Accelerating New Zealand’s innovation and entrepreneurial performance – lessons from Israel, and insights for New Zealand

Posting from Simon Moutter, Managing Director of Spark Ltd

Firstly, thanks to TUANZ and their members for hearing out the observations and conclusions from the recent Israel mission at the TUANZ event held on August 23rd.

I do genuinely hope that the work of the delegation is a constructive addition to the ongoing discussion about how to secure a better future for New Zealand, and I know that the tech industry is going to be a key player in that future.

As promised, I wanted to respond to the many questions that came through the Sli.Do app that was used at the event, as we did not have enough time to answer them on the night.

Some very insightful questions, some rather confronting questions, and some perhaps less serious questions came through. I do want to point out that the vast majority of questions came through as ‘anonymous’. I appreciate it isn’t always easy to stick your neck out and put your name out there publicly – and I also recognise that the app may not have made it so easy to do so – but I’d like to think that these are serious issues that we should all be prepared to be open about.

The main thing I’d note is that many of the answers to the questions are in the full post-Mission report which has been published on the Trans-Tasman Business Circle website here so I’d encourage you to read that if possible.

I’ll try and cover most of the questions over the course of this blog post that Craig has kindly agreed to host. For the sake of readability I have grouped the questions where possible and answered them as one.

How does Spark work with and support NZ's most visionary entrepreneurs?

We work with a number of NZ entrepreneurs. Directly through our Spark Ventures team, which has partnered in ventures alongside the likes of Sir Ray Avery as well as worked with key innovators in developing new initiatives such as Qrious. We also financially support OMG Tech! co-founded by Vaughan Rowsell and Michelle Dickinson to help address STEM skills shortages in NZ and help get a bigger and more diverse group of NZ kids interested in tech. We also support a range of innovation initiatives – CoLab with AUT, Lightning Lab, and our own Spark Lab. We have another exciting initiative coming soon to help some exciting young NZ start-ups – watch this space.   

Realising you've yet to get into the presentation, what has the Israeli government done to support the sector? How are Israeli govt architecting the start-up Eco- system?

In my view the Government role in Israel is more as architect of the sector, rather than funder. That said, they have recognised that Government funding and policy is an important part of the architecture, particularly when getting the system set up – so they have used matching funding and tax incentives strategically to kick things off and get momentum where it’s needed, and then they tend to step back and let the private capital and expertise step in.

How do they approach skill development within the sector? Any secret sauce going on in the schools there?

Skill development is given a significant boost by the military service – it’s a foundation for skill and people network development that we cannot replicate. But they also address entrepreneurial skill development as a core part of their curriculum from year 10 onwards. Michelle Dickinson from the delegation will be having a closer look at this and feeding into the right channels in Education.

Did the delegate group comprise only middle aged white males? Why haven't you asked the most popular question around the group's composition? It would be great to have the diversity question addressed. Important for innovation and fresh thinking.

There is a full list of all the delegates in the back of the report (and no, not all were white males). As well as the 55 who went, many more New Zealanders were invited (around 350 in total) but declined for various reasons – perhaps because it was a significant time and cost commitment. Certainly at the time the Trans-Tasman Business Circle put their invite list together, there was a strong focus on business, industry, academia, government, investors, accelerators and incubators. While it was a large delegation, not everyone who could or should have gone was able to make it.

But I recognise your main point about the lack of leadership and tech industry diversity in NZ and I agree it’s a significant issue we all have to address. I’m personally very focused on it at Spark as are many other CEO’s who were on the Mission who are – like me - founding members of the Champions for Change initiative. This year we’ve already appointed three new female directors or leadership team members, and we’re rapidly bringing more gender and ethnic diversity through into our leadership ranks. We’re a very different company demographically than we were 5 years ago. And diversity in tech is also a key focus of OMG Tech, which we are proud to support, as well as the Manaiakalani Trust, who we are the principal funder of via the Spark Foundation. That said, there is a lot more to be done on diversity and inclusion within NZ and within our industry.

What will it take to get New Zealand up to the same level of entrepreneurship as Israel?

I don’t think there is a magic bullet – I think its years of effort on a range of fronts. We’ve tried to capture what we think it will take in the full report – please have a read.

There is an audience down the camera that needs eye contact too!

Apologies for that – it’s the first time I’ve used that sort of format, will remember for next time!

Can you please explain the GDP per capita vs R&D graph? It looks the same GDP per capita despite much higher R&D

That’s true, although all the available data suggests Israel was coming off a lower GDP per capita than NZ and is rapidly overtaking us.

Can you give us a specific example of innovation you personally experienced while in Israel that currently doesn't exist in NZ?

To be honest, we weren’t blown away by any of the innovation we saw, what we were blown away by was the success rate at commercialising good ideas. There were many instances of us believing that NZ tech was better – just not as well commercialised.

Why do you think there is such good access to capital in Israel?  Most investors in NZ favour houses.  Are NZ investors are more risk averse in terms of start-up investment? If you fail here you are remembered for life whilst in USA or maybe Israel you start again Are New Zealand institutions - especially financial institutions and other sources of capital - simply more risk-averse (fear of failure)?

There is no doubt that foreign capital has played a massive role there – one figure we were told is that 85% of capital in the system is from FDI. They have over 300 multi-national R&D centres there, and the main reason they are there is they are attracted to the scale of opportunity and capability. And it’s not just from the US – increasingly there is a lot of Asian FDI in Israel. The domestic investor appetite for risk and reward is very different there too – as I said on Tuesday night there is a deep seated fear of risk in NZ investing that simply isn’t there in Israel. My guess is that some of that is driven by painful history, and some of it by the attractiveness of ‘safe’ investments. And certainly ‘failure’ is more of a dirty word in NZ than it is in Israel – maybe we should call it ‘learning’ rather than ‘failing’. We were told often that a failed entrepreneur in Israel is more likely to get backing in Israel than a new entrepreneur – because the odds of them succeeding are higher.

Simon. You are pushing innovation and technology, yet you are reading off paper?

I’m no technophobe – but I do tend to like to move a lot when I talk to groups, so paper works best for me in terms of speaking notes

Given the scale of debt in NZ both personal and corporate, how do you foresee NZ raising the capital to support lifting R&D closer to the levels of Israel?

That’s a good question. Two of the big missing areas in NZ are big business and FDI. Our hunch is that we need more domestic scale and capital in order to attract FDI – they want to see local skin in the game before committing - and we won’t be able to get to the same levels of Israel on our own. This is why I’m personally focusing on solving for how big business can make more of a contribution to R&D investment.

Do you think NZ house prices are limiting investment in NZ innovative companies?

Not sure if its house prices per se, but certainly it would be great if investing in innovative NZ companies were easier and more attractive for Mums and Dads – but I think we need to get the big Kiwisaver funds more into the game first.

Stronger common purpose can stray into nationalistic fervour. How do we emulate this higher purpose while valuing diversity and local connections?

I don’t have the answers to this one – NZ has a huge amount of things in its favour, and I’m optimistic that we can share a collective burning passion for unleashing our future without straying into nationalistic fervour. I think it’s an attitude thing – working together rather than competing against each other.

Was there any engagement in the topic of Palestine and whether deleting indigenous cultures affects business innovation?

Good question. While we did not meet directly with any Palestinian organisations we heard a lot about the geo-political context of the region, and we also heard about the growing concerns in Israel about the divide between those participating in the tech economy and those who aren’t, most conspicuously Israeli based Arabs and Orthodox Jews. We met several organisations and entrepreneurs who were actively working to address this divide – most notably Chemi Peres (son of Shimon Peres) who runs the Shimon Peres centre for peace and who is involved in Pitango one of the largest VC funds in Israel. We also saw first-hand how many of the schools actively address this divide by forcing diverse groups together when teaching business/entrepreneurialism.

You're saying companies should go global, but Spark has refocused its business on NZ. Can you explain through difference?

Very fair question. We have very publicly refocused our business on one single market after some ‘learnings’ in other countries. It’s worked for us in terms of returning our business to growth after a decade of decline. But we also see ourselves as an enabler for globally ambitious NZ businesses – the digital services we provide mean there is no reason why a young NZ business can’t sell to the world.

Following this Israel visit and confirming a new CEO what are we likely to see next out of Spark Ventures?

I think I answered this on the night, but essentially Ed Hyde joins Spark Ventures with a very similar mandate to his predecessor Rod Snodgrass – look at emerging technologies and see where they might take Spark.

Accepting risk - NZ has a chequered history of large corporations taking their shareholders to the cleaners - how do we get past this?

I think you must be referring to the share-market crash of 1987 and the Finance Company failures out of the GFC? There is no doubt in my mind that these events have impacted NZ retail investor behaviour, and of course there are attractive investment alternatives in the form of property. But I’d love to see greater investment literacy being taught in our schools – equities have actually been a great investment over the last decade, and many of the big stocks such as Spark, Auckland Airport and the power companies have offered attractive and low-risk yields.

What's the biggest thing spark will do to help the start-up ecosystem? Your presentation informative but depressing for NZ! What are you most passionate about doing to change things? Will you be making any changes to Spark's R&D investment in high-risk initiatives/businesses as a result of the Israel learnings?

If we can help address the big gap of corporate investment in R&D I think that is perhaps the biggest difference we can make. Its early days but I have a mandate from my Board to at least get started on the discussion about what a corporate VC fund might look like.

Thoughts on possible reintroduction of tax credits for R/D?

I’d be open to it – but at the same time I’d reiterate that I don’t see this as a Government-led solution – they obviously have a role to play, but the private sector needs to step up.

NZ's digital companies had a market cap of 8.25bn just prior to the takeover of Diligent for a staggering 900m. Aren't you underestimating digital's success?

I don’t think so. It’s true that our tech industry has been growing well – but the main point I wanted to make is that it’s a global race – no matter how fast we are growing our digital sector, if we aren’t growing faster than our main competitors we are going backwards. The disruptive and exponential nature of today’s digital businesses means that the impact on NZ can be rapid – both good and bad!

How many large companies in NZ that in theory could contribute to R&D are actually headquartered overseas and direct spend to their local HQ economy?

It’s an issue for sure. This is why I have been very public about multi-national tax avoidance and the need for companies that operate in NZ to make a contribution here.

Can you tell us more about Israel’s incentive model?

Ray Thomson who was on the Mission obtained some great information from the Israel Innovation Authority that details their various tax incentives - I’d start with Ray.

Do we need a shift in our education system from being heavily theory based to something that pushes more on site practical experience? How did we do this?

I’m no expert on education, but clearly we need to boost the number of kids getting into STEM education, and we need to get better linkages between the skills being taught and the skills our digital businesses are going to need over the next 10 years. A good example is our own data analytics business Qrious. There literally is not enough data scientists in NZ to meet the needs of our big data businesses – so we are having to bring some of those skills in from offshore

What IP will Spark be releasing? IP in NZ seems locked up by funders wanting to get a return so they can recycle back to more research rather than commercialisation. How do we break out of this?

We’ll certainly be having a look at what we have and whether or not there is any potential commercial application for it outside of Spark. But the broader issue of ‘warehoused’ IP is a tough one – I think it will take a serious look at offshore commercialisation opportunities first, in order to deal upfront with the concerns about competitive risk to the IP holders.

Has this presentation been given to other NZ businesses and politicians?

I’ve delivered this presentation a few times now, in Auckland and Wellington to a range of different private and public sector audiences

You mentioned the Commercialisation boiler plate used by the Israeli ecosystem. Can you please make it available?

Wendy Kerr from Auckland University is looking at this action point

Great ideas, what's the action plan moving forwards, how will delegates continue to work together?

There’s more detail of the action plan in the full report, but its early days yet. I know that there is a lot of appetite to keep the momentum going.

The immediate challenge is likely to be getting people of Netflix and smoking dope - the next generation is one we can inspire but what about everyone else?

I’m an optimist!

This a long-term journey requiring a long-term commitment. Are you - we! - up for it?

Absolutely – I’m also upfront about the fact that a successful New Zealand is good for society and good for the economy, which is why Spark is so committed to this. While we won’t all agree on everything as a nation I think we all share a common desire to see our country do well. So yes, I’m for it.

Is the difference between NZ and other country private sector investment in R&D basically tax breaks versus government grants

I think Government policy is a small factor, but the bigger issues are around scale, capability and appetite for risk.

Where should the money come from in big corporates to fund research and development?

Most of the big yield stocks in NZ have fairly strong balance sheets – as long as we can make a strong case for the investment opportunity that early/expansion stage represents, I think it will be plausible for them to participate. Whether or not they will is up to them.

What opportunities do you see for Christchurch and their evolving early stage ecosystem

I’ve heard a lot of good things about EPIC down in Christchurch – and the co-location model is definitely proving successful at other places like Biz Dojo and the Grid. NZ needs the opposite of fragmentation – scale and mass, and certainly Christchurch seems to be doing a good job of that in the innovation space.

To what extent is Israel's success due to its 'special' relationship with the US, as Ireland in the 90s succeeded due to EC links/aid?

No doubt it’s a big factor. But most of the FDI in Israel is in the form of the 300+ multi-national R&D centres from all over the world, and they are attracted to the opportunity. One thing that was obvious is the benefit of tapping into the Israeli diaspora (which is clearly strong in the US) in terms of access to influential networks and to capital.

 

Thanks for all your questions! – It’s a clear signal that it’s an area ripe for discussion. Thanks again to Craig and the TUANZ team. Look forward to seeing our tech industry go from strength to strength in the coming years, and to Spark playing its part in helping more NZ businesses succeed.

Cheers


Simon