Stop talking product, NZX CEO tells IT start-ups

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Weldon says tech firms must emphasise their business case; cites Xero as example

By Stephen Bell | Wellington | Friday, 25 September, 2009

When start-up companies talk product to investors, instead of talking business, they’re asking them to buy into a dream, NZ Stock Exchange CEO Mark Weldon told an IT audience in Wellington recently.

Start-up and early-phase ICT companies searching for capital give potential investors little real information about their business, Weldon says.

“It is extraordinary how little [New Zealand] CEOs know about their business,” he told a meeting of the NZICT Group late last month. “That is why capital markets don’t fund them. They want information about the company. What they continue to get out of the ICT sector is information about the product.”

Product information, even if investors can understand it, is almost irrelevant to them when it comes to sinking money into the company, with a prospect of a return and in due course a profitable exit.

“If that continues, there will be no capital,” he says “You’re just asking them to buy a dream.”

Xero stands out as a company that has it right, Weldon says. It set up good links into the financial networks, through Cameron & Partners and First NZ Capital, two companies that neatly complemented each other’s skill-sets. Such networking is more important in New Zealand and Australia than it is in many overseas countries, where the banks are more active in that respect.

“Raising capital and doing it well are different,” says Weldon. “Xero has gone back to the market several times. Most companies think of capital raising as a one-off exercise. But if you want New Zealand to be more than an incubator for the rest of world, if you want to generate New Zealand companies that stick around, then you should aim to minimise the cost of capital over a period of time.

“The ones that struggle are those that fight for the last cent the first time.”

Xero takes care to keep its shareholders informed Weldon says. It sends out a monthly shareholders’ letter that tells them the single most important thing — how many new customers have been added that month.

One size does not fit all in the capital market, Weldon emphasises. He outlines several dimensions to consider when characterising what kind of company you’re running: size, phase of evolution, publicly or privately owned and whether the product is tangible or (as with most NZICT members) an intangible product whose potential for profit rises meteorically once most development costs are paid. Considering all those possible variables in combination there are several hundred types of company, each with its own distinctive needs and issues it should try to fight on the regulatory and policy front, he says.

The New Zealand capital market suffers from out of date securities legislation and a tax system that encourages investment in non-productive assets like housing. “Your companies are competing with apartments in [upmarket areas like Wellington’s] Oriental Bay.”

Weldon is involved in a number of working parties on reform of such laws and regulations and he actively solicited ideas from the NZICT members. “The next session of the tax policy working group is on September 16 and it will be considering corporate tax. If you have constructive ideas on that front, get them to me,” he says.

Asked to comment on government’s role in stimulating the industry, Weldon points to the significance of government purchasing power and the need for reform of procurement policies – a change already underway. “Some of the default settings around procurement have bias towards large established companies because the people who make decisions are reasonably risk-averse, he says. “If this becomes systemic, you’re going to lock out product from local suppliers and innovators.”

Government can affect a company’s reputation powerfully just by becoming a customer, Weldon says. It shouldn’t be necessary to mandate that a certain proportion of government procurement be from local companies, he said answering a question. If it is an otherwise equal decision and government has an eye to its tax-base, it should logically choose the local supplier, he said.