Lance Wiggs

I’ve received a series of comments from Ken Pedlar on some recent posts, and decided in the end to approve them for publication, removing any personal details such as phone numbers.

I’m excerpting from the latest comment below, which was in response to the the post on Xero valuation. I’m doing this and commenting on it to show how to avoid making the very poorest investment decisions. There is much in the note which should cause any reasonable person to never reply, but it is worth going through why it triggers investor instincts to run a mile.

The comment

“How would you go about estimating a value for a new Wingless Vertical Takeoff & Landing Pico–come Microlight/Ultralight Craft scalable to immense size. Craft will use latest lightweight high tech permanent magnet electric motors controller energy storage cells etc plus miniaturized avionics autopilot, infrared night terrain scanning equipment etc. Two craft one capable of carrying 50kg and a manned unit carrying 200+ kg craft. , Both to be constructed over 6 to 9 months and the whole process videoed in documentary style and fed direct via a pay per view site to the net to raise money to repay initial funder. Upon maiden launch and info being sent to certain long interested parties I am absolutely confident of raising several billion for forward order. As inventor of the globally patented Inertialess Drive Rotor and multiple green tech developed from it and having done a successful launch worldwide of my previous company with a handful of people while engaged in a convoluted war with racist idiots in the corrupt SEC. They becoming engaged after nasty pathetic niggling shareholders made four anonymous complaints to them of which the ensuing public warning notices literally destroyed the company. Thus I do have the necessary experience to go global real quick if I can find a couple of guys like yourself who are smart enough to come to the party part fund an expert engineer/physicist/entrepreneur to the tune of $100K to get the two prototypes built over the next few months in the run up to April first whereupon it becomes legal to raise funding without a prospectus using the crowdfunding format. I could certainly teach you guys a thing or two and also am willing to learn for your ample expertise. Know also I am well know throughout the fortune 500′s and upper echelons of scientist, engineers, and royals the world over and have powerful above top tier people. I require one or two person who can be trusted to front me my name having been tarnished by the SEC and a few of the nasty petty shareholders who have been blocking my access to funding. All I ask it you come and help me an I can assure you I can and will make you a very very wealthy man in return. My interest is the craft as I don’t need money once I have these for my family. I have 12 kids and a heck of a lot of grandchildren. Should you decide to help please come talk to me or at least call me, I only bite on Friday’s. LOL. Ph..”

The Issues

Let’s walk through the issues:

1: a new Wingless Vertical Takeoff & Landing Pico–come Microlight/Ultralight Craft scalable to immense size”

This sounds similar to Martin Jet Pack, and their company is 9 years old and they have yet to make a commercial sale. So from an investor perspective this points to years of funding over multiple rounds, a lot of work with the company and the founder personally. So the idea and founding team had better be credible.

The “scalable to immense size” triggers less than credible physics warnings.

2: Two craft one capable of carrying 50kg and a manned unit carrying 200+ kg craft. , Both to be constructed over 6 to 9 months

The timing to construct two aircraft seems very unrealistic given the Martin Jetpack experience. Moreover it is now clear that this investing into an idea only, and not into a company with a tangible prototype or paying customers.  That’s a good way to sink a lot of money over multiple rounds.

Meanwhile there are at least three aerospace companies in New Zealand that have advanced prototypes, including a Composite Helicopters, a fixed wing player who I am not sure I can name and Martin Jet Pack itself. All of these are perhaps seeking investment.

3: the whole process videoed in documentary style and fed direct via a pay per view site to the net to raise money to repay initial funder.

This raises the question of what the investment is for – a documentary or an aircraft? Very few people could point to a successful track record in either, and certainly not both.

4:  I am absolutely confident of raising several billion for forward order. 

This raises the concern that the writer is not realistic in his expectations. If it were remotely true then funding would not be an issue. If the founder had a track record of attracting such orders then this could read differently, but we would expect to see evidence for the same.

5: globally patented Inertialess Drive Rotor

This raises the question of patent validity. I searched and found this.

However that search raised lots of questions. There is the failed delivery of any products from the company that owned the patent, which calls into question the usefulness of the patent. If everything else checked out (it does not) I would unleash a professional, such as Kristian Slack, on this field to determine just how interesting the patent is before going any further.

I also searched on the term “patented Inertialess Drive Rotor“ and the results are not good. The third result is from Crank.net, the second is titled “Is this possible” and the first says someone did a search and turned up nothing. The fourth result is a Youtube video with surprisingly readable, and negative, comments about the former business.

The phrase itself screams “fake physics”, in the same category as “frictionless” or “perpetual motion.”

6: having done a successful launch…. while engaged in a convoluted war with racist idiots in the corrupt SEC. They becoming engaged after nasty pathetic niggling shareholders made four anonymous complaints to them of which the ensuing public warning notices literally destroyed the company

This raises the first question of why the previous company failed if the launch was successful, and secondly on what actually happened to the investors in that company from their perspective, and thirdly on just how hard the founder was to work with.

However the real issue is that the way the investors and regulator are referred to in the comment, as even if their actions were poor (and I doubt it very much), the rant reflects very poorly on the founder’s ability to work with anyone in the future.

7: Thus I do have the necessary experience to go global real quick if I can find a couple of guys like yourself who are smart enough to come to the party part fund an expert engineer/physicist/entrepreneur to the tune of $100K to get the two prototypes built over the next few months in the run up to April first whereupon it becomes legal to raise funding without a prospectus using the crowdfunding format. 

This raises the question of whether the founder understands and has learned from the lessons of the catastrophic failure of the previous company. It also raises the question about the expectations of the founder for being able to build two prototypes so quickly, with such limited funding. I would expect to see prototypes that are built using more time and less money before investors are approached at all. Given the challenging physics above it seems that an actual product would never get off the ground, as it were.

However this raises the very deep and problematic question of the prospect of this  proposition being offered to the public through a potential law change. How will we prevent major losses of funds for investors if crowd-funding becomes law in New Zealand? It also calls into question whether we should even allow the law in the first place, which is sad as it could deliver substantial benefits.

8:  I could certainly teach you guys a thing or two

This raises the question of whether the founder is a collaborator, and can learn from advisors and experience and can write in a way that does not make people angry.

9: and also am willing to learn for your ample expertise

This raises the question of whether the founder actually could learn from others.

10: Know also I am well know throughout the fortune 500′s and upper echelons of scientist, engineers, and royals the world over and have powerful above top tier people.

This raises the question of why they and others are not investing.

11:  I require one or two person who can be trusted to front me my name having been tarnished by the SEC and a few of the nasty petty shareholders who have been blocking my access to funding

This raises the question whether the founder is looking for people who to convince to give him money based on a process or evidence that the SEC and former shareholders would be very uncomfortable with.

It also raises the question of what actually happened, and a quick search reveals that the SEC (now FMA) had a warning in 2001 about an illegal share offering. The notice also states that there is a long history of treating with public investors without the necessary legal processes and documents :

“The Commission had previously, in 1998, banned advertising for shares by Inertialess Drive Technologies (1995) Limited (now liquidated) because there was no registered prospectus. In 2000 the Commission also banned advertising for shares in Inertialess Drive Corporation Limited for the same reason. Mr Pedlar was involved in both these companies. The advertisements in the Bay of Plenty Times are targeted at former shareholders of these companies.”

It raises the question of whether the founder has good legal advice, whether he would take good legal advice or whether any good legal advisors would work with him after this track record.

12: All I ask it you come and help me an I can assure you I can and will make you a very very wealthy man in return. 

This raises the question of inflated investor expectations, leading one to believe that the founder is targeting unsophisticated investors, a real issue in early stage businesses in NZ. Investors in this space should know exactly what they are getting into, and sadly many do not. Angel clubs can help educate investors, but there is no substitute for full time professionals on the job.

13: My interest is the craft as I don’t need money 

This raises the question of credibility, especially as a search finds this Bay of Plenty times article about Pedlar raising $6.8 million from local investors and then disappearing. The key quote:

“Mr Pedlar moved to Switzerland following a shareholders’ meeting in Tauranga on February 24, 2000. By the time the company was put into liquidation, he had left behind more than 1200 shareholders, most of who lived in the Western Bay of Plenty.”

Again this raises the question of his own motivation and ability to deliver value to investors. It also raises the question of what he told the investors, 1200 of them, in the 2000 fund raising process.

In Summary

Some people prey on our vulnerabilities to take advantage of us, using things like greed and dishonesty to capture us into an elaborate confidence trick. It may not be planned or even deliberate, but the general rule when confronted with something new is worth putting in lights:

If it sounds to good to be true, it is

There is plenty in the above pitch that makes it obvious to any reasonable person that the investment is best stayed well away from.

Which makes it even more upsetting that so many people were caught up as “investors” in Pedlar’s prior company, Inertialess Drive ZPE. More than 1200 shareholders gave a total of over $6.8 million to a business that was flimsy at best and arguably fraudulent at worst. Let’s quote from the Bay of Plenty Times again:

Mr Richards said he was struck by how the factory looked like the set of a B-grade movie, with people in white overalls milling around like extras, with nothing really happening.
He asked Mr Pedlar how business was going and was told that the company was working with General Motors on a deal worth billions of dollars.

Astonishing. Those investors were targets of a scam at worst and victims of an illegal investment (no public prospectus) at best. It would appear that they did not make their decision based on well-informed robust analysis, they did not do proper due-diligence on the company and they did not “invest in what they know”. They broke the basic rules of investing in early stage companies, and as a result all early stage companies will look risky to them.

But I don’t believe that early stage investing is necessarily risky, but like all investing it should be done on the basis of good information and understanding. The first step is to avoid any stories that are too good to be true.

 

I’ve been asked too many times what I think of Xero’s valuation — whether it’s in the last few months, or in the years gone by. I don’t have much time, so decided to set myself a time and information limit and give it a go. 

So let’s walk through how to do a valuation:

1: based on very limited information — specifically, just one piece of information — this earnings release from yesterday:

2: And I will try to do it in an hour. I really don’t have that much time.

Constructing the financial forecast

We start by putting down what we know from the earnings release into a spreadsheet.

There is not much there, but it should, however, be enough.

We next work out some ratios, and back-fill the run-rate numbers for September 2012. From now on we are starting to make assumptions, but we are using the known data to make sure they are roughly reasonable.

Now know that the average revenue per customer was $379.50 per year in the USA, and $279.50 in New Zealand. We could check by looking at Xero’s pricing page, or even their annual report, but that’s out of scope — I’m only using the information given.

Next up – let’s forecast forward a year, based on the same growth ratios.

I put an adjustment in for churn and so on, but really didn’t like the thought of doing a model based on six-monthly numbers. So I stepped back and decided to convert to monthly numbers. The first thing to do was to derive the correct monthly growth rates. This is a core part of any forecast, and it’s worth a look at how to turn yearly growth rates into monthly growth rates, double checking to make sure we get the formula right:

At this stage I was recovering from the wasted time on doing the model the wrong way. But it’s normal to re-jiggle things a few times when building a model, as it’s the manipulating of the numbers that lets you understand how it will work.  

I next put the months across the top of the page and got the initial growth rates sorted. I also changed the order of data on the page to be logical, starting with customer numbers, then revenue per customer and then revenue.

All this is very quick and I could now stretch out the table

The model uses the customer growth rate per country as the main driver. US 7.6% per month, NZ 3.4% per month. These numbers feel low for folks in the early stage game, but Xero is 7 years old after all.

But it’s still not good enough as nothing grows forever, and growth rates fall over time.

So I put in a decelerator on the growth rates, so that the monthly growth rate would decline over time. I varied the numbers by market, so that the US and UK growth rates would not decline for a few years, and the NZ one declined at a faster rate than the Australian one.

I also put in some cost assumptions – very simply assuming that each staff member was worth $200,000 in total salary and overhead. Staff numbers were the only piece of cost information I had to go on (not even profit/loss) and so that’s the best I could do.

I used a ratio of the number of staff per 1000 customers to drive the increase in staff numbers over time, which would rise as the customer numbers rise.

From there we can derive the EBIT (Earnings before interest and tax), which unsurprisingly was negative for the first few years. 

I like extending models out a long way, so I did. For something like Xero the hyper-growth is going to continue for a while, so long curves are needed to get a good grasp of the value. 

I then tweaked the assumptions to make sure that the numbers were as rational as possible. 

The key cost driver of the ratio of staff numbers to customer numbers was making the model lose money forever, so I cheated. I looked up Intuit’s numbers of staff and revenue, found and estimated the same for its Quickbooks division and then gave Xero a discount on that due to their better efficiency using the SaaS-only model. I then set that number to September 2025 and put a gradual decline in the staff/customer ratio from now until then. Whatever the mechanism, It is important to show that as Xero gets bigger it will have an increasingly better ratio of revenue to costs.

I then looked at the 2025 numbers to check that the end numbers were not outrageously high. They were a little for the UK and USA, but the model does not take any other countries into account, so, running out of time, I left it as it is.

I then gathered up the annual figures into one place, largely for presentation purposes. I  did the Net present Value calculation on these yearly figures rather than the monthly ones. No big reason for that, and ideally I would do it on the monthly ones.

Net Present Value

The net present value (what it is worth today) varies depending upon the WACC, (weighted average cost of capital or discount rate) that we use. Think of the WACC as the amount of interest you would want a bank to pay you if the investment was as risky as Xero. 

At 12%, which is often quoted as a long term stock market return, Xero’s cash flows to 2025 are valued at $2.3 billion. At 18%, which is more suitable for a fast growing company like this, Xero’s EBIT flows are summed to $1.4 billion.

However after 2025 Xero is still a going concern, and so we now need to add something which is the cause of a lot of errors and angst in valuation models – the terminal value. The terminal value takes the last years earnings and assumes that these will be constant from then on. What that’s worth depends on the WACC used, so it varies in each case. In general I advise to use this with care, and if it is too material, as it is here, then the model needs to be stretched further. The WACC used makes the value fluctuate wildly, and there is a certain amount of finding the right WACC to fit the value you want to create going on.

Results

In this case the sum of the NPV of the EBIT to 2025 and terminal value is $2.2 billion when using the 18% discount rate. (Current market cap is $2.22 billion.)

At 15% it’s $3.1 billion. I’ll ignore the lower rates as they are used for “safe” investments like electricity companies and banks. (Which I don’t believe are that safe). 

So overall this very dirty and quick analysis shows that there is value there in Xero. But don’t forget that this analysis is primitive, wrong and I am not a, or your, financial advisor. 

Next Steps

The next steps would be to build a proper model based on the much wider range of inputs available from Xero, both through their NZX releases and from other sources.

I would also want to test the key assumptions, in particular the USA growth rates and potential. For example, Intuit is large and ponderous, but they are trying very hard to redesign how they do business using design thinking techniques.  I’d want to spend a lot of time looking at their redesigned products, and would stay in touch with them (by using them) as I followed Xero. I’d also use Xero products. 

I’d probably extend the model for more years, tweaking the growth rates and other assumptions a lot harder for different stages of maturity by market.

Overall

This was all done in a very quick period of time, and from very limited information. But the purpose was to demonstrate that it is remarkably simple to get to a set of numbers that can provide useful information. Already I feel I know a little more about Xero, and some better questions to ponder as I look at their business.

There is so so much wrong with the spreadsheet, and probably several major bugs that will change things a lot, probably cancelling each other out. There is also so much to add – a model like this should have over 100 lines. But here it is.

Xero 1 hour Value Spreadsheet 

In the end the spreadsheet took around 75-90 minutes and was a fun exercise. If you like this sort of thing then make one for your own company. Actually you should do that anyway, but use real data, a lot more lines and assumptions built up based on facts, not whimsy.

Unfortunately we have not managed to achieve the total we require by today, the original close date for Punakaiki Fund. This is hard.

We have chosen therefore to both extend the offer period, and to amend the offer in favour of investors, in order to give people more time to consider the offer. The press release below summarises the changes.

We have registered an Instrument to Amend, which details the changes and is available here. The revised Offer Document which includes those changes is available on the PunikaikiFund.co.nz website

 

Punakaiki Fund extends offer period and lowers fees

Offer extended to 25 October, Director and Management fees lowered.

Auckland, 2 October 2013 – Punakaiki Fund today registered an Instrument to Amend the combined investment statement and prospectus (the “Offer Document”).

The changes to the Offer Document extend the offer period, which will now close on 25 October, and lower the minimum management fee and the fees payable to the independent directors.  The changes are intended to make the cost structure more favourable to investors where the total subscriptions are not far in excess of the minimum amount to be raised of $5 million.

The initial aggregated director fees have been reduced by 62.5% from $40,000 in cash and the issue of 80,000 shares (at $1 per share) to $15,000 and 30,000 shares respectively.

The minimum annual Management Fee has been halved, to $150,000.

“It’s important that we have a sustainable fund, even this small, to be able to invest in some of the many opportunities that we are seeing in the market”, said director Lance Wiggs. We are still unsure just how close to the $5 million minimum we will get to by the end of today, but we have made the decision to extend and to reduce the fees.”

Wiggs says the extended time will not be wasted. “I’ll be on the phone and on the road, meeting and talking to a long-list of potential investee companies. This is something we were aiming to do at this stage anyway, and our key problem will be to create a short-list of targets. Overall we continue to see that the demand for funding from quality early stage companies is very strong, and we will have some tough choices to make.”

“It was a lot harder to raise the fund that we anticipated, and our timing versus the Meridian offer was unfortunate, with brokers essentially dedicated to that process for a substantial period, especially over the critical last two weeks. We heard on our road trip around New Zealand that some investors wanted to see lower fees in the case of a smaller raise, and have provided that with these amendments.”

Wiggs is grateful for the support from investors so far, and notes that it is particularly pleasing to see a large number of members of the early stage community contributing alongside other members of the public.

The amended Offer Document can be downloaded at www.punakaikifund.co.nz. Investors can subscribe online, through their broker or by mail.

Ends.

The government’s advertising for the Meridian Share Offer is remarkable for its blandness:

Aside from the pictures and the words underlined in red, all of the advertising is selling a deal. Invest $1 a share now, pay a maximum of $0.60 later and make an ‘implied gross dividend yield of 13.4% in the first twelve months”.

However as Martin Hawes reinforces in his article today, when you buy a share you are buying a share of the future profits of the company. You are not making a short term deal. 

The marketing emphasis on a short term deal for investors is perhaps a learning from the previous issue for Mighty River Power, which was a tough sell-in, and worse yet has still not made it back to the IPO price. And while financial literature is clear on the value of investing for the long term, many investors instead think in much shorter horizons.

Investing versus trading

A shorter investor horizon means that prospective investors may be indulging in trading, or speculation rather than long term investing. And while it’s possible to make good money out of speculation, and a vast amount of money is exchanged for this purpose, it’s a risky activity. It’s also expensive, as brokers collect 0.5-1% each time traders trade, and you are fighting full-time market professionals with very smart algorithms, better information and deep pockets.

The smart long term investor focusses very hard on assessing each investment up front, looking primarily at the risks of losing their money, as well as the potential for lasting returns from that investment. They, like Warren Buffet, periodically check that those initial assumptions are firm and they hold the investment for a long term.

Other, sometimes self-described long-term investors, are glued to Bloomberg screens or trading websites, and buy and sell shares frequently. This churn comes at brokerage and taxation costs that means traders have to earn tremendously higher returns from their efforts to match genuine long-term investors. The largest cost here is tax, as short term traders can have their investing gains classed as taxable income and long term investors do so tax-free. (See your accountant – I’m not one and I am not yours).

The above discussion on trading versus investing is there because the government’s headlines for the Meridian deal seem targeted at short term traders. Buy now, make a good yield for a year and worry about the rest of it later. As with Mighty River Power, the financial forecasts for Meridian are for only two years – less than that considering we are in the FY13 year already. All this, backed up by a strong sell-in campaign through brokers, is going to get a lot of short-term focussed investors on board. But it’s got a vicious sting in the tail.

That sting, and the real question with the Meridian and Mighty River Power businesses for me, is that there is no real long term growth story, and that there is significant potential for downside.

That’s not to take anything away from Meridian’s current business, which builds and operates a superb series of assets, as well as being the only player with any genuine innovation in the retail space, with Powershop. They also have, from my observations at Manapouri, a strong and improving safety culture, which always a strong indicator of business strength for me.

Growth is Limited

Any growth in Meridian’s future value, beyond that tied to population growth, will come from new asset builds and price increases.

New asset builds, by definition, are priced to sell electricity at the market price and make a reasonable, but not giant, return to investors. (If the returns were giant, then other players would build plants until the returns are normalised.) Meridian has executed on this well with recent solar plants. Most of the future demand may be focussed on renewables offshore, as we’ve seen reducing demand in four of the last five years (GFC, ChCh, Tiwai). However as I argue below, the long term demand for electricity from large power plants may be flat, or worse, softening. The offshore focus will be on commissioning plants based on renewable energy such as solar that can eventually substitute for high carbon emitting plants such as coal.

Any Price increases will be following on from years of price increases to NZ customers, and any increases in returns to shareholders will rely on the ability of the New Zealand public to absorb them. After years of increases that capacity is arguably near its maximum, and the Labour-Green opposition has clearly signalled its intention to work on the issue.

Medium to long term potential for downside is high

The risk section is alway worth a read in any Offer Document. Three of the short term risks are:

• Tiwai point: The Tiwai Point contract to me is not a substantial risk, as even if the Tiwai aluminium plant does close the average price that Meridian receives for the power previously allocated to Tiwai will be much higher than under the current contract.
• Regulation:  Labour-Greens market regulation is a genuine risk in the short to medium term. A Labour-Green government will be far more affected by and likely to react to high electricity prices, especially for the lower quartile of the population by income. Their potential responses include regulation as discussed previously, including  the imposition of some sort of price controls. This is how utilities are regulated in many other markets, and it limits the growth upside for investors. While I suspect that they are smart enough not to act to destroy shareholder value, investors should be aware that Labour and Greens have a lot of residual anger about the overall decision to start the asset sales and they may do something rash.
• The Deal: The risk of the government’s pay-later investment deal not working feels significant to me, as investors are in essence borrowing money at no cost and repaying it in 18 months time. It is the same as buying a stock on margin, which only investors who are experienced or have sufficient liquid resources should be able to do. Above all, this leverage increases the impact of share price volatility at the lower end, and if the market or share price collapses then investors may lose significantly.

Long Term Risks

All of the above is well understood, and priced into the offer. It’s a great business.

However I believe there are two major underlying risks that are not explicitly mentioned in the summary risks section – the risks from climate change and the risk from micro-generation. Each of these, and they are related a little, are risks that are vast in scale. True long-term investors would be wise to look at them in a lot more detail. It would not take much to produce more detail on the risks, but I would like to see an independent player produce them.

Climate Change

The Intergovernmental Panel of Climate Change’s (IPCC) just released the summary for policymakers on their Fifth Assessment Report.  The overall headline is well-known and accepted:

“Warming of the climate system is unequivocal, and since the 1950s, many of the observed changes are unprecedented over decades to millennia. The atmosphere and ocean have warmed, the amounts of snow and ice have diminished, sea level has risen, and the concentrations of greenhouse gases have increased”

The first report in particular is worth reading – but of most importance to Meridian investors is the research behind the following finding:

“Changes in the global water cycle in response to the warming over the 21st century will not be uniform. The contrast in precipitation between wet and dry regions and between wet and dry seasons will increase, although there may be regional exceptions.”

The text thereafter says that dry areas will become drier, and wet areas wetter. Looking out the window (or looking at our statistics) points to plenty of water in the dams, but I am sure that there is more rigorous research available in New Zealand than my window gazing. The map below is from the report, and has the northern part of NZ near a dry patch – but that’s as much as we can really see.

I would expect that companies as exposed to these climate changes as Meridian and Mighty River Power would dedicate significant resources to understanding and declaring climate change risks. It’s surprising to find only two references to “Climate Change” (or just “climate”) in this document, and those only in relation to the regulatory environment. It also surprised me, given their safety culture and renewable focus that they had not put this at the centre of their values.

In contract Z Energy is fully aware of their position with respect to climate change, and is actively working on mitigation and preparing for change. I even received from them some questions and a request for source data (which I fulfilled) after a blog post on the rise of electric cars. (And I also heard from them that there was a lot of internal discussion after this post on safety in the Z Energy Offer Document, again a very professional response by Z Energy.)

The IPCC report is a reminder that climate change is a core issue for one half of a Labour-Greens government, and that option is currently ahead in the polls. It’s now a lot clearer that the risk of regulation (perhaps overdue) in favour of climate change reducing activity looms large. The impact of climate change and resulting regulation is across the board:

• The biggest emitter of carbon in New Zealand is surely Tiwai Point, as the aluminium refining process is a major emitter. Any tax of carbon emissions will make it harder for the plant to stay competitive, and closure of the plant would reduce New Zealand’s emissions significantly.
• Use of resources like water is likely to become more regulated as the Greens lead the charge to clean up farming and preserve ecologies. This may reduce also the ability to operate power stations as efficiently as Meridian would perhaps prefer.
• Solar and Wind technology may be promoted, subsidised even, as the Greens lead efforts to reduce dependance on fossil fuels. This will accelerate the overall disruption of the electricity industry, discussed below.
• We are more likely to see the introduction of a carbon tax of some kind, which may increase the price of fuel to Meridian when lake levels are low, but also reduce overall demand for power. Given the increased likelihood of extreme weather events, including droughts, this could make dry years extremely expensive for Meridian as they may have to supply their major customers at well under cost. Meridian has hedged some of this risk away, but it remains to be seen how effective this is.

The Technology risk

For me the major medium term risk to the electricity industry is technology-based, and driven in part by governments’ promoting a shift to green energy. It’s the combination of affordable home and business solar generation (distributed-solar), electric cars and smarter devices.

Now on page 96 the Meridian offer document does refer to this risk, stating:

“Demand can be affected by a number of factors, including level of activity in the industrial sector, competitor behaviour, regulatory changes, population growth, economic conditions, technological advances in the more efficient use and generation of electricity (including by customers, potentially as a consequence of regulatory subsidisation of competing technologies)“

Those competing technologies are, in the main, distributed solar panels, and prices are steadily falling so that it is now often viable to invest in a system for the home. Return on investment is 5-10% says MySolarQuotes, and Meridian amusingly has a program that apparently delivers a much higher ROI of around 10%. (That’s higher than the after tax return on their shares, begging a question.) To be fair I know nothing about what’s behind those calculations, but I am starting to hear stories from people who are making the numbers work for themselves.

The key metric to watch is the cost of installing a home solar system per unit versus the cost of adding a new power station. The cost of a new large power station sets the overall price for electricity, and when homes can generate at a lower cost than this then power companies are unlikely to want to build. Finance companies will become very active in offering to install solar units and receiving monthly payments based on monthly solar generated electricity. That price per unit will be set significantly lower than the price of retail electricity, making it easy for householders to invest, and to pass on the system to the next home owner.

Solar will reduce the demand from the lower parts of the day, but do little to affect peak power requirements in the evenings, and that means the industry will still need to build plants, and set prices, to cope with that.

A very large number of companies are working hard on reducing the price of solar energy, so it’s just a matter of when this happens, not if. The so-called Swanson Law stipulates that the price of photovoltaic cells falls by 20% with each doubling of global manufacturing capacity, and capacity is expanding quickly. The chart below from The Economist in 2012 shows the plummet in prices of cells, in dollars per watt. The article also acknowledges that technology developments yet to emerge from labs will drive further cost reductions. It’s just a matter of time.

The cost of energy is only part of the electricity cost that households and businesses pay. A significant amount is spent on line fees, to companies that have a very cosy monopoly in each region and another one nationally. Thus there are two prices for the distributed solar systems to beat. The first is to substitute for householder demand at full retail prices, which include line fees. The second is to be able to sell excess electricity back to the grid, excluding the cost of line fees. That second option becomes very interesting in peak hours, when electricity prices are high.

Meridian, and other power companies, will find themselves doing financial models that include the impact of buying distributed solar power back from customers (excluding lines costs) during the day. That’s going to make it increasingly hard to justify new plants, as they can use less hydro during the day. However solar power is generated during the day, while peak demand is dinner and bath time at night, so that tilts the balance towards the generator-retailers who can buy cheap solar during the day and use hydro at night. 

The energy that distributed-solar generation supplies to the grid will also require the lines companies to significantly upgrade their own networks (lines and, especially, meters) to cope. This will be expensive, and that expense will drive their lines fees higher, and in turn the prices of our retail electricity will go higher, and in turn this will further promote the switch to micro-generation.

Finally, as hinted in the prospectus and investment statement, to accelerate the adoption of solar and wind power in the home a new Labour-Green dominated government could introduce legislation that required power retailers to buy back electricity generated by homes at a particular price. The higher the price, the faster the adoption will be, and the lower the future profits of the large electricity generator-retailers.

It’s a real issue for Meridian. This Yale Environment 360 article is a recommended read. It includes a quick survey of the US market, where prices are falling underneath retail in some states, and some utilities are fighting using government, while others are joining the rush to support distributed-solar. No prizes for guessing which ones will win in the long run. 

Enter Electric Cars and Big Batteries

I’ve written before about the rise of electric cars, starting with plug-in hybrids, but as the Tesla S is proving electric cars will be superior than internal combustion cars for many use cases. The relevant impact here is that they can be plugged in at work or home, and used to store that electricity generated from solar panels during the day, and to return the electricity to the house or grid at night during peak times. The electricity storage economics will help accelerate the switch to electric cars, and the end game is that many homes and offices will reduce their overall demand from the grid dramatically.

Meanwhile smart devices will increasingly be able to switch their own electricity use on or off based on the market price at the time, or signal to households to do the same. This all will help to smooth out peak demand, which means our ecosystem capacity is used more effectively and there is less need to build more plants.

If lines companies won’t provide reasonable access to sell back to the grid, then the distribution of electricity could be to neighbouring cars in an office park, or to households in an apartment block or similar – a building, street, suburb or industrial area. As battery prices fall, the installed solar systems will come with enough battery power to smooth demand over the day, with or without the car.

As the number and scale of the distributed-solar installations increase, the retail price of electricity will fall, until it is equal to the marginal cost per unit of the latest solar and battery kit. Meridian, as an all-renewable producer of electricity with superb dams and windmills, will almost always be the low cost generator-retailer and the last generator standing, and I expect them to win in this future scenario. However they will also have to work through a lot of disruption, and for example have to deal with the ever-increasing lines companies fees.

But surely this switch to distributed generation of electricity is far into the future? Well, as I’ve tried to explain above, the switch is already happening, and several companies in NZ are offering the service to homes. The number of installations is absolutely tiny, but the number to watch is the annual, or even monthly, growth rate for new solar installations. It’s going to be a classic disruptor growth curve.

Valuation

None of this takes away from the fact that Meridian is very good at what it does – building and operating generating assets, and retailing to consumers. It’s a very solid business. (And a nice hedge against rotten weather, as more rainfall means greater profits.) 

However the issue for valuation, as this analyst report from FNZC states, is that “The long life of electricity assets mean that most of the DCF value comes from years after 2017”, which in English means that the majority of the value of the company is ascribed to rising streams of profits into the future, driven in part by an assumed price rise.

Brian Gaynor, sees little growth story, stating that

“Analysts may argue that Meridian’s 21.8 prospective P/E fails to reflect the company’s higher “normal” earnings and strong cash flow but the fact of the matter is that an official prospective P/E in excess of 20 in the prospectus is extremely high for a company with low growth and significant political risk.”

I agree. P/E is the price/earnings, often stated per share. A forward P/E of 20 means that the share price is 20 times what the projected net profit after tax will be in a year’s time. It’s the same as giving the bank $20, and expecting (maybe) only $1 in interest after tax in a year’s time. The only reason you would do that is if you also expect the income from the $20 investment to sharply rise in the following years.

But this is not a growth stock per se. When Trade Me sold to Fairfax they had a prospective P/EBITDA of 15.6 times, which is an estimated P/E of about 20 after tax. Trade Me currently has a P/E of 23.5. So is Meridian really going to deliver the similar returns to shareholders as Trade Me did from 2006, or going forward? Given that Trade Me delivered to investors a 22% return per annum since 2006 I highly doubt it.

This means that the price seems very high versus the stated returns. But there is more:

The risk of complete loss – the disruptors are coming.

As discussed the impact of distributed-solar will be disruptive for the industry, and disruptive technologies can reinvent entire industries. Like essentially all disruptive technologies, the well-informed smart observer can see them coming from some way off, even if they at first appear like toys to the incumbents. And just like essentially all disruptive technologies, most of the incumbent players are culturally and structurally incapable of responding, and are knocked off their profitable perches as newer players take over. This can happen quickly, and even the 18 months between share instalments could be enough to show the emergence (but nothing like dominance) of disruptors.

Just as many of us saw the impact that the web was going to have on traditional media, many of us can also see the rising challenge for big power. The disruption will certainly mean a drop in profitability for the industry, but the real question is which companies are paralysed by the thought of reacting, and which ones will take advantage. And the other question is when will this happen? 

I back Meridian to respond well, as we see with their diversifying foothold into Australia with two new solar energy plants, and with Powershop, which is an asset that could take advantage of a fast moving retail field. But overall we should not downplay the medium to long term risks when investing in any traditional power company.

So the disrupters are here, but they are very very small and likely based on marginal economics. As an investor you’d likely look askance at a solar installer player. But then again many perhaps investing in early stage distributed-solar companies is the safer long-term play to go alongside an investment in big electricity generator-retailers? One thing is for sure, having a truly diversified portfolio never goes out of fashion.

Perhaps we will look back at this electricity asset sale process with the same attitude that we now look at Telecom’s huge deal to sell Yellow Pages. Is the government actually prescient in selling down electricity generator stocks? Only time will tell.

I’m not a financial advisor, and not your financial advisor, and not making a recommendation either way for any stock. Seek your own advice.

I am the majority shareholder for Powerkiwi, a company that was until recently a large supplier to Powershop, a Meridian subsidiary. This commercial relationship has now concluded.

Following on from the previous posts on the America’s Cup theme, and how we should be taking advantage, I appeared on TV3′s The Nation this morning, sitting alongside Tim Smyth from Core Builders Composites. The show will eventually be found on The Nation’s on-demand page.

We had a good chat before, during and after the show, and he had read the post below (not the update) and agreed with the thesis that the greater race is how to step up the industry. His own company uses digital manufacturing techniques – automating the creation of the moulds and the manufacturing of  composites. Composites are what we know as carbon fibre, kevlar in things like bikes, boats and buildings, and the material can be lighter, stronger and cheaper for many applications. Moreover there is now accelerated local knowledge in aerodynamics that we can use.

Tim’s take on the automatic control foiling system is that is was there the whole time, and that the dramatic improvements can be put down to the normal (hyper fast) continuous improvement processes with a large contributing fact to the tuning of the wing sail. That does make sense to me as  recall that the commentators said that the Oracle USA wing sail was using a less advanced technique than Team NZ’s – at least near the beginning of the regatta.

We also talked about the frustration with finding money to invest in business and buy capital plant – their business cost just $7 million to set up here – versus the ease of finding money for beach houses and electricity company IPOs. We both agree, for instance, that the electricity industry is nearing the point where it will be disrupted. More on that point at some stage.

Overall let’s maintain focus on the prize – the $40 billion in exports

(I’ve also updated the original post with the below) 

As expected, Oracle USA stormed home to win the last race and the cup, and well done to them, and to everyone in the regatta.

However. A big word that, However it seems that emerging although unverified news is that that Oracle may have been using an illegal weapon, a “special foil adjuster system” that allowed then to gain control over their foiling. Time will tell and I would not want to pass judgement, but perhaps the changes made were not under the rules.

It is well recognised that Oracle was having serious foiling stability difficulties at the outset of the regatta and that their performance could not match that of ETNZ. Half way through the series it was acknowledged that Oracle had fitted an automatic control to their hydrofoil trim, and that this modification was approved by the measurement authorities.

Since this modification Oracle’s performance has almost unbelievably improved.
…
The ‘legality’ of this device has been justified and accepted on the basis that it does not actually ‘drive’ the trim of the foils…..this is still performed by the muscle power of the crew, via hydraulic linkages. That may be so, but the device, using its sensing and directives, has been described as ‘automatic’. This implies that the trim of the foils is determined by what can only be described as ‘superhuman’ technology.

So we shall see what passes, but it appears that the America’s Cup may once again end up in a court.

New Zealand, as one of the top three least corrupt countries in the world, finds that breaking the rules is beyond the pale, and it would be far away from Team NZ’s culture to do so. However if Oracle USA are found out then this country will be horrified – and it may be seen as a major scandal with implications well beyond sport.

To draw out the business analogy, New Zealand companies in my observations, will tend to play by the rules when competing offshore, and many lose business as they are not aggressive enough to bend or break the rules. We do, I hazard, draw the line too early sometimes, and should be a lot less afraid of creating our own rules, within reason, where we can.

But cheating? That’s not us, and we should promote trust-based ways of doing business through-out the world by the best way possible, through the success of our own companies.

Update Saturday 28th

I appeared on TV3’s The Nation this morning, sitting alongside Tim Smyth from Core Builders Composites. We had a good chat before, during and after the show, and he had read the post below (not the update) and agreed with the thesis that the greater race is how to step up the industry. His own company uses digital manufacturing techniques – automating the creation of the moulds and the manufacturing of  composites. Composites are what we know as carbon fibre, kevlar in things like bikes, boats and buildings, and the material can be lighter, stronger and cheaper for many applications. Moreover there is now accelerated local knowledge in aerodynamics that we can use.

Tim’s take on the automatic control is that is was there the whole time, and that the dramatic improvements can be put down to the normal (hyper fast) continuous improvement processes with a large contributing fact to the tuning of the wing sail. That does make sense to me as  recall that the commentators said that the Oracle USA wing sail was using a less advanced technique than Team NZ’s – at least near the beginning of the regatta.

We also talked about the frustration with finding money to invest in business and buy capital plant – their business cost just $7 million to set up here – versus the ease of finding money for beach houses and electricity company IPOs. We both agree, for instance, that the electricity industry is nearing the point where it will be disrupted.

Overall let’s maintain focus on the prize – the $40 billion in exports    

Update – Friday 27th.
As expected, Oracle USA stormed home to win the last race and the cup, and well done to them, and to everyone in the regatta.

However. A big word that, However it seems that emerging although unverified news is that that Oracle may have been using an illegal weapon, a “special foil adjuster system” that allowed then to gain control over their foiling. Time will tell and I would not want to pass judgement, but perhaps the changes made were not under the rules.

It is well recognised that Oracle was having serious foiling stability difficulties at the outset of the regatta and that their performance could not match that of ETNZ. Half way through the series it was acknowledged that Oracle had fitted an automatic control to their hydrofoil trim, and that this modification was approved by the measurement authorities.

Since this modification Oracle’s performance has almost unbelievably improved.
…
The ‘legality’ of this device has been justified and accepted on the basis that it does not actually ‘drive’ the trim of the foils…..this is still performed by the muscle power of the crew, via hydraulic linkages. That may be so, but the device, using its sensing and directives, has been described as ‘automatic’. This implies that the trim of the foils is determined by what can only be described as ‘superhuman’ technology.

So we shall see what passes, but it appears that the America’s Cup may once again end up in a court. New Zealand, as one of the top three least corrupt countries in the world, finds that breaking the rules is beyond the pale, and it would be far away from Team NZ’s culture to do so. However if Oracle USA are found out then this country will be horrified – and it would be seen as a major scandal with implications well beyond sport.

To draw out the business analogy, New Zealand companies in my observations, will tend to play by the rules when competing offshore, and many lose business as they are not aggressive enough to bend or break the rules. We do, I hazard, draw the line too early sometimes, and should be a lot less afraid of creating our own rules, within reason, where we can. But cheating? That’s not us, and we should promote trust-based ways of doing business through-out the world by the best way possible, through the success of our own companies.
End of update.

The moment I realised Emirates Team New Zealand was in trouble was when Oracle Team USA played their postponement card for Race 6, with the scores at 4 points to NZ and minus 1 to USA. That was the signal that Oracle USA was clear that they were slower than New Zealand, and that they had to radically improve.

“We feel they have an edge on us at the moment, especially upwind,” said Spithill. “We need to do a bit of work here and we’re going to play the card, strategically, and hopefully improve in time for the next race.”

How right he was. The time gave the shore team permission to design and implement major improvements, and over the ensuing days it was clear that the USA shore team were in afterburner mode, and the improvements in speed kept coming. Meanwhile the Oracle USA team’s sailors just kept getting better and better, to the point now, 12 races later and tied at 8 races each, including Oracles’ 2 point penalty, the Oracle boat is clearly faster in all modes, upwind and downwind.

How did this happen?

Team New Zealand ran an exemplary campaign, right up until the last few days when they ran out of resources. They were the first to foil, had the most time on the water, were the first to semi-foil upwind and had a clear advantage over all the other teams in crew work.

At 8 races to 1 ahead it seemed to many that the Americas Cup was all over, but for me two of those races we won by out-sailing a boat that looked a little faster than ours. Since then it’s become increasingly clear that the Oracle USA team had really woken up, and fuelled no doubt by a budget beyond belief, they took the steps, and perhaps risks, required to make their boat faster and faster.

Their boat was re-measured before each race, as they were improving it but also, it seems, customising it to the conditions. They, for example, they chopped the bowsprit off for races in high winds when a code zero sail was not required. They copied and improved upon the New Zealand boat design and the way the sailors handled the boat. As they became faster that gave their skipper and crew more confidence on the water, and results on the board.

We have heard little about what is happening behind the scenes, but I suspect that there a lot of the credit should go to the many smart people in front of computers, using video and sensor feeds to manipulate immense volumes of data, running major simulations and constantly improving things for the Oracle USA team.

New Zealand lost their chance to turn things around, their momentum and probably the regatta for me a few days ago, when they failed to ever play their postponement card. It was increasingly clear that the Oracle boat and crew were faster in all modes, but Team NZ were not prepared, or more likely able, to make the major changes required to keep up with Oracle. Was it money, team size or simply lack of creativity? Dean Barker’s quote from yesterday is telling, as he compared Team NZ with the Oracle USA team and their huge resources:

“We have little tweaks here and there, but there’s nothing major we can do. We don’t need to make massive changes. The boat is going well, we just need to sail it well.”

Team New Zealand had a clear advantage in their program of continuous improvement, but hats off to Oracle, who ran a poor campaign for many months, but got it together in the last few weeks. Their larger team and budget, more ambitious program and in the end high-performing team has delivered.

Take nothing away from either team, as this has been a stunning rate of development for boats that were never meant to be able to hydroplane on just one foil. The scale and speed of the races are right up there with Formula 1, and New Zealanders and New Zealand firms are across all of the teams and the competition itself. It’s been amazing, and the Wikipedia page on Hydrofoils does need some serious re-writing.

And we could still win, as I write this.

So this regatta must happen again, whether we win or lose, in some form or other, with radically fast boats like these. The great thing is that New Zealand technology will continue to play the key role in the regatta, as it has for this campaign for all teams.

The Lessons: be brave

As in business, it’s always been clear that in America’s Cup racing that standing still is not good enough to win, and companies must continuously improve their products, services and internal processes.

However sometimes that’s not enough, and a business can beheading in the wrong direction. In that case, as it when Oracle USA was heading for defeat, some major changes in strategy are required. The time to make these changes is as soon as you realise that the competitors have an advantage.

Arguably Team NZ needed to do the same a few races later, once it was clear Oracle UA was faster. That’s hard to do when you are one race away from winning, but, again, as in business, it’s all about the growth rates not the results today. That’s why the real competitors to watch out for are not the sleepy incumbents, but the rising stars whose growth rates will eventually lead to domination.

In the mobile phone industry the incumbent competitors, including Nokia, Blackberry, Motorola, and Microsoft, failed to change their approach radically enough to cope with the emergence of the iPhone, allowing Apple, Google and Samsung to dominate.

The newspaper industry had far longer to decide, with the very obvious rise first of free classified papers, and later of the internet-fuelled competitors like Trade Me in New Zealand and eBay and Craigslist elsewhere. It took a long time for them to wake up, and the only decent response I’ve seen was when an industry outsider, David Kirk as CEO of Fairfax Media, to buy up the major New Zealand online player, Trade Me. An inspired purchase that since then has delivered 22% annualised return to shareholders (Fairfax Media or not).

Oracle USA had essentially unlimited resources, and the same is required if a company is going to repurpose itself for a major strategic shift. Most large companies are simply incapable of doing so, with embedded bureaucracy, norms and people who believe in one version of the ecosystem. We sometimes see these companies forming internal innovation groups, but they generally fail as they are either staffed with people with the internal mindset, or are constrained by having to work for the same. A true shift in direction must be driven come from the top, who unleashes the folks at the very bottom who generally know the answer. This needs a strong CEO with the support of the board and shareholders. Sadly that support usually only comes when it is far too late, as the quarterly results have already plummeted.

There is a great Harvard Business School series of case studies on Team New Zealand’s earlier campaigns. The kiwi teams ran superb campaigns to win and hold the cup. The cases hold many valuable lessons in high performance leadership and teamwork, and in continuous improvement. This regatta demands a new case study.

Now the real race begins.

New Zealand has gained a lot from this  Americas Cup campaign, win or lose. The campaign was backed by our Government, and by a number of high profile sponsors. Less known is that behind the scenes were a number of high net worth individuals who put their own time, money and commitment into the team, receiving little in return. Our sincere thanks to them.

But the challenge now is whether we can we take advantage of our collective edge in understanding the technology behind this new dimension to sailing. From previous regattas we saw the formation or acceleration of companies like Southern Spars, Doyle NZ, Structurflex and a host of boat builders.

We have a chance to be the first to bring, somehow, the advanced technology back to more mainstream sailing as well as to other industries. Can a local firm become the first to bring semi-inflatable wing sails to the industry? Can we create computer-controlled rigs that can automatically find “the right mode” for yachts? Can we apply the hydrodynamics and aerodynamics lessons learned to bicycle building and other endeavours? Can we move beyond an elite sport to more mainstream products?

I suspect we can, and will certainly be looking closely for stories of companies who are doing so. Meanwhile we have a whole other race on here, the rce to meet Sir Paul Callghan’s vision of $40 billion per year in high tech driven exports. That’s a slower race, but the companies that will drive it are currently in formation and rapid growth stage.

Well done.

My congratulations to everyone involved – we’ve run an amazing campaign and as we head into tomorrow, win or lose, we can be proud of what we have achieved.

But let’s win – that would be much better.

Today saw the launch of AttitudeLive – a highly professional website by and for people living with disabilities. It’s the brainchild of Robyn Scott-Vincent, who with her team from Attitude TV have already transformed the way media portrays the sector.

Attitude TV and AttitudeLive bring the premise that they should be telling stories “for and about the disability community”. There are over 1,000 stories to see on the site, sourced from the AttitudeTV shows over the last few years.

AttitudeLive has global aspirations, and is addressing what they see as a large gap in a huge market. I’ve been a little involved in the process of putting this together (on a pro bono basis) and am watching with interest.

One thing the team has done very well is to work hard on accessibility, going well beyond the standard requirements to deliver something that works in practice, and is also up to date with the look and feel. That’s no mean trick. I’m sure they will have teething problems, but do consider checking them out next time you are considering design for all.

Working safely, wherever you are, starts with identifying hazards. This is generally just before a job, more formally when planning a larger job or on a safety walk, or, ideally, just part of what you do day to day.

Those who have been through the recent earthquakes in Wellington are rapidly adopting, for example, the hazard recognition skills that Christchurch residents have also unfortunately had to acquire.

In industrial workplaces it’s common to use hazard report forms to capture hazards before a job or after observation. Here’s the result of a google image search: 

But what if 80% of  staff were not able to complete the hazard report form?

Sadly this is the case, at least for a sample of mainly frontline workers, predominantly from the manufacturing and warehousing industries. 

The survey was conducted by Workbase NZ, experts in workplace literacy. As part of the survey they asked workers to fill out their employer’s hazard identification forms. For a start 7% didn’t even attempt the task, while 19% failed to complete it, and 54% conveyed the essential ideas, but missed information and detail, and so the information could not be relied upon without further clarification. Just 20% completed the form properly.

Three quotes from the survey:

All industries’ workplace health and safety documents consistently used unfamiliar, specialist and formal vocabulary (e.g. spillage, adversely affected, orifices, designated place, eliminate).  This vocabulary caused difficulties for all employees.

Most employees (63% in the total sample and 73% in manufacturing and distribution companies) had limited knowledge and understanding of their company’s health and safety documents.

The 24% of employees with the lowest literacy skill levels could read basic texts but they did not know formal words such as: “sustain“; “maintenance“; “visible“; “appropriate: and unfamiliar words such as “horseplay” and “rough handling”.

A lot of these are ominously familiar. Next time you look at spreading your safety message (or other messages) throughout an organisation, it might pay to give Workbase a call.

(Disclaimer: Workbase were a workshop client in July 2013)

 

Today’s press release.

The Offer Documents are avaialble on the Punakaiki Fund website. They are lodged with the FMA and now visible on the Punakaiki Fund document page on the companies office website. 

Chris and I are going to be touring the country over the next few weeks – so look out for us. If you’d like me to speak to a group then please get in touch. I can talk about the fund, or about starting and growing businesses in general. 

Punakaiki Fund announces IPO to invest in emerging New Zealand technology companies

New company offers public access to early-stage private company investment

Auckland, 22nd August 2013 – Punakaiki Fund today registered its combined investment statement and prospectus (the “Offer Document”) for an initial public offering of ordinary shares, seeking to raise $20 million, with the ability to accept oversubscriptions of up to an additional $30 million, to invest in New Zealand’s vibrant internet and technology sectors.

The Offer Document can be downloaded at www.punakaikifund.co.nz

Punakaiki Fund intends to invest in early stage and emerging New Zealand internet, technology and design-led growth businesses, generally well before they reach the public markets.  The minimum investment for the offer is $2,000, making an investment in Punakaiki Fund accessible to a wide range of New Zealanders.

Lance Wiggs Capital Management (“LWCM”) will manage Punakaiki Fund’s investments.  Principals of LWCM, Lance Wiggs and Chris Humphreys, bring extensive experience of founding, investing and advising emerging technology, internet and design-based companies.

“We want Punakaiki Fund to be the investor of choice for founders of the next generation of innovation-led New Zealand companies,” says Lance Wiggs, a director of Punakaiki Fund, an early advisor to Trade Me and an investor in Vend. “We see ourselves as part of the start-up and growth stage business community, and we intend to work collaboratively with founders before, during and after investments. We expect to offer very fair and simple investment terms, and, like the greatest investors, are committed to investing for the long term and so are not looking for premature conversations about exit strategies.”

Punakaiki Fund has already received strong interest, with over 450 members of the public expressing an interest in investing over $7.7 million through the pre-registration website.

“We are confident in the number and quality of privately-held high growth companies in New Zealand. We also see that any well-diversified portfolio should have a mix of asset classes, and believe that Punakaiki Fund is essentially alone in this space for public investors,” said Lance Wiggs. “This is unashamedly a high risk, long term capital return investment category, and we are not offering short term dividend streams. We will aim to focus on investing where we can help founders and management teams steadily build toward the billion dollar businesses that the late Sir Paul Callaghan rightly identified that New Zealand needs.”

“The economic potential for New Zealand from innovation-based growth is exciting, and Punakaiki Fund aims to help accelerate that growth, and help write a new generation of business success stories”, says Wayne Hudson, one of Punakaiki Fund’s two independent directors.

Sandy Maier, also an independent director says, “Lance Wiggs and Chris Humphreys bring strong financial and business qualifications and experience, but, unusually, also have hands-on experience with early stage companies. Lance has been very actively involved as a founder, advisor and investor in the target internet, technology and design-led sectors, and his networks will drive Punakaiki Fund’s early investments.”

Punakaiki Fund has not sought assistance from the Government-backed Venture Investment Fund (NZVIF), with Wiggs adding, “We’ve therefore given ourselves the ability to operate far more effectively and simply, and see this as a strong competitive advantage when it comes to investing in what we think are the best companies.”

The offer will open for applications on the 30th August, or later if FMA extends the “consideration period”, and close on 2nd October. Investors must receive a copy of the Offer Document before subscribing under the offer.  After completion of the offer, Punakaiki Fund is not listing on the NZX, but will instead offer a share trading facility through Link Market Services. The directors note that there is no guarantee that a liquid market will be created through this facility. Potential investors are advised to read the Offer Document carefully before making any investment decision and to consult an authorised financial adviser for investment advice.  None of the persons named (nor any other person) guarantees the offer or the shares.

When I was young I thought it was normal that my grandparents’ (Edna and Grev Wiggs) house looked like ours. They had a few interesting items scattered about, but otherwise all the equipment and so forth was up to date.

As I grew older I increasingly understood that this was not normal. That Japanese doll-set in the cabinet was obtained on a visit there before anyone else realised what Japan was to become. The TV was the latest in a line that started with the first in the area. The kitchen that was my height was especially designed to be lower for my grandmother, who was just shy of 5 feet. My grandfather was jogging well before it was mainstream. And so on — they basically lived, and quite deliberately it seems, in the future.

This is something that we discussed as a family during the time between my grandfather’s passing and his funeral, and we found that this trait (along with other traits) is something that has passed through the family to the grandchildren. At least three of my generation are heavily afflicted with the need to live in the future, and I would not be surprised to see cousins Kim or Mikkel match or beat the score below.

>One bit of evidence is the three year old How Millennial are You quiz? Millennials are defined by Pew Research as those born after 1980. Times have changed since the survey in 2010, but I suspect that my answers would have been similar back then. I did bend the rules a little and count Twitter DMs as texts, but they are directly substitutable after all. I suspect most readers of this will also find themselves way across to the right.

For reference I was born just to the right of the red dot marked 33.

What does this mean?

• It means that we can deliberately choose to live the life of people younger than ourselves, without sacrificing the benefits of being older.
• It also means that people find it increasingly difficult to keep up with he new generations, as they age, which explains adoption curves by age. Some of my parents’ friends do not have computers, and never will despite another potential 25 years left to live.
• It means that we should make sure that the leaders of our businesses and society include a good dose of people who are living in the future, whether they are older or younger, they need to be represented at the table.
• It means that I don’t feel so bad about playing video games on my iPad. (One benefit of being older is higher income, which makes it easier for me to purchase the toys required to participate in the younger generation’s activities.)

The survey is already wildly out of date, just three years later. Where are the questions about videos and photo sharing and time-limited video and photo sharing? The assumption that a social media profile is a differentiator is almost (not quite) laughable, and video content is downloaded now. Even texting is gone if you and your friends have iPhones – it’s now iMessage, if not Whatsapp, Viber, Facebook or Twitter.

And where is music finding? And how or even if people commute or own a car?

But you already know that. I see you are already here in the future.