D for both local and international tech businesses who set up in Toronto. We do not have the same incentives here in New Zealand for founders and companies, but having seen the positive flow on effects for the Toronto ecosystem New Zealand might want to consider taking a leaf out of their book and look to learn from some other world leading tech ecosystems.

The role of our government and the R&D opportunity

The government can have a great impact on the success of the tech sector, but to be clear, it’s not the government’s role to start up a whole lot of tech companies. Rather, it is the government’s role to provide the right economic and social settings and incentives that can encourage more founders to commercialise their ideas, grow our ecosystem and talent, and help our existing tech businesses thrive.

This needs a strong political vision and leadership for the tech industry, including considering various policy settings across the likes of housing, social welfare, education, immigration, agriculture, conservation and business policies not as isolated initiatives, but connected and aligned to a broad technology strategy.

Again, looking to the tech ecosystem in  Toronto, the wide range of government incentives for R&D are a key part of the attraction of both local and international tech businesses. It’s not about picking winners, but incentivising activity and commercialisation across a broad range of underlying sectors and industries. The ecosystem flowed from the availability of R&D incentives and support for founders and businesses. This is but one opportunity we would be wise to consider.

It’s worth noting that R&D, in this context, predominantly means wages (and jobs) for time spent by staff innovating to introduce new products or services to market – and generally exportable products and services. This could be an interesting way to grow more local talent.

For the government then, there is the opportunity for New Zealand to be a world leading tech ecosystem and nation (rather than just having world leading tech companies). We should look closely at the most effective initiatives offshore governments are employing to support their wider ecosystems and take on board those that would best work here. And we should do it now as there is somewhat of a global tech and innovation race and hesitancy will put us back of the pack rather than a leader.

A Minister of Technology

There are 68 ministerial portfolios, from economic development to digital media, science and innovation and racing, but no Minister of Technology Industries.

If we did give our technology industry a Minister and a department, it would give the tech sector an identity and a champion to coordinate a vision, a strategy, alignment across other parts of government and policy support to:

• encourage more innovation and R&D
• development of local talent and qualified students
• immigration policy to attract world leading people and capital
• affordable housing
• centres of excellence
• innovation hub/s and infrastructure
• more NZ owned intellectual property
• cultural (Maori, Pacific Island, immigration) enablement
• higher-paying jobs
• local career pathways for our children
• access to smart capital (from here and offshore)
• conduits to international markets
• faster commercialisation of ideas
• a richer and more sustainable New Zealand.

Here at BNZ we would support such a change, but Minister or not, we would support any coordinated effort to build a world leading tech and innovation ecosystem for the benefit of all New Zealanders.

How to make it easier for banks to finance the tech industry

A key advantage of bank funding is that it is non-dilutive of shareholding and if well structured, is an attractive and relatively cheap form of financing. Too often we see founders raising capital in return for giving too much ownership away, too early. This has the effect of limiting future capital raising potential, let alone the negative effect on founder motivation for the inevitable ups and downs of starting and scaling tech businesses, with limited upside.

For bank debt financing, the landscape tends to be overly challenging for tech businesses as bank regulations and models don’t cope well with intangible assets or the non-accounting financial metrics and unit economics which are most relevant to tech businesses.

Those permitted bank models which assess risk and drive pricing tend to be based on accounting rules which were first codified in the 1970s (before the internet even) and remain largely unchanged. So, it can be harder for banks to fund tech businesses and more expensive because banks are effectively required to hold more capital reserves against tech loans compared to those businesses with more tangible assets (e.g. land or machinery).

Despite all this, we have been actively financing tech businesses for several years now. It is very possible, but it could be much easier. Main bank financing should be an option for tech businesses. Of course, the risk and reward trade off is different when compared with other forms of capital and bank financing tends to suit those with some degree of scale.

The tech industry is a key focus for us and we have taken the time to understand tech business models and how to apply capital, connections and expertise to support them.

We have seen unprecedented incentives to help banks lend during Covid-19 to support businesses, including effective capital reserve relief under the Business Finance Scheme. We would be very open to exploring ways to develop incentives or different settings for banks to more easily support tech businesses. For starters, this could include being able to update our bank models to accommodate intangible value and tech business models. A bonus would be regulator support to take more “risk” in the tech industry or hold fewer capital reserves for tech financing.

Ten-year goals and some short term doing

I am encouraged by the government’s Industry Transformation Programmes which cover large parts of the tech industry and hope that the potential of these initiatives will be realised.

To help execute, and in the place of fragmented and short term initiatives, it would be valuable to consider a ten-year coordinated vision and framework of social and economic change, with short and medium term actions to move in the direction of a vision for the tech industry. It’s also important to get substantial government investment (particularly in the R&D space). If the government can look ahead and take care of the macro changes, it’ll help deliver the micro benefits in the short term.

Next steps

New Zealand’s reputation as a stable, welcoming and resilient nation is as strong as it has ever been on the global stage. We are recognised for our quality of life, natural beauty and much more, but we are not necessarily recognised for innovation and technology. A stronger, longer term government vision and strategy to bring all the existing tech strands together and funding it with private sector contributions and guidance would be a leap in the right direction.

At BNZ, we want to play our part and would welcome the opportunity to provide our perspective to help the current and future success of the tech industry. We certainly do not have all the answers, but we see the value for New Zealand to have a strong tech sector and want to work with government, public bodies, tech associations, businesses, founders and others to help create the conditions for it to thrive.

We will continue to share our observations of opportunities in better support our tech businesses and founders.

As mentioned earlier, the race is on to seize a leadership position globally and we must act now to lay the foundations  for New Zealand’s tech economy now.

The information, recommendations and any views expressed in this article are the personal views of Tim Wixon and do not necessarily represent the views of BNZ, or its related entities.

The information in this article is provided for general purposes only, and is a summary based on selective information which may not be complete for your purpose.

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