Being Founder-Centric

Before we get stuck into this topic, I recommend you read two earlier posts which give important background on what I want to discuss here:

  1. From Idea to Impact, about the full chain needed to generate a measurable impact from an idea.
  2. Flailing, about the difference between activity and progress.

I should note that this post is full of my own prejudices. I assume that by reading this blog you’re interested in hearing about those. I don’t claim to offer fair and balanced reporting. I apologise in advance to those with ugly babies – it’s not personal.

I recently read the following summary of a new venture in the newspaper. I’ve removed the specific details as they don’t matter.

“The company has received [government funding] after winning [business plan competition], and has now joined [incubator program]”

Three strikes and you’re out, I thought.

What a hopeless cynic I’ve become! Why?

At the moment there seem to be a lot of people focused on creating start-up infrastructure: incubators, accelerators, shared working spaces and innovation hubs around the country; networks of angel investors pooling their resources and investing in a portfolio of ventures; countless competitions designed to flush out promising new business ideas; various initiatives to commercialise research done at universities; and, last but not least, millions of dollars of government funding – direct grants to companies, subsidised professional services and co-investment. This is all to try and create more high-growth companies.

So, is it working?

As far as I can tell, there is very little impact. Intentions are good, but the results don’t seem to be there. Why not? Let me give you a possible reason…

When the start-ups we work with think about their product, we quote Steve Jobs and tell them to start with the consumer and work backwards to the technology. In my opinion, those who want to help start-ups need to do the same. That is, begin with the founders of these ventures and work backwards from there to the constraints that early-stage companies actually have.

Unfortunately just about all of this “infrastructure” I listed above has been designed from the top-down, often to solve problems that those putting it in place have – e.g. we’re a bunch of rich dudes and we want an easy way to invest in some sexy start-ups, or we’re a big corporate and we want to look like we’re helping small businesses, or we’re from the government and the minister would like a ribbon to cut.

What’s missing in all of that? Motorways are not much use in the absence of cars!

Sadly, no matter how much you might want it, you can’t will an innovative eco-system that generates new companies into existence, you have to let one grow. As Dave ten Have said recently, entrepreneurial activity doesn’t come from central planning. So, while it seems like a lot is being done, in my opinion at least, it is mostly splashing and thrashing and not much forward momentum for the people that all of this is supposed to be helping.

The questions we should be asking in each case are:

  • Is it needed?
  • Does it work?
  • Will it get to those who need it?
  • Will they use it correctly when they get it?

Let’s consider each of these initiatives in the context of this idea-product-impact chain

Incubators/Hubs

In a hospital an incubator is a safe place to put a sick baby – somewhere they can recover without worrying about the stresses of the outside world. Our youngest son was born with jaundice and spent the first week of his life in an incubator. It was horrible, and we were so pleased when he got out.

In a similar way, business incubators try to create a protected and supportive environment for young companies – typically offering a working space shared with other early-stage companies with access to advisors and mentors. Perhaps because of the negative connotations I described above, most incubators now prefer to describe themselves as innovation hubs. However, as far as I can tell the service they provide haven’t changed, so for our purposes we’ll treat them as the same thing.

There are three problems for incubators/hubs:

Firstly, and most importantly, the problems they solve are not usually big constraints for smart founders, so the benefits are limited. It is good to be surrounded by supportive and like-minded people, and to be able to bounce ideas off them when you need some advice. But if this is what you need it is very easy to achieve, especially in a place like NZ where the business community is small and well connected and people are generally happy to help if you ask them to.

Secondly, they cost money to run, meaning there is a price attached to the help they offer. There are four possible business models that an incubator/hub can use to cover these costs, none of which are founder-centric:

  • Renting desks. This effectively makes the incubator a real-estate venture, and normally means start-ups end up paying a lot more rent than they should (paying 3x market rates for a desk and access to a fancy coffee machine isn’t a good deal!);
  • Taking a shareholding. This doesn’t seem to work for either side: founders need to give up a percentage of their company in return for no cash in and the limited benefits I described above – in the short term equity costs nothing to give away, but in the long run a “free” place in an incubator can end up being hugely expensive if things go well; on the other side of the equation the incubator/hub taking an equity position quickly ends up with a too-large portfolio of companies in which they own too small a stake for it to be material to them, and in which they are usually reluctant to play an on-going role by continuing to invest time and money as the venture develops. Because of this, few incubators/hubs contribute more value as shareholders than they extract.
  • Corporate sponsorship. If it seems too good to be true then it probably is! Large companies are normally pretty keen to be associated with helping young companies, especially those that aspire to be suppliers to start-ups. It always helps to be aware of the strings, if any, that come attached to this sort of help.
  • Government subsidies. I’ll cover these specifically below, so will save fire till then. Given that all of the local incubators use all three of the methods described above, it’s slightly depressing that government funding is required at all. On the other hand, if the incubators themselves had to raise capital to fund their business, how many of them would get it? If you took the amount “invested” so far in creating incubators and applied it directly as seed capital it could have funded a large number of start-ups.

Last, but not least, the advice that start-ups get from incubators/hubs is often terrible. We recently met with a promising start-up who had a good enough product and a handful of paying customers. Our advice was that they needed to get in their car and sell what they had. There was a possibility they could get to a break-even position with their current product and ~100 paying customers. Instead, having joined an incubator program, they were wasting their time working on writing an investment statement and market positioning document (whatever that is). We could only shake our heads and wish them luck.

There is no start-up methodology, sadly, so it’s not always obvious if the advice your getting is smart, or something that might make sense for a larger company but is misguided for a start-up.

You don’t need a special desk in a special room and a qualified grown-up in a nice suit to hold your hand in order to start your company.

Accelerators

Accelerators are the exact opposite of incubators. They are all about speed!

The idea is to take a promising idea, throw together a team and attempt to fast-track the venture to a funding event – ideally in just a few weeks or months.

There are many accelerator programs stating up all over the world, all with slight variations on the theme. But, by far the highest profile accelerator is Y Combinator, based in Silicon Valley. It runs two intakes per year – one in the summer, one in the winter. It gets over 1000 applications and from that picks about 30-40 start-ups to join the program. This runs for 10 weeks, during which time the chosen ones get access to an amazing array of mentors and alumni founders as well as regular office hours with the insiders, such as Paul Graham, Paul Bucheit, Jessica Livingstone, etc. Y Combinator typically invests ~$20k in each company (anecdotally, enough to pay the living costs of three founders for the time they are in the program) and in return expect 6% or 7% of each of the companies. The end goal is “demo day”, which is a chance for the start-ups to pitch themselves to the Who’s Who of Silicon Valley investors.

If you want to understand more about the approach and philosophy behind accelerators like Y Combinator, I recommend this interview with founder Paul Graham. Note, of the start-ups that have come out of Y Combinator so far, one of the most successful to date is Y Combinator itself.

Here is the problem with accelerators, in a New Zealand context: it is a volume game.

Accelerator programs attempt to mass assemble start-ups in the same way as manufacturing companies in China mass assemble electronics. To make it work you need a lot of capable people interested in start-ups (see: http://www.paulgraham.com/hubs.html) to put into the top of the funnel and a lot of investors willing to pick them up and fund them once they graduate. In New Zealand our competitive advantage is not in mass assembly – we just don’t have the population to support it.

Of course, there is also nothing to stop kiwi start-ups from applying to join these higher profile overseas accelerators. Some smart founders already are and I definitely encourage more to do so. As Elizabeth Iorns, a Y Combinator alumnus originally from here, told me, “There is already a Y Combinator for New Zealanders … it’s Y Combinator!” (Science Exchange, Elizabeth’s start-up, recently announced they have received US$1.5m of investment).

In early 2012 I’m going to be in Singapore as a mentor at JFDI Bootcamp (part of the TechStars Network). It would be great to see a few kiwi companies take the opportunity to apply and get over there and be part of this. If you have a business that would benefit from launching in Asia then I recommend you consider it seriously (applications close 16th December: apply now).

Unfortunately for local programs, as more smart founders realise they can do this it just accentuates the problem by further lowering the volume and quality that they have to select from. It’s not clear yet if accelerators are viable anywhere, even at scale. But, the model definitely doesn’t add up with only a small number of people – you are relying on a much higher success rate, which is a crap shoot. If we’re going to be successful at this sort of thing here we need to play to our strengths, rather than just copying the models that are working in Silicon Valley. Perhaps we should consider the philosophy of “Designed in California. Assembled in China.” that is printed on the back of every Apple iPhone?

As a potential investor, the rush to make early-stage companies investment-ready also feels a bit icky to me. To create something good takes time and/or money. I’m not convinced that it helps founders to try and compress the development of a start-up into an arbitrary period for the sake of investors. Many of the start-ups I’ve seen coming out of local programs chasing investment remind me of the young kids who are pushed into competing in under-age beauty pageants.

There is a famous mantra in technology: “Good, Fast, Cheap – Choose Two”.

Business Plan Competitions

There are now so many competitions for people with a business idea that we almost need a business plan competition of the year competition to help founders identify the good competitions.

Again, the intentions are all good, and they are possibly really useful to those people who need extrinsic motivation and artificial deadlines in order to get started. (see, for example, my triathlon posts)

But, the goal is the business, not the plan. As Steve Blank, one of the pioneers of the Lean Startup movement, says: “customers don’t ask to see your business plan.” Ideas are worthless in the absence of execution. The problem with competitions is that they reduce the start-up process to entertainment, just like Pop Idol or Master Chef. This ends up giving would-be founders quite a distorted picture of what it takes to create a successful business venture.

The latest fad in this area are start-up weekends, which combine a business plan competition and an accelerator into one 54-hour period (indeed startup weekends are often run by those looking to recruit people to be part of their accelerator). I haven’t been part of one of these weekends myself yet, but as far as I can tell they are heaps of fun and a good chance to meet some like-minded people. If they help connect two people who want to work on an actual start-up together … great. But the competitions themselves have as much in common with working on a real start-up as being a contestant in Survivor has with living unassisted in the Amazon for three weeks.

What’s worse, the value to founders, even if you win, is normally tiny. The prizes are typically a non-material amount of cash, and some free services from the sponsors (normally incubators, lawyers, accountants, marketing agencies or web development companies). You may get to have your picture in the paper or in a magazine. Or, you may get to meet someone famous and tell them about your idea!

So, you have to ask: whose problem are these business plan competitions solving? They are good for investors, who can use it for deal flow, and good for the sponsors, who get publicity for being involved. But do they help founders?

<aside>
If you do want to win a business plan competition this is my advice: approach it as you would a popularity contest. Really get to know the judges and understand what appeals to them. Forget about what would attract customers or even be realistically able to be built. The people who pick the winner are the only ones you need to impress. You just need to make sure your idea gets the loudest cheer and the most votes.
</aside>

Angel Networks

An angel network is an easy way for a bunch of high-net worth people to invest in a selection of start-ups. There are a number of problems with these from a founder’s perspective, in my opinion, but here are just three:

Firstly, group think is unfortunately common. In these groups everybody tends to assume somebody else is doing the work to validate the opportunities, meaning often nobody is. Typically there are just one or two key individuals in the group, whom everybody else looks to and follows. It sucks to be them.

Secondly, because New Zealand is small and the credible investors are all well known and easily accessed, the better founders just approach them directly. So, an investment group ends up self-selecting for the worst opportunities from those that remain otherwise unfunded. It is incorrect, in my experience, for a new investor to assume that there are a lot of impressive but unfunded start-ups out there, who just don’t know how to connect with potential angels. All of the hot guys are either taken or gay – you have to work hard to be an investor of choice for smart founders.

Lastly, but perhaps most importantly for founders, there are very few people who seem interested in investing a material amount in any one venture. The model that just about all of these groups adopt is a portfolio approach – i.e. they aspire to invest in a number of start-ups in the assumption that most of them will fail, and a couple of others will break even, but that there will be a small number of  big winners that return the overall investment. This might work if you’re prepared to invest a seriously large amount (of money and time), but when the amount you’re starting with is already small, spreading this even more thinly across a lot of ventures means you end up with a minuscule amount invested in each one – far too little to make it material to you either way, or to justify spending too much time on it – so you end up watching from the sidelines and learning very little from the process.

I’m also not sure the odds stack-up in their favour the way that many angels assume when they start. Perhaps this portfolio approach works if your portfolio is big enough (e.g. hundreds or thousands of companies) but if you’re spreading across just 5 or 10 local companies then there is every chance that all of them will bomb. You can’t just randomly date strangers and expect to find your soul mate!

Unfortunately the standard angel experience is to make a few small investments that struggle, find out that it’s much harder than it looks, become reluctant to continue to invest the time and money required to support the ventures on-going and then bail on the whole thing having made very little positive difference to any founders at all.

Government Funding

In terms of access to government funding, it’s a great time to be a start-up founder!

I have no issue with pouring fuel on existing fires. Unfortunately, most of the time, it’s the exact opposite.

In addition to funding all three of the things I’ve described above, there are also a growing list of national and local government organisations who provide direct funding grants to new ventures. In fact, so many that it’s become a confusing and complicated maze for founders to navigate. There are even consultants who will help guide early-stage start-ups through the application progress (for a fee, of course) … that points to a problem!

As a result of this, in our experience, the best founders often don’t bother to apply because the benefit doesn’t justify the time spent. Funding programs create distortions on both sides of the fence. We’ve seen lots of examples of founders adapting their plans ridiculously in order to fit into the funding criteria – a classic example of confusing the engine and the tender. And, in order to justify their existence those administering the funding need to make sure that they are picking winners – and, of course, the easiest way to do that is to pick those that are already winners, rather than directing money to where it could make the biggest impact. Also, just like any investor, administrators are often loathe to write off obvious losers so continue to throw good money after bad. The majority of this money is provided as indirect funding of infrastructure or as grants with no material strings attached.

In my opinion, if the government funds your start-up then it should be a shareholder or, in the least, a creditor. Not to do this is to privatise profits and capital gains but socialise the up-front risk. Funding isn’t an entitlement. As Selwyn Pellett points out, this would also force founders to think a lot more carefully about how they spend grants as it would put a cost on the capital provided. Note, some funding is provided as co-investment – where the government tops-up an investment round by matching the amount put in by investors, on the same terms. This is a pretty spectacular deal for investors, who get to reduce the amount they have at risk, or spread their bets across more companies, while still having the option of most of the upside if things go well. I’m not personally an accredited investor, but some of the companies I’m involved with have received co-investment via other investors. I’m sure the high net-worth people who are part of this program appreciate the government’s help.

To summarise, the most promising ventures don’t really need it, it doesn’t often get to those who could use it, and those who get it instead end up applying it inefficiently. Welfare for early-stage ventures struggles to meet any of the criteria we started with above!

It is widely believed that there is a lack of capital for growth companies in New Zealand, which is part of the justification for government funding in the first place. I struggle with this, because just about all all of the ventures that I see which really deserve to be funded manage to access the money they need, as do lots of outrageously stupid ventures that should never have been touched by investors.

The people who complain most loudly about the lack of capital are typically those whose ventures are unattractive to investors, either because their valuation is too high, or their likelihood of decent return is too low or non-existent. In my opinion, neither of those gaps should be filled by the taxpayer.

Is it working?

To know if an intervention is working you need to measure for impact. This means measuring outputs, not inputs. And, it means comparing the group who have received support with a control group who have not, to properly understand if the input your considering contributed to the output you’re interested in.

Is there any evidence that any of these things done to support start-up companies have an impact, when compared to other companies that just got on with the job? I accept that this is very difficult to measure because “success” is hard to define, but just because it’s hard doesn’t absolve those who promote the things I’ve described above from trying. Indeed, it forces you to think more about what you’re actually trying to achieve.

It’s tempting to quote the number of companies created, or the number of jobs created. However, these are still inputs.

A better idea would be to measure the impact on the economy. In that case, a good measure would be something like total export revenue earned or total tax paid. (e.g. In their recent press release NZTE “celebrated” that over the last 10 years they have funded 250 companies via incubators, of which 177 are still operating, and who have collectively paid $45m in PAYE and GST over that time. They didn’t say how much funding has been provided to achieve that result).

Or perhaps we are happy just raising awareness?

I’d love to see some full analysis of all of these different initiatives, and better understand what the desired outputs are and how well they are achieved. Perhaps my opinion is wrong. I’m certainly open to that possibility.

Show me the feedback loops! Or are we too scared to look at the results in case that forces us to admit that it’s not really making much difference?

Is there another way?

This is not school! You don’t qualify your start-up by winning a competition or getting a sucker to invest or being accepted into an incubator program. You qualify by building something customers want and win by selling it repeatedly to them at a price that is greater than your costs. There is already a well established way to keep score in business: profit and loss. If you think you need $100k to pursue your idea, rather than hoping for a prize or chasing investment, why not build something you can sell to 1000 people for $100?

If you are somebody who wants to support start-ups: be founder-centric and understand that most start-up infrastructure doesn’t help founders much at all. Rather than trying to solve meta-problems, like how to create an eco-system, why not get your hands dirty and help directly? This is exactly what we’re trying to do at Southgate Labs.

If you are a founder, or aspire to be, I have some good news: all of the things I’ve described are opt-in. The choice is yours.

But don’t just take my word for it…

Over the next few weeks I’m going to hand over this blog to a series of guest posts by founders who are doing just that. Some of them are higher profile than others. Some you have probably never heard of. All of them are heads down working on building a successful business, with a product, paying customers and a team in place. I’ve tried to pick those who have not over indulged in the various distractions I’ve described above, but there are amongst their number those who have dabbled, and hopefully their first hand experience is useful in understanding how that has helped, or not. I’m interested in the different business models, the different approach they are taking to getting in front of customers and making sales, how they put their team together, how they got started and how they funded their growth. I want to thank them in advance for taking the time to tell their stories. I hope you find this interesting as you think about how to approach your own ventures.

Enjoy!

PS thanks to all of the people who were kind enough to read a draft of this post and help me to make it better – I won’t name you in case you get tarred with my cynical reputation, but your contributions are much appreciated!

38 thoughts on “Being Founder-Centric”

  1. Rowan, thank you heaps for this blast of fresh air liberally infused with common sense, real insight and distilled experience! I’ve experienced most of the scenarios you discuss, either directly in the course of developing my own start-up, or indirectly in the process of advising others. I’ve had my own growing doubts about the real value – both to the start-up/innovator and to NZ – of the burgeoning innovation and development bandwagon, and your opinion piece expresses my concerns to a T.

  2. I have a couple of perspectives that compel me to respond. On the one hand I’m a co-founder of a profitable technology company that was entirely bootstrapped without the assistance of external capital or incubation. On the other hand, I’m deeply involved with efforts to build a community ecosystem that promotes a start-up culture.

    I agree that there have indeed been bad companies that got funding for the wrong reasons and, with possibly one exception, I can’t think of a (New Zealand founded) incubated company that made it really big. That doesn’t mean we shouldn’t do those things, but it does mean we could do them better.

    What I’ve noticed recently from talking to a lot of aspiring tech entrepreneurs is that there is an emphasis on aiming for early funding, rather than creating value. I think this mindset is largely driven by over-exposure to media hype from Silicon Valley. The reality is that most New Zealand start-ups will never receive funding.

    Why should we continue to do incubation and to extend government co-funding programmes? We should do this because New Zealand needs a transformative approach to encouraging more high end, knowledge based ventures. By running Startup Weekends and business plan competitions we are creating an environment for potential entrepreneurs to experiment, learn and network with peers. Even if only a small number actually go on to build successful businesses in the future, then we have achieved something.

    There is value in creating a social ecosystem that promotes entrepreneurship. We accept that there will be some failures and that we are still learning how to build this environment. Of course this is the political antithesis to libertarianism, which pre-supposes that only a small, well resourced, well connected elite are entitled to win.

    1. Paul, your last two paragraphs are based on the premise that what the taxpayer is funding will actually achieve the goals of creating a social ecosystem that promotes entrepreneurship. If you step back and ask the question “is this *actually working*?”, and I’m not so sure it is.

      There are alternative policies which could be implemented to achieve the same goal. The millions that have been sunk into fancy-desk incubators could instead have been given as grants to small employers (maybe covering their PAYE for a few months of a new hire), or maybe spent on education. That’s leaving aside the much more pressing problems sorry state of child poverty in this country where the money could do some good right now.

      You’d struggle to find anyone but the most intransigent dairy-farming septuagenerian who would disagree with the goal of a country with more “high growth knowledge ventures”, however it’s legitimate to ask if the current policies are actually consistent with that goal, and there certainly seems to be very little evidence to show it working.

      1. I agree, Koz, although there’s one thing that should be made clear: “create social ecosystem that promotes entrepreneurship” is a different goal than “Maximise the number of successful start-ups”. I’m not sure that there’s even a consensus on what the measure of success here should be.

        The best example of the conflict is probably the start-up weekend, which is an awful way of creating a successful business, but a great way of getting people thinking about creating businesses, and getting them into the same room as other people who are also thinking about that.

        You may belittle this as trite “awareness-raising”, but frankly, I’m inclined to think that the social challenges bigger challenges than finding funding and advice. It’s easier to buy Paris Hilton a Maserati or put her on TV than it is to teach her how to have a sense of self that doesn’t revolve around fame and wealth.

        In particular: on average, the biggest barrier that New Zealanders face in creating global companies is not funding or the tyranny of distance, it’s that (on average) we don’t tend to think of ourselves as people who create global companies.

        It’s like the whole “a black kid from the projects doesn’t see any future other than crime and violence” meme, but less glamorous. And like that meme, it’s a little condescending and judgmental, but that doesn’t mean it’s void of truth. You probably have more anecdata on that claim then I do.

        1. I think having a bunch of smart people in a room is hugely valuable, and so long as everyone’s honest about that being the primary benefit of these gatherings then more power to them. Though I do wonder if having the sponsors instead spend that money on tech meet ups and conferences would be more effective.

          However you’re right, there’s no consensus on what the right success measure is, let alone the right policies to achieve it.

          As to your proposed biggest barrier, I wonder if that gives us a hint. What better to help Kiwis realize we can build global companies than to have a few more ‘wins’? Is perhaps the right goal ‘better startups’ not ‘more’? Should we be working to convince the talented people wasting away in corporates to join small dynamic companies?

          I wish I knew the right answer, hell I’d settle for knowing the right question, but that doesn’t absolve those who think they do from having to work a little harder to prove it.

    2. Thanks Paul. I appreciate your comments.

      I’d like to see us all take some of the energy, enthusiasm and money that is invested in creating an environment, and put it into creating a few startups. If we do that then the environment will probably take care of itself!

      1. Perhaps it will take care of itself, but there is a small problem that I perceive, having been involved in the scene for a while now.

        Not sure if it is a Kiwi thing or not, but we tend to operate in silos a lot. We know that Southgate, Enspiral, Webfund, Koz, Wiggs and others have some good projects coming through. Even our own team has been engaging with one or two external projects this year. There are some complementary skill sets out there, but how often do we all sit together and share these around?

        You’ve raised some important questions, but I hope there remains open the possibility to both build cool companies AND participate in the community. In fact there are some sound business reasons for doing so, not to mention that it’s more fun:

        http://iwantmyname.co.nz/blog/2011/10/being-good-neighbours.html

        1. Just for the record, Koz == Southgate these days, I’ve nothing else on my plate. Plus we share an office with Enspiral and 3-10 other startups, depending on how you’re counting. Desks which, I might add, are much cheaper than an incubator ;)

        2. Do you honestly believe that there is a shortage of networking events?

          Koz is one of the founders of Southgate. Lance is a shareholder in three of our ventures. And we all share an office with Enspiral. If we’re not all talking on a regular basis already there is something horribly wrong!

  3. While I am in general agreement with your points, I do take issue with tarring the StartupWeekend with the Accelerator brush based on my limited (2 hour) experience of it in Wellington. Most of the ideas that did well displayed prior thought, planning, decent chance of making it to market etc. But what it did give was an event for people to come together and actually MAKE something. Sure there’s a format and razzle-dazzle about money and judges but the whole thing was about nudging people to get together, noodle along, have some arguments and get greater insight into actually doing something – which is about 3 lightyears ahead of where many startups get to which is an idea in the back of the mind poorly-conceived and doomed to irrelevance.

    One of the better groups, the Auti-toy was an academic who had a product, but nothing else. The weekend gave her the potential to get a start with customer people, techies, whatever simply through the numbers of people in the same space.

    So Paul, and Dave Mosc and all the rest, I thought it was an excellent event precisely because it was so focused on facilitating people working. Whether that’s a Y-Combinator, well that’s not really what it’s about IMO.

    1. I’ve only heard good things about Startup Weekend from people who attended.

      As I say, as long as you treat it as entertainment then there is no harm I can see.

      If it does actually generate a business or two, that would be an excellent outcome. We’ll see in time I guess.

  4. Agree that we lack hard data on the return on public investment. Some of the returns are intangible however.

    A number of highly successful and respected people from the tech start-up community have already commented on this thread. Most have been involved with incubated companies or else companies that received government investment or assistance of some form in the past.

    Doesn’t that suggest that we are generating some positive outcomes from past public investment?

  5. We no doubt all share a lot of similar beliefs & goals with respect to the startup infrastructure & environment in NZ. Namely a belief that high-growth, high GDP-per-employee businesses are an essential part of building our country’s future prosperity, and it would therefore be good to understand what makes a genuine contribution towards this. Great Rowan to see you provocatively challenging what you see as not working.

    I have spent a lot of time this year in particular pondering this issue myself, and talking with other startups & ecosystems players, and reflecting on it in the context of my own experience. I have been wondering what can practically be done to make difference, & in this respect my focus has been predominantly on the environment itself and what can be done to build a more supportive environment to foster a greater quantity and quality of entrepreneurial ventures.

    Some of the challenges I see are;
    * few anchor firms
    * startup community is young & not well organised. Weak networks
    * general lack of entrepreneurial experience
    * poor availability of early stage capital, & angel investor community is largely uneducated about new business models and digital/internet-based businesses.

    Some of the solutions I see are;
    * Building the social capital of the startup ecosystem by building strong networks with fellow entrepreneurs, NZ & non-NZ investors, universities, regional & central government agencies, and the industries we specialise in
    * Work at helping founders to grow their entrepreneurial expertise including mentorship programs & peer-to-peer support

    Events like StartupWeekend in its current form here in NZ are in and of themself pretty ineffective at creating startups, but they play an important role in the ecosystem as a whole, as they bring helpful attention to the idea that creating your own business is a possible alternative to working for someone else.

    There is much that can be done to get a better ROI from NZ incubators and I understand that there’s lot of work underway at present to effect this change. I am also in favour of the acclerator model, and beyond that I am in favour of bringing more specialised mentorship & experience into these spaces so that the potential value-add of these environments can be improved.

    Overall I am feeling pretty optimistic about what I see being done by various parties to make for a more supportive environment for nurturing new businesses in NZ. There is some great people out there doing great work.

    1. It was lousy in 2004, absolutely lousy. But now the situation is excellent.

      * few anchor firms
      There are an increasing number of anchor firms, starting with Trade Me which spins out a good number of smart, well trained people who know what awesome business and customer focus looks like. A few of them even got money out of it and have invested in other businesses, like StarNow, Sonar6, VendHQ, and VC firm Movac. Next we have the likes of Xero, Ponoko and SLI Systems – each about 5 years old an doing extraordinarily well. Scratch the surface and there are plenty of older and newer companies in the ecosystem. Reading Idealog gives a really good picture of the emerging landscape.

      * startup community is young & not well organised. Weak networks
      Rubbish. New Zealand is small, ‘we all know each other’ and almost everyone is contactable and will respond o a request for a coffee. There are a good number of events that cross over the various groups, from free technical, design and founder meet-ups, to baacamps, Webstock, Foo Camp (invitees only, but late churn), Morgo, 0to60 and so on. Get out there and you’ll soon find you have to start picking and choosing.

      * general lack of entrepreneurial experience
      It’s true that there is no substitute for doing it, but there are plenty of people who are getting their hands dirty right now and who have been there before. A lot of them are out there doing it again – including Rowan. Auckland has a great little founders group that meets monthly – founders only are welcome and it’s a peer to peer based session. Start your own if you don’t like any of the others.

      * poor availability of early stage capital, & angel investor community is largely uneducated about new business models and digital/internet-based businesses.

      It’s generally lousy out there compared to the frothiness elsewhere, but there is also plenty of cash for awesome companies with great teams. As Rowan says the focus should be on delivering to customer ends not to raising capital, and if you do that then the money is easy. Meanwhile my interpretation of the Lean playbook says we should try to get as much organic growth as we can – after all when we get money in from VCs, we are almost certainly going to spend it to fast (I’ve been there), and often at the behest of the VC.

  6. Couldn’t agree more. There is this game show feel to it all and it’s breeding a generation of talkers and very little do-ers. I know many “entrepreneurs” that are blinded by stores of hundred million dollar buyouts after 6 months.

  7. Excellent read, very well thought out description of the problem. However, I’m left wanting for more detail in the solution.

    First, You should know you are not alone. These issues are the same ones being faced in a majority of first world countries. There’s an established infrastructures that’s been in place for many years. Those involved are struggling to understand how they can keep their infrastructure and adapt it with these new techniques. It’s a classic innovators dilemma, unfortunately they will not be able to successfully adapt due to legacy scared cows that will keep them from true innovations.

    The good news is there’s a better way. As you mentioned, the Lean Startup philosophies are helping to define how to create a customers centric business. The book Nail It then Scale It, takes this structure and wraps it with a systemic process model that can be executed and measured against.

    Startup Weekend is also another great opportunity. Most of this has been covered in the above comments. It’s not typically about creating a new business. However, it does take a team through the process of creating one allowing them the understand the process better, build out team dynamics, and see first hand how potential investors look at a deal. To get all this knowledge in one weekend, plus the opportunity to build new relationships it’s truly amazing.

    The old model is broke, the fact that we even still have business plan competitions is the clearest sign. Where are the Business Model Competitions? These could be held over a weekend with the focus on customer development and modeling. Working with a one page Business Model Canvas creates a focal point that can’t be achieved by an old business plan. Get to know your customer, identify their pain, and then create a hypothesis for the solution… test, repeat. Given the right focus these steps can be executed in a very short amount of time.

    The answer to the question exists. We just need to eat our own dog food and connect with our customers to identify their pain. Stop the “build it and they will come philosophy” and start working with entrepreneurs to create solutions that provide real benefits.

    A founder-centric community can be built within a startup ecosystem.

  8. Great post Rowan, this certainly touches on an issue a lot of people I know have been anguishing over for a while. Certainly agree with the ineffectiveness of the govt. funded incubators, I think the most galling aspect of the whole system is the complete lack of initiative shown by these groups to engage with the rest of the ecosystem (i.e, when was the last time Andy Hamilton showed up to the Akl Startup Meet-up?). There has to be a better way to spend all that money than through these networks and personally, I lean towards ideas like @koz’s no PAYE for X months, perhaps the govt. could look into guaranteeing small bank loans to early-stage ventures as well – or even offer something directly through KiwiBank..?

    As a (proud) member of The Distiller (http://thedistiller.org) your article is heartening as a lot of what you talk about is what we’re trying to foster here. We exist as something of a reaction to the Upstart govt. incubator in Dunedin and now have spaces in Auckland and Dunedin where founders can work. We provide an internet connection, office and power (thanks mostly to the benevolence of the University of Otago), with the only expectation being that the person be a committed founder of a new venture, that they participate in our internal sprint process, and that they actively engage and help others in our community. Whether this is working or not is up for debate (the whole organisation is only ~2 years old), but personally it’s had a profoundly positive effect on my ability in early-stage companies.

    I think we need more organisations like The Distiller where the focus is on building the skills and abilities of individual entrepreneurs by taking people that are willing to learn and allowing them to be part of a supportive community that is willing to assist them through the start-up process. I’ve personally seen the difference this approach can make in peoples’ entrepreneurial capabilities both through The Disiller and through Enspiral, I’m sure there are other organisations doing this too.

    In my mind a great outcome for NZ is if we can build lots of fast growing, high value companies – if we don’t get the companies right the first time around though, hopefully we can build up a strong community of entrepreneurs who are highly skilled in the new venture process so they can better execute the next time they try.

    1. I can’t speak for Auckland, but in Wellington, Creative HQ have been very proactive in engaging with the Lean Startup meetups we have.

      Speaking as a founder of a web startup in Wellington, here’s my view (just one data point in all of NZ of course):

      * Our revenue exceeds our costs, ignoring salaries. We would _only_ need money for salaries. Investors don’t give money to founders to pay themselves a salary. So we’d need to be at the stage where hiring people will accelerate sales enough to be worth it, and we’re not yet.
      * Taking $10K for business expenses is pointless, we have our expenses covered. So these “business plan” competitions are a complete waste of time for us.
      * We considered taking a spot in an incubator, but came to the conclusion that we didn’t need to be in that environment to do what we were doing (we were already talking to potential customers, building product etc). It wasn’t worth the shareholding they’d take – although their advice while we were talking to them was fantastic.

      In short, I don’t need a competition, or money. I want advice, contacts and opportunities. And I don’t want to have to strap myself to a rocket ship to get them. Luckily, in New Zealand, I can get the things I want through our community.

      Will strap on the rocket ship only after we’ve “nailed it”. Am convinced once we’ve nailed it, the money will be easy enough to find in NZ. Perhaps we’d be better off investing more time in helping people “nail it”?

      1. Charity, basically. We’re currently pretty close with Otago Uni (and mostly comprised of Otago grads, but that’s a network thing more than anything…) as both spaces we have are within their facilites (Centre for Innovation in Dunedin and the Uni’s Auckland Centre on Queen St.), but this isn’t a bad thing as we have a pretty great relationship with them. Thanks to this a desk in both labs is currently free. Within both centres there’s scope to rent private offices when you start making money/outgrow the labs. There’s organisation afoot to widen our support pool as well, and hopefully once we get a win or two then the startups that have benefited will contribute back – that is up to their individual sense of charity/community though.

        There’s periodic discussion internally about what other options we could investigate to both fund ourselves and make more resources available to the founders, but in most cases the potential schemes are too complex/require too much admin, or are inferior to just getting out of the way and encouraging people to build the best businesses they can, in they best way they can, as quickly as they can.

      2. I think the interesting thing with the Distiller is that they are more founder centric. It is run by people who care, who are running startups themselves and it is being done cost effectively. The offices are hardly glamourous and as they said they try to foster an environment of people working together to produce better companies.

  9. Interesting and well written post.

    I would like to comment on the issue of Government grants, not whether they should exist, or how they are awarded, but whether the government should get a shareholding / become a creditor.

    In my view that would be a silly outcome.

    Who wants the government on their board? Really?

    And who wants to be saddled with more debt to the NZG?

    Let’s face it, that tax payer already has an interest in all Kiwi owned businesses, we pay taxes. These include PAYE, GST and corporate tax. The more profitable we get the more the NZG gets in return, they don’t need a shareholding.

    Where the government might miss out is where a company they have granted money to is sold. But the fix for that scenario is easy, capital gains tax.

    Finally, the government is the country’s largest procurer of goods and services and this has a massively distorting effect on our economy. We need to recognise that and realise that smart procurement could do away with the grant process, which is pretty much an “ambulance at the bottom of the cliff” approach to stimulating new business. But, until folks holding the purse strings recognise this fact the ambulance is all we have.

    1. I don’t think Rowan was suggesting that the government should take any role in the governance of the start-up. Rather, taking a silent shareholding, or sitting on the books as a creditor charging a nominal interest rate has a lot of merit. The original article and the linked articles cover the reasons for this well.

      I can attest to the benefits of having to sit down with dudes that have skin in the game regularly and measuring progress.

    2. Thanks for the comments Don. I agree with your advocacy on the procurement side. Has there been any progress on that front?

      In terms of treating grants as equity or (preferably) convertible debt, the purpose of this is not to have the government on the board of these companies, but rather to put a cost on the money they are providing up-front. When you do that you force people to think a little more before taking the money and it means there is an expectation that it will be repaid if things go well, over and above the tax obligation that all businesses have, start-up or otherwise.

      1. Progress on the procurement front?

        In a small way. After some NZRise engagement a couple of months ago, Wellington City Council agreed that “contribution to the Wellington economy” should be part of procurement evaluation. We are putting together an economic case for this to be applied by the rest of Government.

        On the other point, I still think the NZ tax payer gains from have more successful companies grow more quickly is enough of a gain to the taxpayer and economy without the govenment needing equity or debt. Maybe a windfall capital gains tax, backdated to 2006 would help strengthen my point :-)

        1. The government doesn’t *need* equity or debt. The benefit comes not from potential repayment but from founders applying a bit more rigour to their decision to take government funding assuming it’s not just provided as free money.

    3. Everyone pays tax, everyone gets to benefit from the health sector, roads etc. By contrast not everyone receives government grants. Seems to me that the corporations which receive outsized contributions from the state should make outsized contributions *to* the state. Even if you claw back some gains via CGT they’re still benefitting more than their neighbors. Something like convertible debt with a modest interest rate (maybe the same interest rate we charge students who emigrate) would make people think twice and let the tax payer have some, likely limited, upside.

      As for procurement, absolutely agree. That process is so broken that we have a strict “No Government RFP” policy.

      1. I guess a definition of “outsized contributions” might help. I doubt many start-ups or SMEs receive outsized grants.

        Multi-million dollar deals may be more subject to the regime Rowan and you are suggesting.

        And yes, how sad, but totally understandable, is a “no govt RFP” policy when they account for 30% to 40% of our GDP spend?

        1. Even a few thousand dollars in grants to a company for market development or research is outsized in my book. Compared to the grants which get given to the guy running a coffee shop or the family on the DPB it’s ‘real money’.

          As it stands that money is free, not ‘free’ but free, and I feel like it shouldn’t be.

  10. Thanks to Rowan for calling Bullshit on the whole “start-up” scene and whether or not it is succeeding at creating the value for New Zealand.

    Disclaimer: I have the experience of being a founder in a few start-ups (Australia/India/South Africa & NZ) and being an incubator resident. I have had some successes and a lot more of failures. I’ve also been a participant and a keen observer of the start-up scene to see successful exits, failures and implosions across the industry.

    I’ve noticed a few things about the start-ups which explains why incubators / competitions etc are popular.

    1) Attention: First and foremost, I think these organisations exist because they actually listen to (and not shoot down) would be start-ups and offer a quick way to get started. “Wow, someone told me that my idea _might_ work” and they get some advice and discount services. It makes it an easy option for a business to start-up. I question whether the goals of such an organisation that are supposed to help start-ups are aligned given they are working to a quota.

    2) Noise/Marketing: No surprise the start-ups are attracted to the “noise” and marketing of start-up events. Theses event offer to get some “free” advice or prizes which is enough to lure start-ups to participant. I’ve learnt that those who make the biggest noise aren’t actually the most knowledgable or useful. Very few start-ups look to qualify the people or organisations to see if they are really going to help them .

    3) Connections: I have found that a lot of start-ups are not very well connected. They are very insular working on their ideas and don’t know too much of who or what is going on around them. Very few take a look around and find who and what is going on unless they need to. Many of the start-ups I’ve interacted with recently in the last 12 months don’t who the the likes of Lance Wiggs, Ed Robinson, Rowan Simpson or Dave Ten Have are. We have a strong start-up community where everyone is easily approachable and happy to give advice, but you’d be surprised how many start-up don’t make the effort to connect.

    4) Advice: Support organisations offer lots of experts and advice. Again its important to qualify who is giving you the information and look at their recent track record to figure out if they are going to provide what you need. I have personally wasted a lot of time and money from talking to “experts”. I didn’t validate whether or not they are actually worthwhile. Start-ups (and myself included) are very stubborn and naive about getting and following advice. Often they don’t fully understand fully understand what they being told. In my own instance I have now was to naive to ask more questions about why the solution/advice was offered. I’ve observed (and made) plenty of mistakes that have been after good advice has been offered. Unfortunately, it seems we only learn when we get burned. We are not as a community learning collectively from our experiences and not make the same mistakes over and over.

  11. Hi Rowan. First of all, thank you for publicly acknowledging the state and approach being taken to the entrepreneurial ecosystem here in NZ. I agree with many of your points – if not most – and am grateful that you would utilise your position to raise the bar.

    I will take some time to read the comments here a little later, but I did want to address you understanding about startup weekend.

    I have been enrolled in many Startup Competitions in NZ; SPARK, imagine cup, BNZ challenge, and startup weekend. I’ll be honest, I can’t talk from a startup weekend global perspective, but from a local perspective startup weekend is doing exactly what you consider important.

    I attended the first Auckland Startup weekend as a participant. It was the first in NZ and was a wonderful experience. A whole load of fun and I met many great entrepreneurs I hadn’t found before. This was the major success for the first event. But this wasn’t enough.

    I then co-organized the second Auckland startup weekend with Jason Armishaw and Alan Froggatt. Here we took a much more proactive and targeted approach to the event with two goals: (1) rapid learning of lean startup methodology and customer validation, and (2) bring together the entrepreneurial ecosystem. I feel that we succeeded in this respect: educating over 60 entrepreneurs (many first timers) about the dire need to focus on customer development and validation. It was an amazing and fun event as well mind you ;) I do recommend that you talk to any participants themselves and enquire what they thought of the event and what they learned.

    The Wellington Startup weekend, just recently was much the same. I participated instead of Organising and from this perspective the event was superb. Our team of 7 people (2 of whom were ring-ins) is still together 2 months later with another team member – one of the top UX/UI people in NZ joining too. We have turned down investment offers to date for your very reason – we are not yet validated as a business. Our team is not the only one still operating, I have caught up with others too. This is great. Time will tell the true impact of these efforts.

    In summary, many competitions are focused on the wrong thing – favoritism and politics, business planning and pitching. Is is where startup weekend (In nz anyway) differs. It is all about education and validation. A first and pivotal step in a entrepreneurs journey in NZ.

    I realize you haven’t attended one yet, and do not hold this against you. In fact, I would love it if you came as a mentor to the next Startup Weekend in Christchurch. This is from 24-26th February. And,here, you can experience and judge what we do from the ground level.

    I look forward to seeing you with your sleeves rolled up and getting down and dirty with our future great entrepreneurs.

    You can get in touch with me at justin(at)justinryanscott.com or 0211037476.

    1. Thanks Justin.

      I spend all week with my sleeves rolled-up and working with startups. The weekend is a time to take a break! :-)

      As I said in the post above, by all accounts Startup Weekend is a fun event to be part of.

      I’d be interested to see some analysis of the impact it has in the medium/long term. How many people go on with the things that are started in a full time capacity and how many of these grow to be successful businesses?

      I’m just preparing another guest post now from somebody who got the spark for their venture from a competition, so I certainly don’t discount the potential completely.

      One question: what is the business model of Startup Weekend itself?

      1. Thanks Rowan. Sorry to hear you can’t make it. Let me know when you change your mind ;)

        Startup Weekend NZ is a NPO so the business model is really simple. We run on sponsorship and ticket sales to cover our major costs and supply prizes. We agree with your assessment of poor prizes and each time we run it they are getting better – Christchurch will have a decent was of cash prizes.

        The issue with a short event like sw is that it is early grass roots; suited to educating new entrepreneurs and opening the minds of not-yet-entrepreneurs. We therefore place a lot of value with partnering with local incubators and more permanent startup resources. This enables the journey for some teams to continue if they wish.

        In summary, sw is a feeder for some of the early stage incubators or seed programmes. With events like these we hope to have many more entrepreneurs with a better education and expectation of the life of an entrepreneur for NZ.

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