Is NZ a startup nation?

New Zealand is a nation forged by dreamers and doers, a country with the spirit of exploration and outward expansion woven into the fabric of its existence. From the innovative Polynesian voyagers who traversed vast ocean expanses guided by the stars and their intimate understanding of the natural world, to the European settlers who faced challenges establishing a life in an unfamiliar land – New Zealand has always been home to a people who possess curiosity, drive and determination.

That cultural identity has sparked the emergence of a startup ecosystem in New Zealand, and one that has the potential to shape the country’s future.

If, that is, we nurture it.

With signs of a weakening economy, and a real danger we’ll slip lower in global economic rankings if something doesn’t change, many have pointed to the potential of New Zealand’s technology sector to boost our overall economic fortunes.

After all, it’s 2023. While New Zealand has built a strong nation by relying on top exports of dairy products, meat and pine, technology is emerging as the next top sector for growth, with $11.5 billion in revenue in 2022, per TIN data. That continued growth in the future will be fuelled by the startups of today.

“We want to become a startup and innovation economy because it’s going to give us the ability to transition from primary industry into an industry that’s super innovation focused, where we’ll have much higher-value jobs and much less of a negative impact on the planet,” says Suse Reynolds, executive director of the Angel Association New Zealand and a member of the Government-appointed Startup Advisors Council. 

“There’s no other way that we’re going to be able to continue to lead on the world stage.”

The question is, can New Zealand become a startup nation? And what does that even mean?

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‍The Israel comparison

Say ‘startup nation’, and many people think of Israel. In a lot of ways, Israel and New Zealand are similar. They’re both small countries with a reputation for agricultural excellence and innovation, diverse populations, and strong educational systems. But there are also key differences.

Over the past decade, Israel’s high-tech exports have doubled. The sector was responsible for 48.3 percent of all Israeli exports in 2022, totalling $71 billion. According to Startup Genome, Tel Aviv is ranked as having the world’s fifth top startup ecosystem.

Early government initiatives in the 1990s like Yozma – a programme of government funding venture capital funds – helped attract private sector investment and stimulate the growth of its high-tech and startup ecosystem.

New Zealand has established similar initiatives – most recently Elevate, a $300 million fund-of-funds that has, to date, committed more than $220 million into nine VC funds. And over the past couple years, the government introduced a 15 percent research and development tax incentive.

Much of Israel’s innovation has also come off the back of military service, which is compulsory for all Jewish citizens. Many veterans have gone on to found startups, particularly in cybersecurity and intelligence sectors.

New Zealand doesn’t have the same military culture, but it does have a culture of agriculture that sets us apart from many other nations. Kiwi kids who grow up on farms learn the importance of hard work, ingenuity and grit – a knowledge base that can be transferred to the tech sector. The government last week announced it was injecting a further $100 million into the NZ Venture Capital Fund to invest in agritech businesses, including through its joint investment fund with Finistere Ventures developed through the agritech Industry Transformation Plan (ITP).

Israel has also leaned on its diaspora connections, particularly in the US, to help connect Israeli startups with investors, mentors and markets abroad. It is estimated that around 1 million Kiwis are living abroad right now, with many having skills and a willingness to help their home country.

Finally, Israel has succeeded in turning cities like Tel Aviv, Be’ersheba and Herzliya into innovation hubs, with direct university-to-startup pipelines. New Zealand, with its host of world-class engineering universities, has only scratched the surface of what’s possible here. While most Kiwi startups are based out of Auckland, which has the most mature ecosystem, Wellington or Christchurch, there’s still much work to be done turning those cities into true innovation hubs.

What can we do to improve? What founders want to see?

The Ministry of Business, Innovation and Employment recently published its Upstart Nation report that lays out a range of suggestions to help support New Zealand’s nascent startup ecosystem, from better tax incentives to improved connectivity.

Caffeine spoke to the report’s authors, including Reynolds, and a handful of startup founders and investors to hear what they think New Zealand is doing well, and where we can improve.

Living the New Zealand dream means buying a house. And maybe also a bach. And then probably another house. Why? Because property ownership is one of the few ways average middle class Kiwis can accrue generational wealth.

And the tax system, which lacks a capital gains tax, is set up to encourage property buying.

But there’s a strong narrative today that it’s never been more difficult to buy a house in New Zealand. So why not encourage a new asset class?

“We need tax incentives and mechanisms to make it more appealing to innovate and launch a business than it is to buy property,” says Connor Archbold, founder and CEO of brand insights startup Tracksuit. “That would create a country that looks towards growth and export instead of just property assets.”

One suggestion offered by many startups and experts we spoke to is to advance a more comprehensive employee share option programme (ESOP). 

Both Upstart Nation and policy guidelines set out by Blackbird, GD1 and Pacific Channel, outline a recommendation to shift the taxable event (when an employee is taxed for their shares in a company) from the time of exercise of an option (when the employee buys options) to when the underlying share is sold (such as when the company goes public or is acquired).

Startup founders typically give employees ESOPs to offset the fact that they can’t pay market rates for salaries, which is particularly true in the early stage. The current tax regime sees options as income, and creates a system where employees need to pay upfront, often out of personal savings, to make the most of their share options.

“It is so important to me that my staff who are helping build the company get an ownership stake in the company that they’re building, but to have to pay tax on the options when they get the options initially is complicated for two reasons,” says Janine Grainger, co-founder and CEO of crypto exchange Easy Crypto. “One, employees don’t necessarily have that kind of money [before the company has a liquidity event]. And two, you have to value the company and that can create issues as well.”

The tax also makes it difficult to attract talent in New Zealand.

“Let’s say you’re one of the best and brightest in New Zealand, and you have a choice of going to work in an investment bank and earning $500,000 cash, or you can join a startup and earn $100,000 plus $400,000 in equity,” says Archbold. “That $500,000 cash comes into your pocket straightaway, and you can go and buy a house and pay that mortgage, rather than wait for that $400,000 of equity and be taxed on it right away.”

Archbold says rather than taxing employees on that equity right away, the government should reward employees who take a risk working at an early-stage startup that has the potential to create jobs.  

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‍Double down on government funding

Upstart Nation recommended the government invest another $500 million in the Elevate fund over the next 10 years.

“We are still relatively poor as a nation, so we don’t have the depths of wealth or the breadth of experience to be able to leverage and amplify a lot of the opportunities that exist in Kiwi startups, particularly in deeptech,” says Reynolds. “Those companies that are solving the world’s biggest problems – climate change, health, feeding the world – they take tens of millions of dollars worth of investment. Helping people understand what opportunities are here requires the government to reflect that confidence in the first instance and be a part of the early investment.”

Reynolds notes a caveat that government investment doesn’t have to be a forever thing (although the US government, by comparison, invests millions into startups every year); once the ecosystem is of a size, scale and maturity to attract the levels of capital it needs, there will be less need for government capital, she says.

‍Some have argued against increasing government investment, claiming that there’s plenty of venture capital in the world – Kiwi founders just need to go abroad and take it. But most seed-stage funding comes from local investors, not international funds, and the government can help boost that early-stage funding.

“We could take a very purist approach and have no government investment in startups, but that would put our startups on the backfoot against ecosystems that we're competing with, not only across the ditch in Australia, but in Singapore and the UK and Europe where startups are getting loads of government support and investment,” says Reynolds.

Archbold says he’d also like to see more government grants helping startups when they get to the point of international scale, which is where a lot of startups tend to stumble.

“Going into the US or China takes twice as long and twice the money,” says Archbold. “So if you write a model that says we need $5 million, and investors give you $5 million and then you run out halfway through the job, you might benefit from having extra grant money from NZTE or Callaghan to support you, and your investors will benefit, as well.”

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Cultivate talent at home

Giving startups enough capital is crucial for building successful teams and hiring top talent.

“We try so hard to build our engineering team here in New Zealand, but we find there’s a lack of experience and the interest from some engineers to work at a startup is quite small,” says Alliv Samson, co-founder and chief growth officer at edtech startup Kami. “A lot of them, we find, would rather move overseas to go work in Australia at Atlassian or Canva, because they’re bigger companies and the salaries will be more competitive.”

Funding can help with one piece of the puzzle, but cultivating talent in New Zealand to work at all levels of a startup is also vital. New Zealand suffers from a lack of software development and deeptech experts, so creating pathways in early education and encouraging kids to code is vital, she says.

But at a less-skilled level, Samson says Kami even has trouble finding undergrads interested in product marketing and development – roles that are specific to the tech sector but that aren’t well advertised in universities.

Acquiring talent from overseas, particularly executives with experience scaling, is also essential for New Zealand’s startup ecosystem growth. Offering good salaries and comprehensive ESOPs might attract some, but there are roadblocks that will hinder the free flow of talent.

Upstart Nation, along with several industry players we spoke to, recommend refining immigration settings to ensure they’re fit for purpose and maximised to attract top talent. On the one hand, that could look like making it easier for people with relevant startup skills or potential founders to migrate to New Zealand through dedicated work visas.

Additionally, the government could take a second look at its Foreign Investment Fund rules. Today, people from the US or returning Kiwi expats get taxed in each country on gains from investments held outside New Zealand, forcing many of them to reconsider bringing their skill sets and international networks to Aotearoa.

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‍Be a sandbox nation

For years, New Zealand has been a beta nation for big tech companies to test products before launching internationally. EFTPOS machines were famously tested here before expanding globally, and Google tested its Project Loon initiative here to bring internet access to remote areas using high-altitude balloons.

Founders say we should lean into and own the test nation identity and create regulatory sandboxes for emerging technology.

Cryptocurrency, blockchain and fintech could be a great place to start, says Grainger, noting the lack of clear regulation in this space.  

“But more broadly, we can look at how and where New Zealand can build regulatory sandboxes to encourage people to innovate without worrying that they’re going to fall afoul of the law,” she says. “Getting your legal and regulatory side right is a huge burden for startups … So to encourage that would be really huge and would help us attract good talent from overseas, as well.”

Grainger goes on to note that New Zealand, as a small country with a single layer of accessible government, has all the building blocks to make regulatory sandboxes happen.

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Celebrate our wins

Tally poppy syndrome is on its way out, but its roots are still deeply entrenched. At least, that’s what Will Barker, founder of e-waste recycling company Mint Innovation says.

“One thing that really disappoints me about New Zealand is we are not great at celebrating our winners, and we’re very good at picking on losers,” he says. “That needs to change in order for us to become a true startup nation.”

There are going to be a lot of failures, but the point is not that people failed; the point is that they took a risk and tried to solve important problems, he says.

Celebrating our wins not only helps the community thrive, but will demonstrate to other Kiwis the value of startups and startup investment.