Responding to COVID-19 – the 3 phase approach to planning

Over the last few weeks we’ve had many conversations with founders and others inside companies about the pandemic. The conversations we have had involve three main topics: How to maintain health and safety of people, how to ensure the company survives the coming economic crisis and and how each company can help (generally for free) with the COVID-19 pandemic.

One recurring theme was how to plan for the business over the next year, especially given that this nearing the end of the normal planning and budget cycle. It’s clear that anything can happen over the next days, weeks and months, and the timing of events such as lockdowns and return to some sort of normality is highly uncertain.

The one thing we know is that we are in uncertain times, and each region and country will have different responses to the pandemic.

The Three Phase Approach

Therefore as companies, or even individuals, plan it might be useful to think in terms of three phases rather than in months or years. I’ve described these from my perspective below, but each company should have their own perspective, as there may be other phase definitions that make more sense.

Phase 1: Survive – Emergency Response to COVID-19

This is the lock-down or worse phase, and we are seeing see a wide range of imposed restrictions across the world, many where businesses are shut down. Essential businesses, such as food production, may be able to continue, but manufacturing and in-office work will cease. Borders are essentially closed and the population is in lockdown, or fearful to go out. We will, in some places, see a health crisis that exhausts the ability of the local healthcare system to cope, and many many people will be seriously ill and many will die across the world. Economies will be supported by government intervention, but underneath it all will be plummeting demand for products and services. We are in a global depression.

Phase 1 is primarily about survival – making sure that the company will get through the crisis. The longer this goes on the more dramatic the changes will need to be, so keep a very close eye on the numbers, and have plans if this stage goes on for months.

We are very lucky in New Zealand to have a government and a system of government that is able to – and has – respond effectively to the crisis. The best case scenario, and it does not seem unreasonable, is that the virus is contained and we are fortress New Zealand, with well guarded borders.

We are well into this phase in New Zealand, with the lockdown requiring working from home for all but “essential” businesses. Every business needed to react aggressively to survive, and most in the high-tech space have done so. Some, like Bauer Media, a company that produced magazines, will not survive this phase. Others will be exposed to sectors, such as aviation, retailers or salons, that are in a state of collapse. Companies exposed to those sectors need to focus early on survival – and on helping their clients.

What to do:

1: Forecast revenue and cash, and stay on top of this daily or weekly. Look for the leading indicators (such as product use) for changes and adjust accordingly. I would not spend a lot of time refining a complicated model – simply cut the expected growth to zero, and increase churn according to how you see your industry (and product) reacting.

2: Survive by cutting costs. Revenue growth will be hard, so you need to move to get sustainable. Governments have launched programs to help because they know that businesses will need to lower staff numbers to survive. As an owner the imperative is to make sure you can pay some salaries or some of most salaries rather than all salaries and then failing to make it through. The human costs are potentially very high – and I am happy to see that the companies that I am involved with through Punakaiki Fund or personally appear to be able to retain most or all staff.

3: Help – Do what you can within your product to help your customers. If you are doing something to help potential customers then consider making it free. Timely published pages of information for its customers, RedSeed released a COVID-19 learning course for retail staff, and RedSeed and Melon released services to help people cope.

While crisis times may call for more autocratic decision making, remember that the (zoom) room is smarter than the individual, so use the team and board to make the important policies and decisions. Lean on the older directors and advisors who have been through a few crises and market crashes. Everyone is at home, and wanting to help, so pick up the phone and treat the kids in the background – and foreground – as part of it all.

Phase 2: Living with COVID-19

Each country and market will operate under various levels of lockdown, but this phase business can get done, albeit with controlled access to premises. The measures will vary over time and by country and region, but it should be possible to manufacture and sell non-food products. The global economic depression will become official, unemployment will be high, stock markets will fall and raising money will be expensive and hard.

In this stage doing businesses will be strange – almost back to normal for some businesses, and quite different for others. It’s going to be hard to sell to new clients in this environment, so don’t expect to restore your historic growth. International travel and shipping may be constrained, and many companies will fail.

However some industries will do very well, and others will be able to restore some growth. It won’t be impossible, but it will be hard. smaller New Zealand companies exposed to large markets hold continue to do well, even as their overall market demand falls. But demand in some sectors such as travel, will be catastrophically lower and overall global demand will be low for almost all sectors.

This is the time to invest in helping getting product and marketing ready for the recovery, as well as continuing to do the best you can for your existing and any new customers. Obviously keep the business sustainable – this is no time to be asking venture capitalists for funding if your company is not able to cope with COVID-19. If the new reality is not one that is sustainable for your company then consider aggressively pivoting to product and markets that will thrive.

For those with funds available there will be opportunities to acquire complementary companies for relatively low or even fire sale prices.

Phase 3: Recovery

Over time the regional blocs that have the virus under control will expand, and there will be better economic integration, and even the resumption of tourism. Eventually there will be a vaccine, but that will need to get to everybody before a region can truly open its borders. The world will slowly emerge from down times, but will never be the same again. Some sectors will take years to recover, and with the Climate Crisis perhaps some never will.

This is the time to invest in expansion, as people and companies are increasingly willing to trade. Aim to have funds set aside for this phase, as there will be new land-grabs for re-emerging buyers.

Economic recoveries can take a long time, and we should recall we have had 12 years of some of the best ever economic times for businesses. The catalyst for the emerging market crash has been a long time coming. And let’s not forget that the boom times were not there for all people – the rewards were quite uneveningly distributed. Those who lose jobs now could suffer greatly, especially in societies with poor safety nets, so look to find opportunities for large new workforces.

Using the Three Phases

The point of this exercise is to form a shared understanding of what each phase looks like for your business and market, and to make plans for each phase.

I would not advise thinking too hard about the timing of these phases, as that is highly uncertain, but do think about how long the company can sustain each of the phases, and what changes you would need to make if they go on too long.

Two new and free initiatives to help cope with COVID19

Two companies have stepped up to offer direct help to individuals and companies.

Melon Health, in conjunction with the Ministry of Health, have launched an online community with psychosocial support tools and resources specific to Covid-19. This is intended to support people when socially isolated and experiencing anxiety related to lack of certainty and control, and is, obviously, based on Melon Health’s successful clinically proven platform. Anyone can access the program directly, and may be referred there by their medical professionals as well.

RedSeed has launched a training platform aimed at helping people manage stress and anxiety. The course is presented by Clinical Psychologist Graeme Clarke, who did a lot of work after the earthquakes in Christchurch. RedSeed are experts at how to use training to change behaviours, and they have already provided a free Retail and COVID-19 course to their retail clients.

Punakaiki Fund is an investor in each of these companies. We are delighted that RedSeed and Melon Health have launched these free and complementary services. Well done to founder-CEOs Siobhan Bulfin from Melon Health, and Anya Anderson from RedSeed, and to their teams.

Did ISOC leave $1 billion on the table?

The Internet Society (ISOC) sold the .ORG domain business to a PE firm for US$1.135 billion. There is plenty of coverage of this, and I have been following both Hacker News and InternetNZ threads.

From what I see I believe this was a really bad deal. Bear with me, but this post covers questions we should ask, how the PE firm and their investors are going to make ridiculous returns and some recommendations.

1: Questions we should ask

These are the sorts of questions that are asked for any M&A deal, and listed companies have a heavy burden to answer these and a lot more when proposing deals. Some of these may have been answered, and hopefully they and more will be answered over time.

Was a top M&A law firm retained? (E.g. Skadden Arps)
A great mergers & acqusition law firm would advise the directors/governors of the process to run and their fiduciary obligations. The lawyers would ensure the directors/governors are not liable for the lawsuits that will follow, and would bring in their connections to investment banks and funders who can help. They would ensure that the deals is shopped to other potential acquirers, and that ISOC is in possession of very high quality investment bank advice.
We do not know whether a proper M&A legal firm advised on this deal or who the lawyers themselves were and what experience they had with M&A and finance. It is up to ISOC to provide this information.
Update: “Goldman Sachs & Co LLC. is serving as financial advisor to both the Internet Society and PIR. Morgan, Lewis & Bockius LLP and Proskauer Rose LLP are serving as legal advisors to the Internet Society and PIR, respectively. Macquarie Capital is serving as financial advisor and Morrison & Foerster LLP is serving as legal advisor to Ethos Capital.’”
Was an investment bank retained by ISOC to advice on valuation and options?
A great investment bank (think the biggest Wall St banks) would offer alternative funding strategies, show how the economics work for the PE firm and show the valuation of the company being sold.
Alternative strategies could include raising debt, investing the current funds more wisely, IPOing, finding trade acquirers willing to pay a lot more and, of course, doing nothing. Doing nothing would be, as is becoming highly evident, the easiest course to ensure the stakeholder requirements are met.
A bank may also have advised on better ways to make the governance of the financial aspects of the business work. Heck a consulting firm like McKinsey would have done this for cheap or free – I even did a tiny pro-bono piece of work via McKinsey for a player in this space last century.
But most of all a bank would run a competitive process, so that the price paid is a whole lot higher. They would make commission on this, but the commission could be structured as a % of everything above the offer on the table.
We do not know whether any investment bank advised on the deal and ISOC need to tell us. Normally a bank would brag about this sort of thing (although this is not a deal I would brag about.)
Update: see above and comment below
Was a competitive process run?
A properly run competitive process would have got a lot, tens or hundreds, of PE firms and trade buyers out of the wilderness, as this is, as I show below, a ridiculously good investment for them.
It’s impossible to say how much this would have changed the deal, and we don’t know whether this shopping happened or not.
What we do know is that the eventual buyer was very unusual and that a cursory analysis shows the price looks unusually, highly unusually, low.
We also know that there are much more established well funded PE players out there, and given todays market we can argue that some would surely have considered paying a lot more – perhaps even double or triple. I argue below that at least $1 billion left on the table, perhaps $2 billion.
We do not know if a competitive process was run, and the onus is on ISOC to describe how this deal was done.
Update: we still do not know this
Is the story of how this deal came together published?

I don’t know what I have not yet read, and with 2 little kids at home I have precious little time to search. So perhaps the story is published, and it certainly should be.

Directors of public companies being acquired (or the owner in this case) have a serious fiduciary obligation to retain advice, run processes and then you will see the details of the deal published. “Jo met Tim at a BBQ and ….

In this case, if this were a listed company, and particularly with the sale to a brand new PE firm started by an insider, there would already be class action lawsuits going on. And they would be winnable.

So we should see evidence of how this deal was conducted in a way that ISOC was able to get the best deal for the society, and that the governers are confident that they are able to defend the deal. If the story is not and will not be published then we are reliant on whistleblowers, and later we are reliant on any lawyers doing discovery.

ISOC should publish a detailed account of how the deal happened, including their own internal process to ensure ISOC got the best deal and did the right thing for stakeholders.

Did ISOC consider other financing instead – such as issuing $500m or $1 Billion in bonds and then investing that in a more diversified portfolio?

ISOC might, if they really wanted funds, instead have raised say $500 million in bonds at a tiny percentage interest. Their recurring income is amazingly solid and has easy ability to grow with price increases.

Meanwhile government bond yields are close to 0%, and even negative in some places, and there is a search for yield by investors. ISOC’s stellar income stream would mean they could get finance at say 2-4% relatively easily, more likely the lower end of that. But even at 6% that means they could have received $500m and only had to pay $30m a year. If they then put their prices up they basically have the same deal benefits as the PE firm. ISOC should then invest the cash in very long term growth funds, delivering much higher returns over time.

We do not know if ISOC explored other options, and they should disclose this and any other advise they received from credible investment banks who do regularly advise on deals over $1 billion.

Was the investment bank incentivized to not do a deal at any cost?

If an investment bank was retained to advise just on on the offer on the table, and they were not incentivised to look elsewhere then the advice was not aligned, and they are incentivised to just make the deal happen.
A correct relationship would see them give stern advice on how to run a proper process and to either run, to to advise on who could run the process. What to look for here is a highly reputable bank taking a percentage fee that increases with larger sale (and a competitive process, with attendant publicity).
All we know is the result – a process that was not public, acquirers who appear to be insiders and a price that seems far too low.
We need to know what actually happened before passing judgement, but the onus is on ISOC to provide this.
Did the deal include the PIR proceeds from 2019 and/or any other cash held?

As above this can make the deal free if the cash in the tin is included in the deal. A good banking adviser would make sure all the cash is taken out at the point of sale, including income in advance. Cash is king.

Again I have had little time to look into this – so perhaps this question is already answered, but it not then ISOC needs to disclose this.

2: Why the price is too low

The price of $1.135 billion might sound like a lot of money, but it’s not. Last year ISOC made $44m from PIR, which is a 4% return on $1.135 billion. However the forecast for next year is $55m, so the yield is 4.8%. They sold the company for a bond rate. Let’s work through that.

This year PIR was meant to return what looks like $55 million*, and with a 10% annualised profit increase (let’s rise costs at the same rate) the returns would be off the charts.

That sounds ridiculous, but I am serious. The present value of a stream of income is C/(r-g), where C is the income stream, r is the cost of capital and g is the growth rate. So $1 million a year, no growth, at today’s interest rate of say 4% is worth $1/(4/%-0%) = $25 million – conversely you’d need $25m in the bank at 4% to get $1m a year.

In this case C is $55 million, g is 10% (the cap on price increases) and -well let’s look at r.

Let’s say the private equity firm wants to make a 20% return, which is pretty normal.

If they financed the whole deal then that makes C/(r-g)= 55/(20%-10%) = $550m. So obviously the private equity (“PE”) firm would not spend $1 billion or more.

But that’s not how PE works. The PE firm is able to finance a considerable part of the deal using senior debt (lowest interest) and mezzanine debt (higher interest). In this case the stream of income is so reliable that the debt lenders would be lining up, and the percentage that could be borrowed would be very high, perhaps over 90%.

But let’s say they could get 80% of the deal priced at an average interest rate of 12%, and the required rate of return for the PE firm is 20%. That would make the weighted interest rate of r = 80%*12%+ 20%*20%= 13.6%. That’s would mean the C/(r-g) formula would be $55m/(13.6%-10%) = $1.53 billion – so the PE firms has $400 million of value on day one.

But that not close to how this works today, as right now interest rates are a whole lot lower than that, with government debt trading at say 2%. They will perhaps be arranging debt financing  at 6% or less, but even at a weighted average interest of 8% for the debt the return interest rate, r, would be calculated as 80%*8%+ 20%*20%= 10.4%

That makes C/(r-g) = $55/(10.4%-10%) = $13.75 billion. Obviously that’s a very large difference. But if we use 6%, say, then the equation fails as (r-g) is negative, and that means the returns are off the charts.

So there’s plenty of value here for the buying firm, and very little risk. I see that it’s not unreasonable that the PE firm has put the $13.75 billion valuation deal together.

So that just leaves the PE firm with the problem of finding the remaining 20% of investment (~$230m). If PIR did not pay the ~$55m for 2019 then that will just go straight into paying off short term bridging finance. The 2018 PIR Form 990 showed almost $20 million in cash, $7 million in investments and another $30m which has no explanation. So some of all of that would go straight out to finance the deal. Overall if there were, say, $80m in cash to free up from the company then it’s not unreasonable that all of the rest of the purchase price could be putto debt. In reality I suspect $1-300m is from the PE funders – but they will get that back quickly.

After the acquisition a reasonable PE firm will pay down any bridging finance with any of that cash in the PIR bank (including cash in advance), refinance any high debt with lower priced debt to lower outgoings and then use the ongoing income stream to pay down the more expensive debt first. Obviously they will not just put the wholesale prices up by 10% per year but also pull all the other fees and costs levers hard, certainly resulting in a much greater than 10% profit growth. But even at 10% after 10 years they would be collecting $142 million a year, so you can see how the debt servicing or repayment is not an issue. They could also sell data and so on, no longer being constrained by their owners.

Then they sell that company – making $142 million per year, growing at 10% – that’s obviously worth several billion, and they pay off any remaining debt and pocket the rest. The General Partners from the PE firm who arranged the deal will take 20% of the uplift between the money down from the PE firm ($0-300m say) and the eventual exit price (Say $4-6 billion)

There is much more to this. The debt providers are often the same funding firms or related to the PE firm so they can charge PIR much higher interest rates then the company would normally need to pay, and they and the PE firm make margin there too. (E.g. they could borrow one tranche at 4%, lend to PIR at 8% and without having to do or pay anything make 4% risk free margin, say $20m/year for a $500m slice, plus they would stick the company with a setup fee (2% say) etc.). As the owners they cash do what they like with the balance sheet.

At its worst a PE firm would load up the company with crippling levels of debt & fees, take that money and invest it elsewhere or return to investors. That debt burden on the invested company (PIR in this case might have to pay high amounts of interest each year) can and often does destroy the company, and then the debt-holders own the company outright and they can start again. And so on.

One more thing. I’ve used the 10% growth figure on the dividend stream from PIR to ISOC. Actually the 10% growth rate is applied to the revenue from PIR, which was $93 million in 2018. This increase would come, I suspect, at very little cost in net sales numbers. I’ve also assumed the costs rise at the same rate, but I suspect not only would there essentially be no increases in underlying costs, but the PE firm will work to rapidly reduce costs.

So in reality the forecast ~$55 million paid for 2019 could rise by $9 million (10% of $90m) to in the first year to $64 million, an increase of 16%.

But let’s add, say, $10m in annual costs savings, and that lifts year-1 revenue payout to $74m, and so on.

Over 10 years that $90 million in revenue could be $233 million, less costs of say $53 million (to keep numbers rounded) that’s $180 million a year to put into the pockets of the PE firm and investors.

All these changes increase the Net Present Value and Internal Rate of Returns calculations for the PE firm. I don’t even need to slap a spreadsheet together to show that this is an extraordinarily profitable deal for the PE firm and their investors. It’s a deal of a lifetime – a seller like ISOC doesn’t come along that often.

3: Recommendations

Release the facts

We don’t have all the facts, but when we do have is very disturbing. The first things we need are more facts, and quickly. It looks like at least $1 billion, perhaps a lot more, has been left on the table, and it is up to ISOC to prove otherwise.

Stop the deal and get legal and banking advice

I feel for the directors/governors/councillors of PIR and the Internet Society. This sort of deal is hard even for highly paid and experienced directors of multi-billion dollar listed companies, and they always seek very good advice before stepping anywhere close to a deal.

I want the ISOC and PIR leaders and governors to know that they are likely at great personal risk, and that they should be acting to stop proceedings until they can get the right advice. The right advice and process means that they will then feel comfortable answering the questions asked here, (and also to front up about related party deal details.)

It’s easy to argue that they have been bamboozled, or to be charitable, subject to information asymmetry, but they still have a chance to address that, and they are highly incentivised to do so.

If nothing changes I expect a lawsuit will come out of this, and that’s what ISOC, PIR, and each individual involved should seek really good legal advice before this deal is done. If the suit does eventuate any number of parties may have status to be able to participate in a lawsuit, including members and stakeholders. But it’s a losing situation as a good percentage of the extra money magicked up after a suit is won will go to the lawyers on retainer, and that’s all loss to the Society. Meanwhile all the governors and excecs will be dragged through an expensive and multi-year process that will destroy their own finances and reputations. There are plenty of litigation funding PE firms out there, and I am sure some are looking this over already.

Protect the country domains (.ccTLDs)
It was really good to read comments on the Internet NZ members list from Jordan Carter (CEO) and Jamie Baddeley (President) about InternetNZ’s perspective and legal position with .NZ and ccTLDs that give protection against this sort of deal.

I would encourage every ccTLD Council/governing board to make sure that there are protections against doing something like ISOC. In fact ISOC should do this too.

I would also encourage every ccTLD, and ISOC, to stop leaving money on the table, as InternetNZ has been doing for example by letting the inflation adjusted wholesale .nz prices actually fall each year. InternetNZ and ISOC should ensure that their stakeholders, who are the people of NZ and the world, are prioritised versus domain firms and domainers, who have no problem making extra margin from ever-cheaper prices, or PE firms.

Instead put the prices up, invest funds wisely in diversified portfolios and fund getting more people online and more.


About Lance Wiggs

For context I am a former councillor of Internet NZ, an ex Mckinsey Consultant based in Washington DC, have advised on the exit of businesses in NZ including a $750m deal. I am currently a New Zealand based micro venture capitalist. I’m also juggling a small family and lots of work, so my apologies if information is already available that I have not uncovered, or if any of the assumptions are wrong. Please let me know and I will correct them, and if you are involved seek legal advice before defending the deal.

This post has been updated for format and grammar.  

Punakaiki Fund Offer Exceeds $2.5 Million

Our 2019 Retail Offer, including a Discounted Rights Issue, is off to a good start. 

The Offer for $23 shares closes on 20 November 2019, and the 1 for 7 $16 Rights Issue closes on the 25th of November. 

So far we have $2.5 million in commitments for the Offer and Rights Issue:

  • 40 investors have subscribed to the $23 Shares, which come with the attached 1 for 7 $16 Rights
  • We have commitments from 321 investors, mostly, of course, for the Rights Issue
  • The investors have, on average, over-subscribed to their entitled rights by an additional 44%.

Please read the Product Disclosure Statement (“PDS”) before making any investment decision. You can also take advice from a financial adviser to help you make any investment decision. The minimum investment is $2,300, and there is no maximum. 

Invest today using our simple online process

PDS Highlight: The Software as a Service Companies

We shifted the emphasis for this offer to highlight the 14 material companies that form 99% of the value of Punakaiki Fund’s investment assets. We are very happy with their aggregate performance, which resulted in last 12-month revenue of $124 million and around 800 people now employed at those companies.

Eight of those companies use the Software as a Service business model. The most well-known example of this in New Zealand is, of course, Xero. Punakaiki Fund’s Software as a Service portfolio companies as a group show total current recurring revenue of $75 million, and a growth rate of 31%.

To put that in context, back in 2014 Xero had a market valuation of over $2.2 billion, based on a recently reported recurring revenue of $70.6 million. That’s over 5.5 times the aggregate value that we hold the companies above at, reflecting a number of factors including size, liquidity, growth rates and more.  

Xero just reported their annualised was NZ$764 million, as at 30 September 2019, and their revenues over the previous 12 months  grew by 32% year on year.

Xero’s market capitalisation today is AU$10.5 billion, which is 14.8x times their recurring revenue.

Punakaiki Fund’s comparable multiple of aggregate  recurring revenue over enterprise value, was just 5.2x for the valuation performed for this offer. We use company data to September 2019, but rather than using the annualised recurring revenue as at the reporting date we use the more conservative annualised average of the last three months revenue. The difference in the multiples compared to Xero’s is due to discounts we apply for private ownership, lack of liquidity, size and more.  

PDS Highlight 2: Use of Funds

The table from the PDS below shows the proposed use of funds raised. We are very keen to invest both into the core 14 portfolio companies as well as new companies. 

We have one firm obligation – 12% of capital raised will be used to purchase further shares in Devoli, at a buy-price originally set over two years ago. This process will eventually move our shareholding from the 48.8% currently to 53.9%. We are also talking to both Conqa and Weirdly about their funding requirements, and want to ensure they each have funds required to continue to expand.

We are, as always, spoiled for opportunity for new investments, but will be taking our time to make any investment decisions. We want to choose the best investments from the options available. 

Portfolio News
We are very happy to see that Stuff Fibre won several categories in the TUANZ Broadband Awards, including Broadband Provider of the Year. Stuff Fibre is powered by Devoli, and Devoli’s ability to make things simple for Stuff Fibre is a key factor in them taking out the award.


Valuing Xero again

In October 2013 I wrote about “Valuing Xero in one hour“, and (although it had a bug) came up with a forecast that justified the then $2.2 billion valuation of Xero with a Weighted Average Cost of Capital of 18%.

That forecast was, necessarily, very basic, and the exercise was intended to show how SaaS company valuations are driven by revenue growth.

Xero’s annualised recurring revenue at the time was $70.6 million, while the last 12 months revenue was $53 million. How times have moved on – the recurring revenue is now $638 million and last 12 months revenue $552 million.

The 2013 forecast was over-optimistic with revenue rising to $1.6 billion by March 2019.

While the difference between $639 million and $1.6 billion is a lot – this was off a base of $53 million, so most of the expected growth did occur, just late. (Think about the parable of the expanding lily in the pool). Basically the model was 1.5 years early, and the cause was that the model didn’t reduce the growth rates quickly enough.

The forecast success varied by country though, with the the growth of New Zealand subscribers and revenue under-projected, and while progress in USA/Rest of World was dramatically over-projected.

NZ hit 140% of forecast, but overall it was just 41%
NZ was 147% of forecast, but US/RoW just 16%.

There’s a good story here – two of them in fact.

The first is that there is still plenty of growth to come.

The increased New Zealand growth versus forecast shows that the size of the market here is healthier than I expected, and also that the 2013 penetration of the market was lower than I expected. That means we can readjust expectations for the ultimate size of other markets. Along with that it remains very obvious that Xero’s usability dominance and customer lock-in provides it with ample opportunity to increase prices in New Zealand (then offshore) in the future.

Meanwhile there is still plenty of runway in Australia and UK, where adoption of SaaS accounting software has been slow. And the US/RoW markets are even earlier, and with RoW now at $30m revenue and growing faster than any of the main markets I suspect we will see some long term success there. The US market is very difficult, Intuit and ancient arts for doing accounts still dominate, but their turn will eventually arrive.

The second piece of good news is the current valuation (1pm, Friday 17 May, 2019), which is NZ$9.0 billion, is up at a rate of 28.5% annualised return from the October 2013 number.

That represents a 14.1x enterprise value/recurring revenue multiple, which is very high for a company growing at 36% per year. However let’s dive into this a little to understand why it isn’t completely insane.

Firstly though, here’s what Xero has done over the last eight years – consistently strong growth in recurring revenue.

But the share markets have dithered about Xero’s valuation, despite that sustained performance. At times Xero has been over-valued, while at other times it has more clearly been under-valued.

The valuation exercise in 2013 was aimed at showing that growing SaaS companies can justify high valuations using a DCF approach. The market opinions about SaaS companies do tend to vary over time though, and smart investors obviously look to buy when there is a disconnect.

The valuation today is not inconsistent with Xero’s SaaS peers in the USA, with the BVP Nasdaq Emerging Cloud Index boasting a EV/revenue multiple of 12x until just a few days ago. After the Trump incited USA trade war with China escalated that index declined to 10x. It’s worth noting how little exposure Xero has to those two markets.

The second is that SaaS companies, with their recurring revenue, can have value extracted in a very different way than traditional DCF models assume.

Let’s walk through Xero as an example, starting with a projection of Xero’s annualised recurring revenue for the next few years. This projection deflates the growth each year, so that the 2028-2029 growth is just 21%.

Now let’s add a multiple line – answering what revenue multiple in the future would be required to keep today’s valuation constant?

This shows that if the valuation does not change, and the forecast is correct, then Xero would have a valuation of 3.8x recurring revenue in 2025. Revenue multiples for SaaS companies tend to move in lockstep with the market (and their own growth rate), and that market moves a lot as we saw above. So it’s hard to predict a future stock price, but we can say if Xero’s growth continues then the markets would need to be extraordinarily low for its valuation to be lower than today’s in 2025. And of course there is room for it to be considerably higher.

Revenue multiples for SaaS companies work because a new owner can take out all of the non-essential costs and milk a trailing series of recurring payments. This works particularly well when customers have high switching costs or otherwise have high loyalty to a product, as the case with Xero. If, for example, Xero today decided to abandon growth and focus on delivery only, then, with an 85% gross profit margin, they could generate $542 million of recurring revenue. If that was retained it would take 16.6 years to pay back today’s valuation of $9 billion, a very long time and with high risk.

However if the acquirer instead decided to wait 3 years, then the revenue would be $1.38 billion, the residual recurring profit (after delivery costs) would be $1.17 billion and it would take only 7.7 years to pay back, with plenty of upside beyond that.

Hold a bit more, and after 6 years Xero would deliver $2.3 billion per year, and the acquirer would be in the black before the end of 4 years. And so on – the chart below shows how the payback period drops over time.

Obviously this is a basic analysis, and the numbers are not that compelling with the current valuation, but for a long term investor Xero is almost certainly going to rise in value. But given what we know about markets it’s just as certainly going to have a rocky ride between now and then.

In reality an acquirer would also change the game by sharply increasing prices, losing a few marginal customers but banking on loyalty and lock in to generate considerable upside, all while reducing costs to serve. They would also continue some growth efforts, lowering the income each year but increasing the net present value.

If increased prices at time of acquisition drive overall revenue up by 50% (stalling growth), then the payback gets a lot nicer. The ARR multiple falls to 9.4x, and the forward numbers look very healthy. The chart below shows that if this happed in 2025 then the acquirer could bank $2.1 billion a year, worth $15 billion at a discount rate of 14%. Any DCF model using realistic discount rates would show the value to investors can easily be justified.

Uber’s S1 and slowing growth

Uber released their S1, their prospectus for their IPO today.

The biggest concern for potential investors is probably their falling growth rates, which makes it hard to model a future where the company can produce significant earnings to justify its valuation.

The table below shows how the growth rates have punched.

YearRevenue Trip NumbersActive Users

Uber, like most US companies, uses calendar years for their financial years.

The quarterly revenue data is more worrying – December Quarter 2018 was up only 22% over the previous year. (Page 121)

On Page 126 we see that even that revenue increase was subsidised by excess driver incentives, and netting that out the growth was only 17% year on year.

They have tightened things and their adjusted yearly EBITDA loss fell by $800m to $1.65 billion, but has this come at the expense of growth? Or has the growth simply become too expensive to chase? Or are electric mobility devices taking away the shorter distance rides?

And Uber had a loss of $890 million in the last quarter, and it’s hard to see tangible evidence of margin improvement. (P128)

A valuation today of, say, $100 million needs to have net income of, say, $10 billion to be a very real probability relatively soon, or of one much larger later.

At, say, a 20% net margin and 40% growth $10 billion income would take 5 years. But that is a courageous assumption about the growth rate, given the above, and it also assumes significant margin improvement, which will be hard if the marketing spend continues, which itself is required for growth. And increasing pricing is hard because customers and drivers will simply choose other platforms. This is not a winner take all market.

For the model to work the higher growth (100% y/y) of Uber Eats needs to be maintained for quite a while, and while that’s possibility, I suspect their margins will be sharply squeezed as big brand chains respond. Mobi2Go is making very good progress in part because Uber’s take rate from restaurants is absurdly high, and Mobi2Go puts the brand in the centre rather than Uber. So either that take rate will need to decrease, and with it the net revenue, or this market will become a multi-player game and revenue will fall regardless.

Overall if Uber raises a high amount of money then they will simply get a longer runway, but it also seems clear that there is a real chance of judgement day arriving, and with it a plunge in the share price.

Acting responsibly – recent governance lessons

In California the giant electricity utility PG&E requested bankruptcy protection. In New Zealand a former Prime Minister and her previous colleagues around the Board table of Mainzeal have been fined $36 million – although both sides are appealing that. Also in New Zealand Lime was forced to remove their electric scooters from the streets of Auckland and Christchurch, and failed to get a Wellington license. And Facebook, YouTube (Alphabet) and Twitter allow lies, deliberate deceit and hate to be propagated throughout their platforms.

These are all failures in governance.


No conjecture required – Mainzeal’s directors were found by the High Court to simply not have done their job, in allowing the company to trade while insolvent. The board failed to combine understanding of their business and the law with action, and failed to protect creditors and shareholders. The company collapsed owing $110 million, and the $36 million fine, partially covered by directors insurance, still leaves creditors well short.


PG&E neglected to maintain their decaying transmission network, delaying the maintenance on a 100 year old high transmission line that is strongly suspected to have triggered the 2018 California wildfires. Those wildfires killed 85 people and caused billions in damage, while previous fires likely also triggered by creaking PG&E equipment killed 22 more people.

By underinvesting in basic maintenance and safety PG&E chose short term profits over long term profits. Half of the board and the CEO recently lost their roles, and the company has filed for bankruptcy protection as their liabilities reach into the billions.

It’s also clear the blame with this lies squarely with the board of directors, while the CEO and management team at the helm who failed to act are also liable, but ultimately not as responsible as the board. There will be a lot more consequences all-round.

Lime Scooters

LimeBike, a venture capital backed US company, allowed its New Zealand operation to provide their customers scooters with a known sudden braking problem. These scooters catapulted riders into the street, and, it seems, this was triggered generally at very high speeds when the scooters hit bumps, exacerbating the potential impacts.

The company, knowingly it seems (given the same situation happened in Switzerland much earlier), placed their thousands of riders in danger, and several ended up in hospital.

The missives from the company made it clear that the technical problem was not initially at least definitively solved, and, reading between the lines, that the company did not put the safety of their customers first. It’s hard to see that anything has changed within the company. We, as riders, were deliberately and systematically exposed to harm, and potentially fatal harm at that.

Lime’s responses arguably indicated that the US board of directors (and their investors who have collectively placed over NZ$1 billion into the company) did not understand the seriousness of this inaction. The company lost, temporarily at least, its license to operate in New Zealand. They slowed their momentum, and exposed themselves to considerable liability under Australian and New Zealand Health & Safety laws. Short term gains may lead to very poor short term, let alone long term, outcomes.

As a foreign-controlled I suspect the local team was pushed to prioritise revenue and adoption by their US management team and their board, looking to drive short term numbers to justify the vast ongoing investment. I also suspect the local team just didn’t have the authority and power to make the changes required.

The issue under New Zealand law is that some of the people are “PCBU” – the person conducting a business or undertaking – and are potentially personally liable for their lack of action. I’m not sure what happens if the PCBU resides in the USA, but it may be wise for responsible US based Lime executives to consider avoiding travel to New Zealand. On the other hand we’ve seen far too little actual enforcement of the law in New Zealand.

Social Media

Similarly with the social media platforms – we seem to be fangless in our attempts to slow the stream of hatred and misleading information. The three platforms have accelerated the UK and USA into divisive politics, slowed the reaction to climate change and the hateful attack in Christchurch was a made for Facebook moment. It’s well past time these platforms were regulated here in New Zealand, and we assert our sovereignty. If they don’t play then let’s hit them where they will take notice. We have a continuum of weapons, from taxing their revenue at source, through to cutting their revenue by banning advertising and ultimately making it very difficult for users to find or use their platforms. If they cannot clean house then they need to leave.

The directors of these platforms have allowed this to happen – undermining the viability of the businesses as they sought to grow engagement at any cost. They need to be held to account too.

Some lessons

Directors can’t outsource the responsibility that the Board has, but if they are thorough in their work and diligent in their actions then they will be protected. Here are four lessons we can take from the above case studies.

1: Surface the issues, and dive where required

People do make mistakes and bad things do happen inside businesses – so directors need to foster a safe environment for these issues to be surfaced rapidly and dealt with. When issues do emerge treat the people involved with kind hands, and work together to solve the problem and pout controls in place.

But if material issues are not surfaced the Board is still responsible. So directors also need to deep dive into areas where they see or suspect emerging issues, and to be unafraid to ask the scary questions.

The issues range from the obvious, such as company performance and solvency, to things like data security, content, food and industrial safety (even including staff safety at company events) and accounting treatments.

Directors cover all aspects of the business, from ensuring that strategy and execution are fit for purpose, to monitoring the company culture and behaviour of execs, checking in with end users and customers where appropriate, and much more.

This is not by any means an exhaustive list, and you’d be right to note that the governance responsibilities are well in excess of anyone’s capacity to perform the work. This is why the role is to ensure internal processes (including board processes) deliver the required outcomes rather than to do the work.

2: Disclose if required

If a director sees something materially illegal then they are obliged to act.

Obviously there are a range of illegal behaviours, and being aggressive on expenses is not the same as violence, industry collusion or systemic fraud. One litmus test is to ask whether or not action and/or disclosure would prevent directors being liable for prosecution, as liability as a director stops if you act when you become aware.

If, as a director, you see something materially bad then the disclosure obligation is more normally to the shareholders or other stakeholders, but sometimes external parties such as the IRD need to be informed. It depends on where the impact lies.

Obviously the choice to disclose at all resides with the board as a group, but what if you are alone in your dissent?

Was, for example, someone from the board or management team of PG&E, Lime, Facebook or Mainzeal pounding the table for action? Did any of them act? Or at least resign?

At some extreme level, if a board will not do the right thing, directors and executives can consider whistleblowing or contacting regulators or other authorities independently. However as yet no country, it seems, has solved the reputational downside to this behaviour. Directors will balance their own reputation, and their stakes in the company, before considering action. So it’s critical to have truly ndependent directors who are unafraid of doing the right thing.

While directors and management of the companies may have been dissenting, we did not see any public evidence of whistleblowing. While some individuals may eventually regret that, it’s rare for directors to be prosecuted. It is very hard though to consider hiring directors who were asleep at the wheel for other governance or executive roles.

3: Fix the issues

Thankfully these issues are very rare, but it’s normal for executives and boards to find internal issues and then get them fixed before they become problems.

Lime should have yanked their scooters off the streets, installed the updates and put them out again. They may have lost a day of service per scooter, but they ended up losing far more than that. Mainzeal’s board should have prevented or reacted to certain transactions, and PG&E’s board should have been monitoring a well informed safety management system and investing in maintenance and renewal. The social media companies should have acted years ago to clean up shop – as they proved they can do by removing extremist content in Germany, where it is outlawed.

The board are only the governors, not the doers. But they can require a company to implement policies and control systems to prevent issues from emerging, and if these are not forthcoming then they can appoint individual directors or external advisors to perform forensic work and implement controls.

But ultimately the board has only one real power – intervention by changing the CEO and executive team. Perhaps this needs to be more common.

4: Write it down

Along the way, for your own and everyone else’s protection, my own advice (and I am not your lawyer, nor even a lawyer at all) is to keep things in writing. Make copies of written communication and reports, ensure your own important requests are written, and make contemporaneous notes during or after meetings and calls. As long as you and your colleagues do the right thing then you should be protected. If you are intent on not doing the right thing, as in at least some of the cases above, then the absence of notes is not going to protect you. And if you are simply not able, or are not working hard enough, to be across the issues then consider whether or not a directorship of that complaint is the right role.

Lessons from Wynyard Group

The FMA made that clear in their investigation of the disclosure failures for the Wynyard Group, stating “While minutes were kept of Wynyard board meetings… … they did not contain the level of detail necessary to demonstrate compliance” The FMA went on to state emphatically that directors should take good notes:

the FMA’s view is that contemporaneous records need to reflect discussions on important matters…

..failure to do so opens up risk that boards will not be able to demonstrate compliance.

…there is a risk that not accurately recording board discussions can be seen as providing directors with the opportunity to rewrite history to suit their purposes at a later point.

5: Keep asking questions.

Being a director is a responsibility which requires ongoing diligence and improving skill to do well. Directors should be in full command and understanding of not just the core attributes of the business (end users, products, sales and marketing, people) they are governing, but also finance, HR, accounting, legal and safety matters. I would encourage directors to keep asking questions and requesting information until they are comfortable enough to be able to tell when the answers are coherent.

The Gap

There’s a lot of work going on at the moment trying to address the funding needs of hundreds of companies that are emerging from New Zealand.

Investors, groups of investors and funds are all lifting their sights, raising and contributing more money as the success of the sector becomes increasingly obvious. To be blunt people are making a lot of money as a result of founding companies and investing, and they want more.

The FMA and NZX are conducting a study on the financial markets, and asking why we are seeing no IPOs in New Zealand.

And the government (via MBIE) is investigating the venture capital funding gap and seeking to introduce policy to accelerate investment.

At Punakaiki Fund all I can say is that our major problem has always been raising money. We have never, in our five years of investing, had a shortage of deal flow, of great companies to invest in. It’s incredibly frustrating to have to pass on opportunity after opportunity, and then watch those companies raise inadequate or no funding.

In my work with NZTE over the last few years I’ve most often had to suggest to founders that they seek to avoid raising money, as doing so is very difficult and trying generally leads to poor outcomes. Ideally, I advise, companies should raise funds from their customers. Boardingware, to be renamed Orah, one of the companies Punakaiki Fund has invested in, is not alone in taking its payments a year in advance, while Onceit (another Punakaiki Fund investment) takes payment before procuring products for its customers. These companies are able to grow with much lower, or even no, external funding. But Paysauce, as a new listed company with public figures, makes just a few hundred thousand dollars a year and is reliant on continuous funding for survival.

Actually that’s not strictly correct. Software as a Service (SaaS) companies can, after a certain minimum revenue of say $500,000-$1 million, always survive if their funding dries up, albeit at the expense of letting go of staff to lower costs to match revenue. This happens distressingly often in New Zealand, and it has benefits and costs.

The benefits are that we are very good in New Zealand at creating and growing companies with sustainable business models. We know, as investors, that founders will drive these companies frugally and not over-invest in frivolous or non-revenue or product driving activity.

The downside is also clear though. We do not often enough see companies receive funding that allows them to win. Even lousy companies, you see, that raise a huge amount of money increase their chances of winning. It’s almost distressing to watch this occur when we look at so many companies with products and markets that are outrageously great grow slowly enough to be at risk of being overtaken by better funded, but in other ways inferior competitors. Funding is a valid way to win, and in New Zealand we very rarely have that weapon. Xero did, raising well beyond its stage at IPO. Perhaps Paysauce will do so – their product seems ahead of their revenue, and being one of a very few listed early stage companies here they have a very public chance to win.

At Punakaiki Fund we have investments in several companies that could do extraordinarily well with extraordinary funding. In general we are able to provide only a percentage of the funding they could really use, and they end up “only” doing very well. We are grateful, on the other hand, that growth VC investor Movac has placed, we believe, half of the committed funds to date from their Fund 4 into Punakaiki Fund companies, and Vend, Mobi2go and Timely are all charging forth with rounds of $5 million or more. While we placed over $2 million into two of those companies earlier on, we were unable to stretch to the next level.

The bigger opportunity we are missing, as an ecosystem, is for large investors who actively placing very large investments into early stage, yet proven, companies. This sort of risk capital is very common offshore, but here our limited funds, along with a very poor 10-15 year track record for venture capital investment into pre-commercial companies, we see investment mainly into companies with safe levels of revenue.

We see occasionally some pre-revenue companies attracting very large sums, such as Nyriad, Avertana and Mint Innovation. These are high risk generally, and investors are advised (by the companies) to treat their investment as having a high chance of complete loss. Occasionally also we see small companies with, say, under $2 million in revenue receive large rounds from offshore. Ask Nicely is one of the more well known companies in this category. That’s all good, but we need more, a lot more, money to go to companies at an early stage.

It’s the ones who are missing out that are causing frustration. How would our ecosystem look if we had another $250 million per year being professionally invested?

For a start that would fund 2,500 high value jobs at $100,000 each, and it would definitely accelerate or arguably ensure the creation of some unicorns. It would also generate a lot of tax paid (think of the PAYE and GST), as well as investor returns.

Those investor returns have historically been, in New Zealand, atrocious. A lot of angel funding was misdirected for many years, and companies received poor advice and governance. But now things are a lot better. The quality of the companies coming through has improved. The quality of work done by investors (many have been filtered out) has increased sharply. The quality of governance still lags but has also improved a lot. There are a growing number of public success stories, and there are a lot more to come.

But I despair for the money left in the table by most investors. Yale University, with US$29 billion of investments, places 18% of its portfolio into venture capital. NZ Super, ACC and Kiwisaver, collectively around $120 billion, invest nothing. If they placed 5% of their portfolios into venture capital then $6 billion would need to be allocated. And given that they have privileged access to what I consider to be the most dynamic and under-priced market for venture capital globally, they should be placing a good percentage of that domestically. Indeed they should not place money internationally as they are unlikely to get access to the best funds. But here in New Zealand it’s the time and place to make big allocations to venture capital, and they have a home ground advantage.

The asset class deliverers high returns at low correlation to the stock market, and is a great place to invest into when markets are high. New Zealand funds and individuals would do well to consider investing.

But please avoid investing into angel stage companies, not until, at least, you have made a series of small investments and have genuinely done the work required to understand what you are doing. Investing is work, and experience is earned the hard, and sometimes expensive way. It’s a lot of fun though, and if you can help and understand the space well then lean in.

Meanwhile the main opportunity is with later stage companies, and they need a much higher degree of work to investigate, invest into and drive performance, and they need much larger investment sizes. This is the province of a handful of very high net worth investors and an even smaller number of funds. We need more of both categories, and with more finds to allocate.

3 Reasons to invest in Punakaiki Fund Limited (Closing Tomorrow)

We generally hold one retail offer per year for people to invest in Punakaiki Fund Limited. As is normal this year’s offer has a Product Disclosure Statement (PDS), and investors can apply online using our simple system.


Click here to apply online

Three Reasons to Invest in Punakaiki Fund Limited

1: Our investor net asset value per share is above the Offer price

The new September quarter-end valuation, as assessed by the Punakaiki Fund Board last week, increased total assets to $42.4 million, up from $40.6 million in the PDS.

The Investor Net Asset Value (iNAV) per share increased  from $21.22 in the PDS to $21.93.

Obviously the iNAV per Share at the end of September of $21.93 per share represents a good premium over the Offer price of $21.50 per share, and it is good to see the iNAV per share moving upwards. 

2: Your investment will help address the funding gap (and opportunity)

In New Zealand we have increasingly well functioning and highly active pre-seed and seed investment communities, and hundreds (really!) of companies are coming through looking for their next round of funding.

Many, including companies we have already invested into, are superb investment opportunities, and the next series of companies that will deliver results like Xero, Diligent, Pushpay and A2 Milk are almost certainly on our lists of potential investments.

However there is a very large opportunity gap for companies looking for VC investments, as the chart using data from a ministerial briefing earlier this year illustrates. Note as well that our average VC investment size of about $2 million is tiny versus US equivalents of $10 million.

Companies graduating from the Angel and Seed stage often struggle to continue their growth as their funding prospects diminish. Many companies go into a “lean” mode, retaining higher shareholding percentages for founders and early investors at the cost of building their businesses more slowly than they otherwise might. This can lead to some positive behaviours and excellent results, but we’ve also seen too many companies miss out on global opportunities as others move more quickly to take the space.

Punakaiki Fund is addressing some of that gap. The chart below shows that almost 3/4 of our funds invested to date are placed with companies where we have cumulatively invested over $1.5 million (generally over multiple investment rounds). It also shows that 97% of our investments are where we have placed a cumulative total of over $500,000 per company.

About half of those funds were invested since January 2017 – when we raise funds we tend to invest them very quickly.

The charts combine to show that we are primarily operating in VC space. There are very few players able to serve the needs of companies seeking funding at this level, and we are constantly seeking more funds ourselves to continue to address the overwhelming opportunity for New Zealand.

Obviously as investors facing very high demand and low supply we are able to pick the best opportunities.

3: Anyone can invest
This year we set a low minimum of just $215 (10 shares), mainly to ensure that most people can participate and to take away a reason not to invest.

As a pleasing result we have seen investors (including our own family) take advantage of the low minimum to purchase shares for their children. However given that the Offer closes tomorrow to avoid disappointment (the application paperwork for children is a lot more demanding) please consider investing under your own name first, and then transferring the shares after the Offer closes. We also ask that investors consider trusts and companies only for larger investments – again shares can be transferred after the Offer closes.

The offer closes tomorrow, Wednesday at 5pm
Invest online at

Alternatively, download the Product Disclosure Statement and apply using the application form at the back, scanning and emailing.

New Melon Health Investment

Punakaiki Fund has a public offer that closes on Wednesday, 14 November at 5pm. Read the PDS and invest online at

After some gestation it’s great to be able to share the news about our latest investment in Melon Health. We are leading a $3.3 million investment round, with investments also from K1W1 and Impact Enterprise Fund. After the deal concludes (and part of the investment is conditional upon funding from the October 2018 Retail Offer), we will own over 30% of Melon.

The press release is below.


Melon Health Press Release
WELLINGTON, 7 November 2018

Melon Health, New Zealand’s leading digital health platform for the prevention and management of chronic conditions, announced today a Series B investment of $3.3 million led by technology growth investor Punakaiki Fund Limited (PFL). PFL has committed $2.0 million, with additional funds coming from existing investor K1W1 and new fund Impact Enterprise Fund (IEF).The financing will be used to fuel Melon’s continued US expansion and for further investment in its proprietary technology platform.
Punakaiki Fund will hold a 32% share of Melon Health after the round is completed, including commitments made subject to the progress of PFL’s current public offer.
As cornerstone investors, we see enormous potential for Melon Health to extend their platform’s demonstrated capability to change lives and save costs to even more providers and hundreds of thousands of patients.” Said Lance Wiggs, founder of Punakaiki Fund. “This funding round is vital in helping Melon deliver on their commitments to their clients in the USA.

Melon Health is the first investment of the Impact Enterprise Fund.
Melon has developed a leadership position in the New Zealand market and is poised for significant growth in the USA by leveraging recently landed contracts with flagship customers such as New York-based Oscar Health” said IEF Investment Manager, Chris Simcock. “What the team have achieved in terms of patient outcomes and people’s ability to self-manage their health – all through a digital platform – is hugely impressive, and we’re excited to be working together to create a global market leader. Melon is a great example of the type of founder-led, purpose-driven business that we like to invest in.”
As an investor in New Zealand companies whose focus is making a positive social impact while generating a return, IEF is an ideal partner to assist us to continue to scale our business globally” said Siobhan Bulfin, CEO of Melon.

With IEF joining existing investors Punakaiki Fund and K1W1, Bulfin says “We’re excited to have partners on board that provide us not only capital, but also vast  experience in our market vertical and strategic input.

Melon’s platform enables patients to self-manage their health, resulting in reduced utilisation of the healthcare system, driving significant cost savings.  “In the USA, where the focus has shifted to value-based care, healthcare systems can share in the cost savings. Solutions that focus on keeping patients away from the hospital and well are in urgent need. With four years of evidence behind us, that is our target market” Bulfin says.

Over the last year Melon has signed Australia’s fourth largest health insurer, nib, along with Georgia Physicians Accountable Care (the largest physician owned accountable care organization in the US) and Oscar Health as customers. In New Zealand, they have signed additional contracts with primary health organisations and district health boards and have demonstrated that the platform can deliver healthcare cost savings of up to and over 75%, while also achieving superior health outcomes for patients.

“It’s difficult to get health economic data in NZ, but what we do know is Melon has successfully helped prevent over 60% of patients on it’s pre-diabetes program, going on to develop type-2 diabetes or cardiovascular disease – which saves the healthcare system around $7,500 per patient per year.” Says Lance Wiggs

Incorporated in the USA in 2013, Melon Health’s USA subsidiary was one of three companies selected by the Mayo Clinic in 2015  as an innovation partner. Later that year, Melon won the US National Award for Social Innovation using Mobile Technology.

About Melon
Melon’s digital health platform enables insurers, healthcare providers and employers to prescribe curated digital health solutions to their end consumers at relevant touch points in their health journey, and in turn, receive actionable data to deliver value-based care. Their cloud-based mobile platform integrates and aggregates devices, wearables, content and social engagement to deliver personalised health management programs for consumers.
Melon’s clinically-validated mobile interventions combine peer support (connecting members with others on a similar journey), health coaching via video, audio or live chat, remote monitoring and decision support, and behavior change modification, translating into a net healthcare cost savings of $3,500 per person (source. NZ Treasury Tool).

About Punakaiki Fund
Punakaiki Fund Limited makes long-term investments into high-growth, revenue-generating New Zealand companies. The fund holds $41 million of assets and has investments in 20 portfolio companies. Punakaiki Fund has an active Public Offer, and the product disclosure statement is available here:

About K1W1
K One W One Limited is an investment company owned by Sir Stephen Tindall. It and its subsidiaries have invested over a total of $100M Seed and Venture Capital into a large number of start-up and early stage businesses from biotech, environmental technology, high tech, software and other high export potential businesses. The aim is, either directly or as a “fund of funds” to assist young entrepreneurs to grow New Zealand as a leader in the “knowledge economy” and to help create a culture of making New Zealand “cash flow positive” in international goods and services trade.

About Impact Enterprise Fund
Impact Enterprise Fund is New Zealand’s first domestic focused impact investment fund. The fund provides growth capital to businesses who deliver social and/or environmental impact, alongside attractive financial returns.
This fund has two primary objectives: delivering market-rate financial returns, and delivering tangible societal and environmental outcomes.

eScooters and eBikes – let’s upgrade the rulebooks

I’ve been outed as someone who isn’t entirely positive about the new Lime electric scooters in Auckland, Wellington and Christchurch. There are a few reasons for the, but first let’s agree on one thing – the electric scooters (and electric bikes) do bring a lot of joy.

It’s difficult not to grin when you ride the new scooters, and it’s clear that most riders are loving the experience. Lime has a very simple and polished on-boarding process, especially if you have Apple Pay enabled (download the app, scan and ride), and the scooters feel like magic.

They get people moving on the streets in a very human way, at the same level as people walking, but with the speed of running or even cars, but without the effort.

Some Background on Transport Safety

The simple rule for vehicle safety is to separate hard from soft, and slow from fast.

That means making sure that people walking are separated from fast moving cyclists and scooter riders, and they in turn are separated from cars and trucks. A well designed road has footpaths, bike paths and motorised traffic lanes, while really high speed travel happens well away from there on motorways and train tracks.

Where we can’t separate vehicle mode flows then we need road design that helps to ensure that the speeds are consistent. It’s good to see the increase in the amount of mixed use space down-town in Auckland, for example, which does exactly that. We are also going to see lowering of speed limits in suburbs, to 30km, as well as outside of schools and in more densely populated areas.

We are still getting it wrong too often – we should, for example, never have a reason for people on bikes and trucks traveling at high speed to be (often fatally) interacting. There is a lot more work to do before our physical environment is safe and we need to keep going.

Cyclists have known for years that many suburban streets are very dangerous for people on bikes (and motorcyclists have too), and that evolved in past years into a road warrior mentality to ensure survival. Being a road warrior means being constantly vigilant about your own safety, accepting that every rider is going to experience fatal risks on almost every ride and likely carrying a few scars and bruises from falling off after car drivers perform dangerous manoeuvres.

The advent of physically separated cycling lanes has changed the nature of cycling, and it’s no longer a requirement to be a road warrior to survive. We can now wear normal clothes, ride sit-up bikes slowly and increasingly enjoy completely separated – and faster – experiences to being in a car. The more “normal” people we see on bikes, the more everyone adjusts, and we are all safer.

The rapid adoption of electric bikes over the last two years (in particular) has transformed what was, for many, an arduous lengthy commute into a fun and sweat-free ride. These vehicles  dramatically increase average speeds (many electric bikes are clipped at 25 km/h) and make it much easier and safer to accelerate with the cars when the lights go green. They come with improved brakes, stronger and larger tires for more grip, and riding positions that provide better visibility and ability to brake and manoeuvre.

The new electric scooters are also speed-limited, to around 27km/h, although the Lime scooters only see this on flat or down hill, and lose a hilariously large amount of speed when travelling up hills. These can also make journeys fun and fast, and get people out of cars and into the outdoors.

The issues

The electric bikes and electric scooters introduce much faster speeds into a variety of places, and some of our infrastructure is unable to cope. The scooters are under-braked (those tiny wheels) versus bikes, and they are much harder for newbies to turn to evade trouble. On the upside they are easy enough to step off from, but that isn’t necessarily obvious to a beginner. So the risk here is that beginners jump on to a scooter and then get into a situation that they cannot easily avoid. Some of these could be fatal.

The scooters themselves fit into a strange gap in the law. They are allowed to be ridden on the road (off to the left), on the footpath but, according to NZHerald, not on cycleways. For some reason though some riders assume that this means they can travel at 25km/h on the  footpath or over a busy pedestrian crossing  – and that’s very dangerous. Wearing a helmet will make riders feel more secure, and encourage higher (and more dangerous to others) speeds.

On the road meanwhile it’s easy and normal for scooter riders to be zooming along at 25 km/h while cars nearby are doing double that speed, creating a 20-30km/h speed differential between the scooter rider and the road and the cars, each of which is potentially fatal.

What to do

We need more electric scooters, electric bikes and other power assisted and non power assisted human size vehicles. They transform the way we live and interact with our environment, and make living in a city a lot more fun.

However I’d like see a new set of regulations for all small power assisted and non-power assisted vehicles (cycles, scooters, skateboards etc). These should focus on the use case rather than the vehicle, where clearly we are going to see increasingly diverse options.

Safe at Slow speeds

We should allow all these devices to be ridden slowly amongst pedestrians, or more quickly on cycle lanes or and on low-speed urban streets. These riders should not be required to wear helmets, but they should be required to ride at an appropriate speed for their environment. Zooming at 25km/h amongst pedestrians is dangerous riding and should be treated seriously.

Electric Scooter providers should be held accountable for the large volume of ACC claims, and provide better introduction (e.g. speed limited to start) and protection against harmful use by analysing use patterns.

Protected at High Speeds

However on higher speed roads, such as arterial or 50km/h routes without cycle lanes, I’d like to see the rules treat these devices more like mopeds and motorcycles, with expectations, say, that at least a skateboarder quality helmet is worn up to a certain power limit, and beyond that a proper motorcycle helmet.

Overall though we need to continue to work to get more separated lanes, mixed use areas and lower speed limited with speed limited furniture in place, as these are the only way to truly remove fatal risk.

Riding scooters and bikes, or even walking, is really enjoyable, and let’s have a society where we travel at this human level.


About me: I am a walker, cyclist, e-cyclist, e-tricyclist, motorcyclist (with a lot of international experience)  car driver, bus rider, plane passenger and occasional train rider. I live in downtown Auckland and walk or ecycle to work, and ecycle, motorcycle and fly to meetings. 

Yale versus NZ Super Asset Allocation

Disclaimer: Punakaiki Fund Limited has lodged a Product Disclosure Statement (PDS) for a Public Offer. Please read the PDS if you are considering an investment. 

Yale Investment Office have just announced their latest results (good, especially with the lower risk they carry) and their target asset allocation for 2019.

I always find it interesting comparing their portfolio construction to that of our Super Fund. Which portfolio would you prefer to be holding as the stock market wobbles?

The chart below shows how Yale’s portfolio has evolved. NZ Super has 82% in equites, bonds and cash – a situation that Yale has not seen since 1992 or so.

The philosophy differences are astonishing. Yale’s Dave Swensen wrote the book on Institutional Funds Management, and led Yale early into truly diversifying assets – away from US stocks and bonds and into, in particular, alternative assets such as Absolute Return, Venture Capital, Private Equity (Leveraged Buyouts). Their results have been superb, and also resilient to market downturns.

The returns from Venture Capital are particularly strong, as Yale is one of the worlds most desired investors for funds so gets the pick of the crop. Their 20-year weighted return from Venture Capital is 25.5% per year (as any June 2017), and their expected return from Venture Capital going forward is 16%, each of which are the highest across Yale’s asset classes.

It’s highly unlikely that any other investor can do as well as Yale (another peers) investing in Venture Capital, and only the top 10% of Venture Capital funds generate those outsized returns (and Yale has access to them.)

But it still amazes me that New Zealand’s Super Fund allocates essentially none of their portfolio to the class, and that they are so exposed to the stock markets.

Obviously our take is that we, at Punakaiki Fund, are playing in a space that is seriously short of investment funds, that New Zealand has a huge advantage in generating global companies (that need growth capital) and that we could use the funds, and competition, to help those companies.



A Letter to Shane Ellison – CEO of Auckland Transport

Dear Shane

You’ve begun your role as the Chief Executive Officer of Auckland Transport at a moment of crisis, with hundreds of Auckland families coping with the death of their loved ones on the city’s roads every year. You have a mandate for change, a laundry list of initiatives, and a public and media ready to hear your actions.

No doubt you’ve heard – formally and informally – from your Board, from the Mayor and Auckland Council, the road lobby and cycling and walking groups. However, I am writing to you as an individual, and from the perspective of your end users – parents, sons, daughters, car drivers, motorbike riders, cyclists, pedestrians, bus riders, and train passengers. People.

I ask for your leadership – to guide Auckland to become the safest city in the world by instilling a world-leading safety culture at Auckland Transport.

You face an overwhelming number of tasks, varying in scope from the trivial to multi-year projects. to do. I am sure, for example, that you have read the Road Safety Improvement Review and its pages and pages of suggestions. But a long list of tasks means that nothing is prioritised; so while a to-do list will be helpful, the real solution is a change in culture, and this needs genuine safety leadership for Auckland Transport, and from you, as its leader.

Your leadership to save lives in Auckland can start by ensuring that your direct reports take a safety-first approach to everything they do. And you can set the expectation that they will set the same standard for their teams, cascading in turn these values to all Auckland Transport workers and contractors, and by extension, everyone living in and visiting our city.

This will be challenging – some people will resist putting safety first, and others will be slow to start to live the value. Everyone will complain about the extra burden. But it will also be inspiring – as we all see the visible evidence of change, and the change in culture that empowers, requires even, everyone to just make things happen.

The challenge also pales before the mandate – to save hundreds of Auckland’s families from coping with the loss of loved-ones who are fatally harmed on Auckland Transport’s network in each and every year.

This looks like a daunting assignment but it is an achievable goal. I know this from my own experiences observing and being part of safety turnarounds at two very large overseas industrial sites, each with thousands of workers and contractors. In both cases recordable injuries and fatal risks plunged, and production soared. I have looked back at my experience to give you some unsolicited advice about to tackle this sort of turnaround.

I hope you take up this challenge, and create a lasting legacy.


Suggestions for leading a safety culture.

1: Taking personal responsibility for safety of all people using Auckland’s footpaths, bike paths and streets. Live the safety value in your own actions, including:

Talking and meeting with the families of everyone who dies on your watch. Turning up to the funerals, hospitals and homes of the deceased, injured and traumatised. Taking your management team with you.

Starting every meeting, large or small, with safety. These can be a brief as a ‘safety contact’ – a short anecdote on safety (good or bad) that focusses the meeting on the greater aim.

Leading daily safety walks (and rides!) with your management team to observe activity, identify hazards, have structured conversations with staff and contractors, and assign responsibility to fixing hazards.

Demonstrating safety leadership by uncompromisingly putting safety first in planning, and showing visible leadership with dramatic actions like closing streets and lanes to address critical issues, changing work practices, and more.

Conducting layered audits with several levels of staff (and contractors) to deep dive into narrow topics to identify and fix larger gaps in processes.

Reviewing close-out reports for every injury-causing incident with your management team, giving fatal harm incidents even more attention. Ensuring that multiple root causes are properly identified, and Auckland Transport puts in temporary and then permanent fixes to prevent further injury. This is not about punishing individuals – but a quest to learn how individuals can be physically safe.

Requiring the same level of commitment from all of your management team and staff, all leaders of contractors, and all of their staff.

Bringing the board of directors along for the journey, including meetings with families, a safety focus in meetings, and on-site visits. To be fair, the board, and chair, should be with you arm in arm as you drive this journey forward.

2: Systematically identifying and removing hazards, both large and small, using a safety management system for all of Auckland:

Ensuring every employee and contractor is actively identifying hazards. The easiest way to do this is to mandate safety walks (for all supervisory staff), and safety meetings where hazards are identified.

Using the cascaded safety walks, management review of injury accidents, internal and external (public) reporting to identify and classify (severity and risk) hazards across the Auckland Transport ecosystem. Record these in a central system.

Creating and assigning (with permission) actions to Auckland Transport staff and/or contractors for all identified hazards. These is done during or just after the safety walks, in the formal reviews after injury-causing incidents, and by a self-selected or assigned internal team for publicly submitted reports.

Creating the bias and authority for immediate action for these hazards – actions that remove hazards within hours or days with quick fixes. You might need to buy a lot more road cones, but the trick with quick fixes is to give broad authority to all staff within a limited budget. Give everyone permission and authority to make things happen, even it it means going to Bunnings and buying planters.

Systematically reviewing the more serious hazards to upgrade the quick-fixes to permanent solutions that design the hazard out.

Having a bias for very low cost solutions – and keep a close watch on the incessant proposals for more expensive and slower processes to create permanent fixes. Is there a way to do it cheaper and faster? Would the funding be better spent on more implementations?

3: Report to us on your progress

Publish a list (and map) of all identified hazards and allow members of the public comment and vote.

Report, by hazard, progress to put in place temporary and permanent fixes to every hazard. Provide photos, stories and showcase safety heroes from within your staff and contractors.

Measure and report on the output statistics – not just fatality statistics, but hazards identified and closed out, the number of injuries and near misses, and the source of those reports. I will judge you not by the number of fatalities, but by the number of hazards you identify and the speed and methods by which they are closed out.

Work with NZTA and Auckland Council to address the risks that cross your domains. Report on and track the hazards in their domains.

In Summary

This list is not about finding people to blame and remove, but about cascading safety leadership throughout the organisation so that everyone can come home safely each day. If you adopt an inspirational approach then you have a great chance of taking us with you on your safety journey – and we’d all like to be inspired almost as much as we’d like to be able to walk, cycle and drive our streets in safety.

Yesterday my wife had a meeting in the cafe in the Auckland Transport building, on a morning when a man in his fifties was fatally wounded after being struck by a car on a suburban Auckland road. Despite this the mood in the cafe was upbeat – shockingly so when so many of us hold Auckland Transport responsible for that death, and that of so many others, including a 15-year-old earlier this month.

Each and every fatality is preventable. The person in their 50s was in an area “notorious for accidents”. The 15-year-old was killed in an area that had been repeatedly identified as a fatal risk hazard to Auckland Transport.

Nothing meanwhile has been done to fix the issues I identified after I saw a man pass away on The Strand four years ago. There are still no signs for cyclists descending Parnell Rise, the gravel on The Strand remains and there is no sign of a separated cycle lane.

We wait for the next preventable deaths.

The honeymoon is over. I ask that you hold yourself responsible for all future injuries and fatalities under your purview, and do what you can to reduce harm to us all.

I will personally hold you to that standard, and already hold Auckland Transport’s Board, and Auckland Transport’s staff and contractors to that same standard, and I constantly ask myself whether I am doing enough as well.

Lead us to a safer place.

Liars and Fools: Climate change deniers

I have, somewhat randomly, made it a ongoing task to reply to climate change denial comments and articles on

Thankfully over the years we’ve seen the quality of the writing in NBR and the comments themselves improve, but there are still a few writers or commenters who seem to thrive on denying climate change. Denial a surefire way to incite a good volume of comments, but ultimately there are really only two explanations for this behaviour from writers and commentors. They are either liars or fools.


Over the years I have wondered whether some people were actually being paid not just to write articles but also to make comments supporting climate change denial across a wide range of media. The articles and comments often seemed to be so outrageous in their disregard for facts, spouting of pseudoscience nonsense and reference to other deniers that I could think of no other plausible explanation.

It turns out I was correct – it emerged that there were actually groups (e.g. in USA, but it seems also in Russia) being paid to deny climate change. These groups were and still are not just writing articles and haunting comment sections, but have proven ability to capture mainstream and cable network media time. They do make for much better television – simplistic pseudo science and strident denial, for example, plays a lot better on Fox News, CNN or in columns than complex science and deep considered discussions of the possibilities.

This systematic media attack, which follows in the footsteps of the anti-tobacco lobby and is often aligned with the extreme right wing partisan political groups, is arguably one of the biggest civil acts of irresponsibility of our time, and some media (Fox News is the obvious one) have been complicit in that.

It’s hard not to argue that these professional deniers deliberately lie to try to present their arguments (and get more air time), and the fact checking required to hold them to account is painful and time consuming.

But it’s over for them – too many people know that there is no basis to their rhetoric, and society is increasingly intolerant of them.

In the USA the tobacco lobby was finally stalled by losing substantial court cases, and the same approach is underway for climate change denial. Exxon Mobil, for example, just lost a case where they tried to prevent investigators from Massachusetts and New York from digging in to their decades long systematic climate change denial. Over the coming years we can expect a series of US lawsuits to result in some major behavioural changes, and material loses for the affected companies and people.

However lawsuits take time, and they are a peculiarly American approach to resolving these sorts of issues. Other countries, including New Zealand, traditionally use legislation to lower public harm from private activities like selling tobacco, toxins in food and toxic emissions. Arguably we should see laws against paying for or otherwise supporting deliberate and malicious climate change denial, just as we did against arguments (including via advertisements) that smoking cigarettes was healthy.

The worst of these deniers, I foresee, will not just be seen as pariahs, but may also be condemned and convicted by civil and criminal court systems. As the impacts from climate change become more and more obvious and abhorrent society’s perspectives on these liars will worsen. History will not be kind.


The purpose of the professional liar deniers is to prevent action against climate change and to preserve the status quo. They do this by using a wide range of media to create and support legions of people in the second category – fools.

I’ve often wondered whether some of the worst deniers in this category just didn’t ever study chemistry, physics and or advanced mathematics, and don’t know how what they don’t know. As the Dunning-Kruger effect explains, they are perhaps so uninformed about the science that they don’t realise how stupid they can sound. This is worse when they are smart and successful in other areas, as that can make them over-confident about their abilities in climate science. My favourite comment from this sub-group is the one where CO2 is breathable so clearly not harmful.

Dumb as that sounds, I would still back everyone’s ability to learn how climate change works, but they have to have time and motivation.

I expect most in this group don’t have the time, and even if they accept that they don’t really understand the science, they have put their trust in people who are not credible climate scientists. This rapidly becomes a faith-based argument – my expert is better than yours.

It is, of course, ludicrous to believe that a loud yet uninformed TV personality, a marginal website or extremist politician or columnist knows more than tens of thousands of professional scientists who constantly cross check each other. But the scientists don’t help themselves either – they are far less accessible, and the deepness of the topic makes for boring columns and TV. It’s also too easy for harried editors or biased platforms to broadcast the loudest voices, and to ignore the quiet boring ones with nuanced but serious messages..

Once the liar perspective has conned someone into believing in climate change denial, it’s very difficult for them to change their mind. That’s just human nature.

It’s especially difficult if they have a legacy of denial statements, private or public. After all it’s hard to admit that you’ve been conned – and that you have been acting like a fool.

But while avoiding embarrassment is be powerful motivation to pretend to believe that anthropogenic climate change is not real or a threat, it’s pales before the genuine existential threat we are facing.

So let’s encourage those who have found themselves on the wrong side of truth to please stop behaving like fools and either do their homework or to put their trust in the world’s top scientists. We can point them to the clear and present evidence of climate change, like disappearing glaciers, and to the most obvious fallacies that they are spouting, but ultimately we need to point to the liars who have duped so many.

Happily millions of people are changing their minds. One good example is Jerry Taylor, who was thoughtful enough, during his previous job as a professional climate change denier at right wing think tank ALEC, to dig in to the facts, and then strong enough to change his mind.

We should appreciate just how difficult this is, and reward those who do have the courage to learn and change, especially those who do so earlier.

Deniers with a Political Cause

Some deniers, from either of the above categories (liars or fools), are active deniers primarily because they are supporting a particular political agenda. They deliberately ignore the “other side’s” arguments and preponderance of evidence.

However we are seeing generational shift in political parties, and increasingly doing something about climate change is becoming table stakes to get elected. As a society, a world even, we need to help all politicians and their supporters understand that climate change is well beyond politics.

Hobson’s Choice: Liars or Fools?

All climate change deniers, whether they accept the label or not, are stuck between two poor choices – admitting that they are smart and educated enough to believe climate change is real but that they have been deliberately lying, or admitting that they are not smart or educated enough or that they have listened to the wrong people and have been taken for fools. Most are in the second category.

Old Fools

Sometimes the latter is tied up with age – where people are just too old to care about learning something new, and are content to be foolish. (On the other hand climate change from CO2 emissions was reported in NZ well before anyone alive today was born). We generally accept that older people can have outdated views, and tolerate the occasional slip-up, and most are smart enough to accept that times have changed and understand that a few of their perspectives are dated. (I hasten to add my own parents are well ahead of the times.)

But sometimes see well known people from another era suddenly emerge in the press as climate change deniers, perhaps with a dose of racism and/or sexism. While their rhetoric may be great for generating page views and controversy, it’s sad for all of us to watch.

Unfortunately the required speed of response to climate change is faster than the speed of generational change. So let’s make sure they are told, gently via their editors and friends, and firmly by society, that their statements are not just foolish, but dangerous to all of us and damaging to themselves. Let’s give nothing to denial.

What about the deliberate liars, or even those who just say they are trolls looking for a reaction? Let’s stop tolerating them, and start digging into their motivations and funding, while ensuring we capture the evidence for those future lawsuits.

Those who get it

There are two other categories of people, when considering attitudes towards climate change. The first is those who acknowledge the established facts and science, and understand that we need to lower emissions and mitigate the climate change that is upon its and emerging. They know it’s important, and relatively urgent, but there are competing priorities as well. This is the consensus view.

The second group also have some grasp of chaotic systems, positive response and exponential growth, and have read some of the work concerning the ocean currents, ocean acidification, trapped methane and the lubrication effect of the melting ice/water interface. Those people are terrified that our ecosystems may become uninhabitable, at the very least our lifestyles irrevocably destroyed, and many are increasingly (and not at all usefully) moved to the point of despair on whether we can do anything at all. They know we need to act immediately, and dramatically, in order to have a chance of a normal future. This is a more marginal view, but if we are going to create great TV and articles the those are voices we should be hearing more of. They are not just credible, but it’s increasingly concerning that they may well be right.