Silicon Valley-based New Zealander Jason Neal believes he can recreate the essence of California’s IT boom in miniature through a technology park in Queenstown, if the government revs up its ideas on tax breaks and R&D write-offs. Matt Berger, IDG News Service’s San Francisco correspondent finds out if Neal is for real.
Representatives from cities and countries across the world have made the pilgrimage to California’s Silicon Valley to witness the phenomenon that gave rise to the technology industry here. Many have returned home to recreate that success with local innovations and investors and jump-started a similar new economy culture.
Unfortunately, with success comes failure, and the recent economic downturn in the technology industry has brought its fair share of failure to Silicon Valley, which could, some say, just as easily be recreated elsewhere.
That being said, 32-year-old entrepreneur Jason Neal — whose US-based ASP (application service provider) software startup GHS Global avoided many of the publicised failures in the industry — believes he can recreate Silicon Valley’s startup successes again in his hometown of Queenstown, New Zealand.
“It actually isn’t as difficult as one might think,” Neal said, sipping on a glass of ice water at a terrace restaurant in his new hometown of Sausalito, California, a quiet upscale hamlet located across the bay from the tall skyline of San Francisco.
He has yet to prove that true.
Starting start-up culture
Inspired by the once-heralded internet incubator business model, such as Bill Gross’ Idealab and Los Angeles-based eCompanies, Neal is of the belief that building a breeding ground for new business — where venture capital and research tools are just as accessible as good food and health facilities — is exactly what New Zealand needs to ignite a start-up culture.
His idea is driven mainly by personal experience, or more accurately, lack of personal experience. When attempting to launch a startup in New Zealand five years ago he found little success.
After returning to the region from several years working in the hotel industry in Europe and North America, Neal began building GHS Global — a hosted software company that allows customers to receive and run computer reservation software over the internet.
“Venture capital does not exist in New Zealand,” he says. “The average investment there in the past couple of years is about $US1 million. You can’t do anything with that; you cannot compete globally.”
Neal argues New Zealand lacks the resources that he needed to turn his two-person company into a global player. He ended up taking his idea to San Francisco and doing just that, now serving more than 60 customers worldwide who subscribe to the software service.
Started with $US2 million in private financing, GHS Global has become a fast growing independent software vendor, and is profitable. He plans to grow the company by another notch by year’s end when GHS Global merges with another US industry player. But it operates in the shade of much larger industry, which includes multimillion-dollar companies such as Pegasus Solutions and Micros Systems, whose software customers include Marriott International and the Hyatt hotel chain.
“Once I started getting things going with GHS Global, and I started to see how other companies down there [New Zealand] were struggling. That’s where this whole technology park thing came about,” says Neal, who talks with a zeal similar to many of the young new economy executives in San Francisco. “I thought, there’s got to be an easier way to do this.”
On a sunny Friday afternoon, dressed neatly in dark sunglasses and a suit and tie, Neal explained a more polished version of that earlier idea. It begins with the construction of a technology research park on an 8100 square-metre waterfront campus, just outside of Queenstown. Estimated to cost about $7 million to $10 million to start, the facility will be dotted with good restaurants, health facilities and wired research offices for as many as 12 start-ups working in the industries of hosted software, telecommunications and wireless technology.
Neal is also planning a venture capital fund to accompany that, raised by investors in the US and managed there by a handpicked team of seasoned executives.
“It is going to provide everything to get that company off the ground, and guide it to a successful IPO [initial public offering], acquisition or merger,” he says.
The concept of this all-in-one breeding ground for new business has its upside, says William Miller, a professor at Stanford University’s Business School and co-author of The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship. Miller has provided information to international entrepreneurs for years, offering anecdotal advice on how to build successful ventures outside the US in the style of Silicon Valley.
“I know that they do have some very fine universities and institutions in New Zealand, which is a good start,” Miller says, whose book outlines the basic contributors to building a successful business culture such as a technology park. “But one thing to remember is that these new ventures have to compete on a global scale.
“Something that is often missing are the services and infrastructure that can support these regions,” he says. “Such things as specialised legal services, accounting, venture capital. That’s lacking in many countries and it puts them at a disadvantage.”
Neal’s answer to that is to make use of his US ties to feed and manage an operation with 50 initial employees in New Zealand. It could also involve enlisting the help of major vendors such as Oracle, Neal says, which has gained international praise with its ASP software model.
But actually launching a technology business park, compiling a $US70 million venture capital fund to feed technology companies that take root there and making it all lucrative to US investors is turning out to be harder than Neal expected.
Four years after coming up with the idea, Neal is still at the bargaining table trying to convince his financial backers the business park will foster a return on investment. A much tougher effort — he is trying to convince the New Zealand government that lowering its corporate tax will lure offshore investors.
Pressure on NZ government
With business executives and a world economy putting pressure on policy makers, the government recently implemented a tax incentive for R&D. Under the new policy businesses can deduct 100% of the costs of R&D once a product from those efforts goes to market.
New Zealand’s latest efforts are a welcome step for technology startups, Neal says, but he says it is still not enough to entice major investors.
“You can more or less write off research and development costs, which is a good incentive,” he says. “But from an investor’s point of view it’s not good enough. The reason being, an investor makes money after the research and development phase.”
For tax credits to appeal to his US investors, Neal says, the government support has to come in the form of lowering the country’s corporate tax, which currently stands at 36%. A number of smaller countries around the world attempting to lure US technology investors, such as Ireland and Singapore, offer corporate tax rates as low as 10%.
“If New Zealand brought its corporate tax rate down to something that is more competitive, I could link the government with people over here that would be willing to pump a lot of money into their economy,” Neal says.
So far, New Zealand politicians have been less than accommodating. And the budding businessman will offer few details to back up his lofty claim, even if the government does give in.
“Because it’s in its early stages, it’s very hard to pinpoint who is involved until it’s all signed, sealed and delivered,” Neal notes.
Other US businesses have shown an interest in New Zealand, which could translate into sealed deals for Neal.
Multinational companies, including Microsoft and Oracle, have growing business initiatives in New Zealand and Australia, and global venture capital funds that could target the region have reached record highs.
Neal notes that one venture capital firm has nearly committed to back his efforts with an investment from a $US4 billion venture fund, though he would not comment which firm it is. There are few venture capital firms, however, that come near even fitting the description. One is US-based Warburg Pincus Asset Management, whose $US5 billion global venture fund is the largest of its kind. The other is the venture arm of the struggling business incubator CMGI, a $US3 billion fund CMGI@Ventures.
But the question remains whether Neal’s plans for a first class research and development park will ever break ground in Queenstown. If government doesn’t ease its tax policies, he has made claims that he could take the idea to Australia, where tax incentives are more encouraging to investors.
But he is hoping it doesn’t come to that.
“My intention is to not just build this facility but help establish a VC industry and help establish an IT industry in New Zealand,” Neal says.
“And I’ll do it one way or another.”