The innovation gap: What is holding us back?

I recently returned from a trip to San Francisco where I joined a dozen Kiwi cleantech startups in meetings at Stanford, Berkeley, with VCs and others in the ecosystem, and a visit to Lawrence Berkeley Lab (LBL), one of the premier United States National Labs. It highlighted for me the differences between the US and New Zealand in the way we think about innovation.

Since moving to New Zealand I’ve been impressed by the quality of people, ideas and innovation here. On the other hand I’ve been a bit surprised that we don’t have more successful high-growth startups. What is holding us back?

There is a combination of factors that create a drag on the pace of innovation. A few of these are:

• Lack of growth mindset and insufficient ambition
• Attachment of founders to strong personal narrative; lack of a ‘co-opetition’ mentality
• Misplaced nationalism; protectionism 
• Approach to commercialisation in universities and government labs
• Tax policies regarding losses and the concomitant mindset around ‘failure’

Let’s look at these one at a time.

There are several things that can inhibit ambition among Kiwi founders. Almost every person I speak with here invokes ‘tall poppy syndrome’ as one factor. The tendency to disparage and cut down those who succeed and achieve more than others can cause people to keep their heads down and not draw attention to their success. This also often reduces their success in the market where attention is needed to succeed. It is a vicious circle. I find that I frequently have to explain to young Kiwi entrepreneurs that boldness, ambition and pride in one’s success is not the opposite of humility. One can be bold, ambitious and proud while also being humble.

Also, growing up in a small country with limited resources leads to the famous Kiwi frugality (a plus) but also leads to lowered expectations common in scarcity economies (a negative). Helping people understand how to evolve their thinking from the scarcity of New Zealand (limited capital, few customers, shortage of talent etc.) to an abundance mindset (unlimited capital for good ideas, massive markets, abundant talent) as they move off the ‘island’ is critical.

Collaboration is key

The second observation is that the fiercely independent spirit ingrained in Kiwi culture, coupled with a strong sense of ownership over their ventures, can sometimes hinder the willingness to engage in collaborative efforts with perceived competitors. 

In 1996, Hillary Clinton published a book titled 'It Takes a Village' that built on the African proverb that ‘it takes a village to raise a child’.  Well, it does take a village to create a successful startup. The Kiwi founders’ tendency toward self-reliance can hold them back from seeking help and collaboration and instead viewing every other player as a competitor. I often tell Kiwi entrepreneurs that all the competitors are across the ocean and they should seek collaborators among other parts of NZ Inc.

‍

Misplaced nationalism

New Zealanders are justly proud of their nation and this is especially manifest in sport. Rugby and sailing are two areas where the small nation dominates the global stage. This pride and nationalism sometimes carries over to the commercial realm. When a Kiwi company has a successful exit through sale to a global multinational or even goes public on the NASDAQ I have heard people say, 'We’ve lost another one'.  

To me this is a massive win. This idea that containing growth by only building a company on New Zealand soil is limiting. Today the majority of iconic American companies are majority owned by non-American investors, have more employees outside the US, and make more revenue offshore than onshore. Yet they are still viewed as American successes. The US is the largest single technology market in the world while New Zealand is tiny by comparison. Why would anyone limit their company’s opportunity by trying to keep their company only in New Zealand? Fonterra and other primary industry businesses are not good examples as they are tied to the land by the source of their business, rather like mineral-based businesses in Australia and the Middle East.

Commercialisation gap

The fourth issue is the way that New Zealand universities and CRIs approach commercialisation. More than 30 years ago, when I moved to Silicon Valley one often heard a lament about the ‘valley of death’; the chasm between early R&D and proof of concept and initial commercial success. Today that is much less of a topic because US universities and national labs have embraced the role of supporting researchers to a later stage higher Technical Readiness Level (TRL) than they previously thought was their responsibility.  

Similar New Zealand institutions still view their role as ending at TRL 3 or 4 (proof of concept), which leaves a gap before commercial investors are willing to invest (typically at TRL 5-6 technology demonstration).  This gap needs to be addressed.

Tax incentives

The final issue is where I think government can really help. Through some key policy changes New Zealand can become a much more dynamic innovation economy.  Current tax policy does not allow investors who risk capital in adventurous new businesses to deduct their losses against other tax gains. In the US this provides an incentive for risk taking by investors.  

Another challenging area is the taxation on Employee Share Ownership Plans (ESOPs). As I understand it an employee can incur a tax bill on unrealised gain when they exercise an option and may still be unable to sell shares and realise a ‘real’ gain’. This creates a real barrier to the use of stock and options for compensation and motivation of startup employees.  

Many people complain about the shortage of technical talent yet I also hear from many highly skilled foreigners who want to come to work in New Zealand but the current skilled worker visa process is a barrier.  Imagine if one could apply for a two-year working residence visa based on having received an advanced degree in a needed field and demonstrating three to five years of work experience in the field.  One could then come to New Zealand and seek employment with no extra overhead to the employer.  The downside risk seems minimal.  

Finally, I believe that a change to the tax regulations could be made that would provide economic benefit to foreign companies that acquire Kiwi startups and keep and grow the operations in New Zealand. Many might say that this is forgoing tax which New Zealand should gain but in reality the current system encourages foreign companies to shut down and move the Kiwi operations meaning that New Zealand not only loses the taxes on the company, but also the jobs for Kiwi workers.

I see New Zealand as ripe for dramatic improvement in the startup economy which can bring major benefit to the nation. More high-quality jobs for Kiwis, economic growth across the country, better connection to large capital investors, while maintaining New Zealand’s uniqueness.  

There are some things that need to happen to unleash this. Let’s all get to work on them.