Pouring Solution Part Two: A Few Questions Often Asked About the SME Economy

Posted by Andy Hamilton on 3/07/2018 10:29:00 AM

I am Andy Hamilton and for over 20 years I have been a student of business, a student of change and I ask a lot of questions. Here’s my profile on LinkedIn - sorry if you get spammed through my stranger-connections (should say no more!). This series is my own views and not The Icehouse tone. I care about getting content out, sharing and engaging with people to make our country better.


What are the questions I am going to cover in Part Two of this series?

  • Is there a lack of funding for Kiwi businesses?
  • Do Kiwi businesses settle for the three b’s (bach, boat, beamer) and why?
  • Are we focused on the right companies?
  • What are we doing to support SMEs in the regions?
  • Are our education and government sectors fit for purpose?


Is there a lack of funding for Kiwi businesses?

Yes. It is however in my view easier to raise seed and angel funding of less than $1m in NZ than Australia and many parts of America and Asia.

We are an angel backed economy in the Kiwi startup market, with very few venture backed start-ups. Why? Because building a startup from NZ is really hard and there is not a massive track record of this happening successfully enough to create returns that would lead to an asset class being established – yet.

Over the last 10 years there has been more promising listings of Kiwi companies onto the NZX and ASX – however, many of these companies (with a few exceptions) have experienced significant reductions in their market capitalisation. We would not blame the exchanges and more comment that this is reflective of the quality of the companies and their readiness for the listed environment. Think about Wynyard, Orion and CBL.

So, while there might be a reasonable number of options to raise your $250k seed money in NZ, the reality is that there is a shortage of large pools of capital to support our start-ups to be competitive and become the unicorns of the future.

We need more VC funds of scale – it would be great to see two or three more scaled (for NZ) funds – say 2 x $50m+ funds and 1 x $150m+ fund – to complement the Australian and US VCs coming into town who just seem to do quite well with their 5 or so investments from the cream of the crop each year. Where is all the big money going from New Zealanders? Offshore? Property?
If this money was around over the last 15 years would these funds have likely to have enabled start-ups to make top quartile returns to their investors?

When we think about the competence required in these VC funds, invariably they need to be coming from the market, with relevant strategies to succeed here and internationally. They will also not likely be Government. A market driven solution, possibly supported by cornerstone funding would in our view be more optimal.


Do Kiwi businesses settle for the three b’s (bach, boat, beamer) and why?


Kiwi business owners don’t settle because they are happy and content. The majority settle because they don’t believe they can win by growing their business. They lack confidence, belief and aspiration – because running a small business is super hard.

How do you change this? You help them find their dreams, their aspirations and their confidence to go for it. Then you get out of the way as they grow until they need help again or rejunovation and reinvention.

We have an issue, a major issue in that most SME owners don’t want to grow, because they don’t think they can grow. Forget your academic text books, forget your capability analysis from Treasury or MBIE, understand what is the real blockage to enabling growth – self-belief and confidence.


Are we focused on the right companies?

In most cases no. We have an overt focus on funding people who want money, not who have the greatest potential.

We fund research in CRIs and Universities that has no prospect of getting commercialisation funding in NZ – we should stop and only fund those researchers and academics that are truly world leading and/or in the places we have collected good commercialisation funding and/or where there is a clear community need being delivered from the research. We need to say no, so we can say yes on the great opportunities. In reality, we need to have commercially driven academics receiving funding rather than all.

  • Quality issue, alignment issue, scale issue, clarity of roles leads to a waste of funding
  • Separate capability funding of people from commercialisation of IP – treat them differently to build up their competence to influence the IP projects over time
  • Give the commercially driven academics a shot at freedom, support them with funding.

If our largest companies could develop clearer winning strategies to grow their scale, and their geographic presence – these could have a big impact. It is way easier growing something established than it is growing something new – check out the Scale Up Movement led by Dan Isen which is making this point.

  • Challenge these companies to be more competitive, challenge to support small, challenge to address the geographic diversity

SMEs - If you can move 1% at a time for these SMEs into MEs, the benefit for New Zealand would be massive. Yes, digital transformation could play a part, but what would have much greater impact is enabling SME owners’ aspirations to lift, their belief, confidence and desire to go hard at growing their business.

  • Find a way to get SMEs to dream again while also keeping up the focus on efficiency and effectiveness, drive simplicity and compliance e.g. e-invoicing standards.

MEs - We believe there are a whole bunch of medium sized businesses in the regions and cities who, if they could become more confident about investing in innovation and research and development, would unleash great potential and productive outcomes. Money from Callaghan Innovation is not the motivator or creator here, it is enabling ‘confidence’ that is the lever.

  • Challenge and support these ME firms to create more ambition, have more belief, more confidence.


What are we doing to support SMEs in the regions?

I specifically want to talk about the current topical area of enabling growth beyond the main centres. There is some fantastic work that is going on in the regions to explore what their true competitive advantages are and how they can leverage these for benefit. We need to keep doing this.

At the same time, what we know is that any quality business owner can succeed in any market – what they need to be able to do is be competitive, work hard, get lucky and move forward step by step.

What is lacking in many of the regions is an ecosystem of talent, belief and quality to support the local SMEs to dream bigger, solve their issues and to jump into better performing organisations. It can be done – we have operated in the Hawke’s Bay for the last five years, we have got alongside business owners and we have helped them make decisions, move forward with confidence and clarity. These business owners have created just under 700 new jobs.

We can do more in the regions to help SME owners who either have a belief to grow and/or who can develop this believe and want to challenge themselves. We can do more to support them on their journeys. Thousands of jobs are possible if we can unlock growth potential in the regions.


Are our education and government sectors fit for purpose?


At the risk of having an opinion, there are a few other areas where I have a view to make NZ better.

Our education system:

  • Significant bureaucracy, lack of competitive elements, missing non-linear education and life-long learning opportunities – we are seriously in trouble. If we think we have the best education environment in the world, we are kidding ourselves. If the Government was really focused on this, instead of three years free education post school, why not take the 2nd and 3rd years’ funding and apply that to doubling the pay of our primary and secondary teachers to change the game? There is also a huge opportunity for vocational education, right now we don’t have an ethic of lifelong learning.
  • Too much inflexibility and lack of innovation in our approaches e.g. ICT Graduate Schools initiative run by the previous Government – a missed opportunity and a waste of $30m when there were some clear private sector opportunities to address the skills gap in the technology industry in NZ. Instead these jobs will head offshore.
  • We need to run concurrent X-matrix initiatives to drive change in this industry. We need to be leading disruption, not having it done to us, and the whole concept of our children going from one stage to the next is not what they want nor how we should be preparing them for the future.

Our government:

  • Inflexible, too much cost, not aggressive enough, lack of data and measurement to drive decision-making. A lack of data creates opportunities for Ministers to run their own projects without reproach. We can do much better. I have had 17 years of The Icehouse seeing how Ministers and Officials use the lack of data to their advantage, and yes we have also been a recipient of funding as a result of lack of data. When any person or organisation receives tax payer funding, they must be accountable for the use of that funding, same applies for those persons who approve such funding.
  • Lack of focus and hard decision making – Government funds everything which prevents focus, choice and prioritisation. This is a harsh challenge, but we all know that you can focus by saying no to some things.

I am sharing these thoughts to encourage debate, engagement and open-ness as we know there are others fighting the battle with Kiwi business to enable their success. It matters – the first in the series was focused on data on the key segments we see while the third is a discussion on sustainability of the start-up and SME ecosystem in New Zealand.

This is Part Two of Pouring Solution, a commentary written by Andy Hamilton, CEO of The Icehouse. For people who want to see New Zealand do better. Click here to read the preface.

Read the series:

Pouring Solution Preface - A series on improving New Zealand’s economic performance.

Pouring Solution Part One - What are the facts and what is the data telling me?

Pouring Solution Part Two – A few questions I hear often about the SME economy.

Pouring Solution Part Three - Building self-sustainability into the New Zealand start-up & SME ecosystem.