NZ Government on Investing in shares – some more questions

The NZ government now has a page up with all you need to know about investing in shares.

There is not a lot on the page, and certainly not investment advice. It even avoids answering its own question of “How many New Zealanders own shares?”

They do point out that Kiwisaver and term deposits as well as Iwi funds total $100 billion, but a quick search shows that Kiwisaver funds under management was just $11.26 billion at the end of March 2012, according to Morningstar.

However it’s what’s missing from the page is very important. I’ve proposed some more questions which could be answered on the page:

  • How do I sign up to a share broker? Provide links to them, all of them, and show which ones you can sign up to online (That would be none).
  • What are the costs are to buy and sell shares? Show, for each of the brokers, the costs to buy and sell shares.
  • How long should I hold the shares? Discuss the different approaches to investment and investment horizons, defining the traders, long term buy and holders and discussing successful investment strategies.
  • What is selling shares short? Discuss shorting, and its application in the NZ context. Show why a healthy shorting and options market is good and that the NZX is liquid enough to cope with it. (This may be difficult)
  • How do find out about companies to invest in? Discuss disclosure rules, and show where each of the companies is required to disclose information. Show whether the unsophisticated investors are on a level playing ground with the professionals. (This may be difficult)
  • How do I know it is fair? Discuss the rules in place that ensure agents and large shareholders and their friends cannot get any advantage over other investors. Show how the watchdogs are relentless in their pursuit of any irregularities. (This may be difficult)
  • What are tax imputation credits? Show how you don’t, unlike pretty much anywhere else, have to pay tax on dividends from New Zealand companies, unless you are Australian of course in which case you do. Confused? So are offshore investors.
  • Where can I do more research? Point to the large range of analysts that provide free and very cheap reports on the top NZX companies, allowing sophisticated and unsophisticated investors to really dig behind the company rhetoric and numbers to see the real long term value of the business. (This may be difficult)
  • Should I stop my Kiwisaver? Gently show that most Kiwisaver finds will be investing in the top NZX firms already, and that placing more of your funds in a Kiwisaver fund gives the portfolio diversity effect as well as tax benefits, giving  increased returns at lower risk over time. Point out that betting on individual companies is something that is fraught with danger for uninformed people, especially with a short term time horizon. (This may have a negative effect on SOE sales)
  • Should I buy more NZ stocks? Show that New Zealand is a trivial part of the international investment scene, but also point out that we know the most about our own businesses and foreign ownership by short term financial investors, as with Telecom in the day, is a very very dangerous thing. Discuss how a well constructed portfolio will balance offshore and domestic investments, while trying to avoid talking about the asinine tax regime for assessing offshore holdings. (This may create tension)
  • Any others?

Hybrid sales and fleet projections in NZ

This is a very rough estimate, and there are plenty of ways it can be improved.
In 2011 we saw under 1000 NZ new hybrid car registrations, out of a total of 64,000. That’s a small share of the total car imports of 150,000, with 95% of the remainder used imports from Japan. The otherwise excellent NZTA does not break down those imports by model unfortunately.

Those statistics could be improved just by showing the breakdown of hybrid and hybrid/electric and electric vehicles, as I suspect the number of model types would create a book-length statistical summary.

A quick search and look at Wikipedia shows that in 2009 hybrids represented 10% of all Japanese new vehicle, rising to 16% in 2011, despite the effect of the Tsunami.

Given our own tighter emission rules, and given that New Zealand imports 95% of our second hand imports from Japan, we can expect to see that rise in share flow through to New Zealand over the next years.

Meanwhile manufacturers are making more hybrid and electric models, and doing so increasingly efficiently (cheaply). Consumers are increasingly aware that they can, like taxi drivers, save large amounts of money by switching, while they are also environmentally savvier.

The Prius has dominated sales to date, and old and high milage ones are still in great condition, assuaging early fears about battery life.

These are the factors behind the projection, which as I said is rough. I see that the switch will happen, and it’s just a matter of when.
At some stage, I have 30% in 2020 and 60% in 2024, the hybrid share of new vehicles into NZ will switch to become a majority.

Our fleet, with average age of 12 years, will take a lot longer to migrate, but by 2031 we’ll be half hybrid/electric. And that’s good.

If you are worried about losing performance – just take a look at Tesla or WrightSpeed. Electricity is a great provider of torque.

Is New Zealand’s Research and Development really that low?

The August MBIE Building Innovation report is out – it’s worth a read, and I do like the progress report at the end. It is, of course, flawed, but it’s good to see it.

The report uses a chart showing how low New Zealand’s research and development spend is as a share of the economy.

 

The issues that underly this chart are under-reporting, tax incentives and hidden R&D spend.

The Australian level of expenditure is higher than New Zealand partially because they have an R&D Tax Credit system that is “The Best in the World“. This encourages business to actually report their R&D spend, as well as to invest a bit more in R&D. It is difficult to tell how much is due to each reason.

It’s compounded by effect of the incentive for New Zealand companies to under-report R&D spending by showing it as an expense (tax deducted immediately) rather than capital investment (tax deducted over time). The actual reporting I believe is through Statistics NZ, but I suspect companies would align their reporting with numbers submitted to the IRD.

I’m not arguing for a tax credit – I prefer a simple tax system with almost no loopholes. But let’s not beat ourselves up too much.

The overall thrust of the report is focussed on developing technology, patents and so on as methods to deliver market returns. The smarter companies are better at really understanding customer needs first, and perhaps not embarking on longer term risky technology projects, but focussing on delivering less purely innovative but far more defensible and profitable products and services.

It seems also to completely miss the software industry, which is where I see much of the innovation happening. It’s a lot harder to fund something with such intangible products, but it’s an area that easy to grow rapidly.

Rather interestingly (and somewhat sadly) apparently:

One-half of all business R&D around the world occurs in three industries: motor vehicles, electrical equipment and pharmaceuticals. New Zealand has a relatively low share of these R&D- intensive industries.

I say sadly as investment in automobiles and pharmaceuticals is often in the direction of tail fins and hair loss. I’m glad that there is no advocacy for a return to Muldoon style attempts to create our own sub-critical mas auto manufacturing industry. We do though have an awakening aviation industry, with plenty of innovation coming from Altitude Interiors [Flash warning], Pacific Aerospace and more recently Composite Helicopters.

I found the following somewhat surprising:

Kiwi businesses tend to over rely on bank debt and internal sources of capital which can restrict funding for R&D.

In my experience New Zealand businesses really struggle to attract bank debt for anything but purchase of capital equipment, or when backed by director guarantees and their own homes. Regardless, the point is made that there is a huge gap in the market for a fund that can provide capital (debt or equity) to growing companies by looking at their valuation rather than their balance sheet and directors’ balance sheets.

Plenty more in the report – do read it. I would love to see these reports printed and placed in Koru lounges.

Note:

Define Instruments, where I am a director and shareholder, spends 10-20% of revenue on R&D – currently 13%. We have accepted government co-funding in the past, which was extremely valuable for the company.

 

Ten tips for better pitching

Pitching to a prospective client where you have a light or no brief should be easy, but it seems that in practise it is remarkably difficult. The client wants to understand what it would be like working with your company, and what the quality of the output will be. You want to understand the same, and you also want to make sure your reputation continues to build even if you do not succeed in a competitive pitch.

So if you are going to attend a pitch, then you owe it to yourselves and to the client to do come prepared and to do as good a job as possible.

I present 10 tips for companies pitching to clients:

  1. Research your audience. Ask for the names of who will be in the room, and what they are each looking for. Do a quick Google and Linked-In search to follow up so you know what their background is and what experience they are bringing to the room. Front up with the right people from your side, mixing client facing with technical and design if required. Wear the right clothes that reflect the environment you are walking in to and their expectations of you. If you are younger or less experienced in business then consider more formal dress, and vice versa.
    This is an area where you can cheat, simply by having a chat with the person who contacted you in the first place.
  2. Do the introduction dance. It may seem old-hat, but the traditional introduction by name, shaking of hands and exchange of professional business cards remains as relevant as ever. Clients and presenters alike will be easily be able to remember the names of everybody in the room, and the exchange itself gets rid of that awkward first 20 seconds. We are all assessing what it would be like to work together, so take the time to ease into the work using an unforced and natural conversation. The default topic in New Zealand is the weather or traffic, but why not mention common acquaintances or backgrounds as you do the introductions? I also like to pause and ask “How’s business”, as the answers will tell you what’s top of mind.
  3. Listen first. Ask questions about the business and people you are pitching to, answering any unknowns you had before you entered the room. Go ahead also and ask what they are wanting to hear from you, and test progress through the meeting. The entire pitch should be a conversation – and if you find yourself giving a speech then something has gone wrong.
  4. Have a customised presentation.  Build a presentation for the client that reflects your understanding of their needs. The order of the show and depth of information will vary greatly, but make sure you can show that you understand their business and their requirements, and show how you have the experience and ability to help.
  5. Hit the high points early. Go straight to the client’s expressed concerns, even if it means messing up the order of your planned presentation. You’ll want to cover the other basics, but you can hold that until the end. Keep observing the room, and of some people are switching off then don’t be afraid of asking if you can move on, or what they are looking to see next.
  6. Use multi-media. No – please don’t make people endure a video or pre-recorded audio, but do think about sharing your thoughts not just with a presentation on a laptop or screen, but also with printed copies so the audience can write notes. You can even email the presentation in advance so that the entire session can move more quickly. It does perplex me that most people don’t do this, but a presentation in advance also gives the client time to give you feedback before the meeting.
    Get online also (and make sure you can), and don’t be afraid of using the whiteboard or sketching on bits of paper. 
  7. Avoid buzzword bingo. Clients are often on a learning journey, but they will generally be able to see when you are unsure of what you are talking about. If you find yourselves out of your comfort zone then simply state that you don’t know, but that you will get back to the group later. And do so.
  8. Get the energy right. As you walk into the room you’ll get a certain vibe. You’ll need to determine just how much energy you need to exude to be engaging, without being dramatic. This varies with every occasion and client, so get good at it. A good sign is when you and the rest of the group are are having fun and moving at a very quick rate.
  9. Finish on time. These sessions can get derailed, and that’s often a sign of an engaging conversation. But keep an eye on time and make sure you hit all of the important points before you leave. A final slide showing those points can be a good way to help you summarise before you leave.
  10. Follow up. Send a note of thanks along with anything that you promised in the meeting within the next hour or two. Have an internal meeting (probably on the way back) and decide for yourselves whether or not this is a client that you are still comfortable pursuing. If you are not comfortable with them then do let them know, and do so via a meeting in person over coffee or with a phone call.
    Successful or not, do ask for feedback from the prospective client about your pitch, and use it to improve next time.

This is an incomplete list – so what is missing?

A response to Computerworld

I guess there was a tough deadline, but the editor wrote her editorial for Computerworld about NetHui at perhaps the worst time last Wednesday. It strikes me that she did so essentially exactly week ago from when I am writing this, and that she may well have just rectified what came across as an unfortunately negative piece.

“Note to Internet New Zealand, first impressions count“ is not, yet, is now available online. (The delay is amusing given the addressee.) I have finally seen it, and I see that I am quoted in the piece and wanted to reply.

The article covers two negative aspects of the 3 day event – an MC who kicked things off with a sexist joke, and a keynote speaker who was “not inspirational” with her talk on privacy policy in the USA.

To be fair to Pamela Jones Harbour, her wonkish and excellent survey of the state of privacy policy was always going to be difficult to compete with Larry Lessig from 2o11.  Pamela did stick around for the remainder of NetHui, and contributed much to other sessions. I gleaned from her the immense respect which she and her peers across the world hold for our own privacy commissioner Maria Schroff, and for our regulations. Peering behind the curtain and you can see the effect that our sensible diplomatic approaches have not just for privacy, but also for TPP.

But yes – Pamela Jones Harbour (not Pamela Jones Anderson as in the Computerworld article) was not a rabble rouser for the opening session, but someone who set a serious tone with a fact based presentation. I know some didn’t enjoy that, but others, including me, did. I also, however, advocated for asking Kim DotCom to present a keynote, and he was approached but sadly could not do it. I’m glad we managed to attract Pamela to New Zealand, but also have a good degree of empathy for the NetHui organisers who have to find great speakers. For days two and three we had Hon Steven Joyce and Judge David Harvey, critical figures in the NZ  political and judicial fields when it comes to all things Internet, and entertaining and engaging on the podium.

The MC for the event controversially used a sexist joke in what was otherwise an excellent opening audience participation quiz. Some context will help here – at the Gather barcamp a couple of weeks earlier there was an excellent and massively attended session on how to encourage more women into IT and related professions. One outcome from this was learning that women are often subjected to sexist comments and presentation material at some of the more nerdy events. This discourages women from going, and means that they don’t feel like a welcome part of the community when they do. Towards the end of the Gather session I observed that it was incumbent upon all of us there, especially the loud ones like myself, to call out any of this sort of behaviour when we saw it.

After Gather I followed up with one with the organiser of a specific conference mentioned, who contacted me after tweets. He said he was very aware of the problem, clear that the most egregious events had happened in the past and were dealt with, and that the organising group remains on the case.

So it was with some shock when the MC  James Elliott at NetHui used a reasonably sexist joke – not so much the line that “80% of the photos on the internet are of naked women”, nor of the fact that he pulled this out when the winner of the question competition was actually a women (and superbly done), but more for the series of slides after the question which assumed the audience wanted to actually see a picture of a naked woman, and then actually showing one, thankfully relatively tastefully.

I interjected – loudly – somewhere along the way, and was shut down. I was trying to make the point that with the winner of the MC’s quiz being a woman, and the composition of the audience being a very reasonable mix of NZ society, that his expectations of the audience were quite different to the reality sitting in front of him. Not that the sexist series would have been appropriate in front of any audience, but it should have been clear that he should have stopped when the winner was identified.

I then tweeted an apology from this InternetNZ councillor, that was quoted in the article, and I simmered for a good day and a half about the MC’s behaviour.

Pamela spoke next, and unfortunately after that it was the article’s deadline.

Unfortunate because after that things got better and better. Some examples:

  • That morning was, for example, dominated by excellent women speakers, a far more telling story than the unfortunate joke.
  • One of the first new people I met through the day was the exceptional Emani  Fakaotimanava-Lui from Niue, who scoffed at the idea of Vodafone’s $450,000 plus cell towers, as he got one build for $27,000 in Niue. I suggested, mostly seriously, that he had built it himself, and it turns out that yes, he was out there with a wrench with a bunch of others. The tower, I later found, is able to be dismantled and stored whenever one of the rare major storms comes through. A rare individual, and just one of many inspirational people in the hallways.
  • We had 8 MPs in attendance, representing the three major parties and I believe all of them appeared on stage at some time. Along with Hon Steven Joyce there was the leader of the opposition David Shearer, and Green co-leader Russel Norman, who spoke before and then was on a panel which I facilitated. All were engaged, had done their research before showing up and often stuck around for a long while.
  • Paul Brislen from TUANZ ran an excellent session on the implications of UFB, demonstrating what we all know – that Internet NZ and TUANZ are working in many common causes and that we all think that Paul is a great bloke.
  • A large number of people, predominantly women, approached me during and after NetHui to thank me for the interjection and the tweets.
  • MC James Elloit apologised to me. He received the message loud and clear and was excellent and very professional for the remainder of the NetHui. He won me back over.

Nethui was a superb opportunity, as Vikram put it, to listen to the communities beyond the core of Internet NZ geeks, and vice versa. It worked astonishingly well once again, and, I remarked several times, the event was “more Hui than Net”, referring to the diverse mix of people, the range of views and the sheer usefulness of it all. We used to struggle at Internet NZ to get real engagement beyond the core hundred members, and of them only a few were really engaged heavily. Now we have over 300 members, increased engagement and a function in NetHui that lets us  listen to, engage with and work alongside other communities.

I encourage Computerworld, and everyone, to join up to Internet NZ – and, what the heck, will even pay the $21 required for selected journalists.

Measure then fix – why 107 academics are wrong

A group of academics signed off on a letter against school league tables. The stated logic may work in an academic research setting but is inappropriate to apply to the real world. We should instead publish the measurements, improve the measurements and their context over time and, most importantly, focus energy and resources on understanding the issues and helping the schools at the bottom of the league.

Let’s look at the reasoning used in the media briefing note:

1. National Standards data are unsuitable for comparing schools The performance of schools cannot meaningfully be compared with each other unless it can be demonstrated that assessment measures, processes and moderation have been used consistently across schools. <snip>

The argument is that schools have high variability between each other and across years. It’s a combination of measurement error based on inconsistent and low samples and the national standards only measuring numeracy and literacy and not more holistic skills.

However to improve something we first need to measure it, and if we can’t measure it accurately then an approximation will do. In business that means using surveys of customers that have clear sampling bias, reacting more to customers who complain and even believing what we read in the papers. We know all of these sources are incomplete and have bias, but we can account for it somewhat, and are much improved by using the input. The online advertising industry is a lovely example, using a system for measurement that is clearly wrong to measure traffic, but while it is wrong, it is wrong for everyone, and it’s only the starting point for a conversation.

It’s far easier to start a conversation about the quality of a school when confronted with a combination of the socieoeconomic data about the catchment area and the National Standards results over time.

2. The contextualising data are incomplete

Many elements of the school’s local community context affect teaching and learning processes and children’s achievement. These include socio-economic and other intake differences (such as ethnicity, student transience rates, the proportion of English language learners or children with special needs) and other school and area characteristics (local labour market, urban/rural location, popularity compared to surrounding schools).

There are also internal school contexts, such as past leadership or reputational issues, significant staffing changes or schools being damaged.

Many attempts at comparing school performance do not even try to use the best available statistical methodologies. Instead the school decile rating is typically used as a proxy for all these contextual indicators. 

I agree. The National Standards data are only one piece of the puzzle, and the puzzle needs to be completed.

However we need to start somewhere, to create a minimum viable product and steadily improve it over time. While many criticized the early versions of iPhone, Xero and even Powershop, the steady improvement in functionality and usability were what won consumers over time. It’s the same with a measurement system that relies on a variety of data. Some of the early data will be wrong, and some of the things measured will be missing, but we should accept that and move to steadily improve the quality and context over time. If we don’t have the right socioeconomic data, for example, then someone will find it and mash it up with the National Standards data. The 107 academics are ideally placed to perform this work.

The reference source of information on schools will be the website (no doubt) that combines the highest quality information in a way that is meaningful to parents, teachers and students. Releasing the data in an open form is the first step towards creating  complete school reports across a broad spectrum of facets.

I understand the natural academic reluctance to never release data that is potentially wrong, and I see that in business sometimes where companies do not want to release an imperfect product. But while they are polishing the bezels yet again competitors are releasing their inferior but higher selling versions. Similarly we should release the data, and call on the power of academics, hundreds of thousands of parents and even students to provide both sunlight as a disinfectant and the right context.

3. League tables are educationally harmful

The compilation and release of achievement data in league tables to enable comparison of schools has the potential to cause harm: to learners, teachers, schools and local communities.

These harmful behaviours include: ‘teaching to the test’ and ‘narrowing of the curriculum’; valuing of some students over others because of their ability to perform and to conform; prioritising the teaching and other support given to some students over others in order to maximize the numbers that ‘reach the standard’; and damaging effects on students’ anxiety levels and conceptions of themselves as learners – ‘I’ll be below standard’.

All systems can be gamed, and business is no exception. Larger businesses often make decisions based on their corporate structure and internal politics rather than on the facts at hand. Inside a business the ‘wrong’ people may be promoted as they are better at understanding their boss’s requirements than their harder working colleagues.

However it’s a lot easier to understand where there are performance issues when we have at least some degree of measurement. Early warnings in business are easy in some areas, like sales departments who have targets, and much harder  in others such as marketing. But it’s common to have at least some concrete measurements on your personal scorecard.

The really smart businesses understand that people will game the system to over-achieve on their personal scorecards, and make sure that the personal goals are 100% aligned with the corporate goals. Nobody complains about the sales guy who brings in another $1 million of business by pushing harder at the end of the quarter – in fact it’s common to see spiky sales results based on timing of bonus periods. Harmful gaming, such as stealing customers, is deadly however, and jumped on very quickly.

It’s can be the same with schools. No doubt the current system, whatever it is, is gamed. Some schools will get more resources than others simply because they are better at working with the system or at fund raising through other sources. Point England school has done incredible things on a tiny budget, because they worked in a smarter way.

So any measurements must cascade from the goals of the education system, and we should fight to remove bias and the potential for harmful gaming. I would imagine that getting people through the National Standards is the ultimate purpose of the system, and that means increasing the quality of the standards themselves each year as well as helping students achieve. We need to be constantly aware of the potential negative impacts, and, quite simply, measure and set goals for them. If losing poor students early is a problem, then make student retention a critical measure of performance, and so on. It may become a real battle, but ultimately a catch-all “don’t game the system or else” will bring out the best side in our educators.

4. The political argument for league tables is weak

The argument that the Ministry of Education should release league tables in order to prevent the media doing so, does not address the problems that their effects will be damaging and the data used to compile the tables will be incomplete. <snip>

A long piece containing several arguments about why releasing the data is bad.

However while it might be considered bad by the academics, it is not by myself, and more pertinently, at least some parents. While even a small minority, and this is not a small minority, wants access to our data, New Zealand has a policy and obligation to provide it. Arguing against releasing data is quite remarkable for a group of academics. It should be easier to understand school performance than to read about individual student’s private lives on Facebook.

In particular, the moral principle of social justice demands that the situation of the most disadvantaged in our society should not be made worse through the release of official information. 

Businesses often ignore the fundamental problems, such as with their business model, until it is too late to do anything about it. As a consultant to businesses tiny to large I generally focus on these problems, often ignored before my arrival. A great reporting system which highlights emerging problems and a smart management team that follows up on them keeps the expensive consultants at bay.

It’s the same here – the moral principle of social justice demands that the situation of the most disadvantaged in our society be identified and fixed, and not hidden from public view. We can fix these broken schools, and we don’t have to look further than Wellington High or Pt England to find great examples.

I am somewhat dismayed at the attitude of the educators, although I do understand their reluctance to release what is seen as incomplete data from an academic study perspective.

From a society perspective there is at least some demonstrated demand from parents.

From a business perspective there are a number of businesses and individuals who would  love to mash this data up to create something new and useful.

But, most of all, from an educational perspective, releasing the data as a league table will allow us all to ask the hard questions of everyone involved – how are we going to help the schools at the bottom?

Starter notes for #NetHui – Business Ecosystem Session

I’m at NetHui at the moment, and about to facilitate a session on business ecosystem in NZ. In the interests of speeding the introduction here are the starter notes and questions.

Session description

New Zealand’s start-up ecosystem continues to develop. In the last year we saw some exits, good funding rounds with local and overseas investors and a continuous stream of new companies appearing.

Are we happy with the state of affairs?, or do we need to keep working on creating a richer primordial soup?

Funding sources are interesting in NZ, as there seems to be plenty of money for housing or partial sell downs, and some start-ups do very well. But there also appear to be very few lead funders for internet start-ups, so what can we do to promote more funding options?

Xero went down the IPO route – is that (IPO) credible for others now?

What about the VIF program – is it a success yet?

Is New Zealand producing the right talented educated people, and are we retaining them? Do we do enough to help them transition to start-up world?

Are we helping local companies access international markets well, or do we expect that anything online will sell itself?

What regulations and agreements are helping and hindering the sector – what do we need to change?

Questions (and answers) to start the session 

1: Why is business important?

  1. Economy is money is society & cultural uplift. More comfortable, longer life, better life, more for less.
  2. Changes the world: Drives change, profit motive powerful – takes creation and accelerates
  3. Gives people purpose. Meaningful work.

2: What should be important for business?

  1. Change the world, improve the world
  2. Improve NZ
  3. Improve your customers’ lives – awesomeness
  4. Help your suppliers, staff, local area,
  5. Shareholders, while managing debt.
  6. CEO

3: What do small, medium and large businesses need?

  1. Access to Markets
  2. Access to suppliers
  3. Talented people
  4. Basic infrastructure – including internet
  5. Access to capital
  6. Office Space?

Powerkiwi is the thirteenth largest power company in NZ*

Snooping around a bit after the previous post, I came across more data on the Electricity Authority’s website. They track the size of the retail market by the number of Installation Control Points (ICPs) attributed to each retailer.

Powershop is is a very healthy 7th placed retailer. However, while Powershop is the attributed owner of the ICPs, they have retailers on the store who split the market share. Without giving too much away, I’ve estimated PowerKiwi’s attributed share of the NZ market – and it seems we are in 13th place. That’s pretty cool.

You can join the mad rush to buy FlowerPower by, well, following the Flower.

FlowerPower logo

More data on our wonderful energy system

The MED have produced a Energy Data File for 2o12. It seems to be on a new website for energy facts – though just because I have not seen it before does not mean it is new.

Here;s the starting infographic, which I unfortunately found unreadable.

While it’s nice to see them try an infographic, the point is to make the facts clearer rather than pack everything densely together. So I opened the trusty Skitch, removed the clutter and arrived at this:

Personally I quite like the key statistics of 77% of our electricity is renewable and equivalent to 43% of our oil demand is produced domestically. These are numbers that hold our economy in good standing today and looking forward.

I also like this chart below a lot – it shows that while the economy and population have grown we have managed to control our use of electricity, getting more GDP output per unit of power. It’s called energy intensity, and the movement towards electric cars, public transport, and well insulated buildings will keep things under control in the future.

The ultimate prize is a 100% renewable sources for all energy, including for transport. That’s a very big ask, but we are right up there at number 2 in the world behind Iceland, who invested heavily in geothermal. Meanwhile the future for electricity companies is in transport, and the smart ones will not just plan for that with generating capacity, but plan for the distribution as well.

There is no depression in New Zealand

I partially wrote this during last Sunday’s Voyage NZ show. I didn’t really get to finish it, but what the heck.

Congratulations to the Fabian Society, Scoop and PublicAddress for putting on the Voyage NZ. However it was mostly about looking at the downside.

None of this is new. In fact it echoes what was being said in 1982, in 1992, 2002 and will no doubt be said again in the future.

But let’s step back and look at the realities. We were watching Voyagenz sitting in a lovely theatre, or at home over a streaming video connection. We were wearing clothes made around the world, but many of them by local company Icebreaker, an iconic NZ company which should resonate with the Titanic theme of voyagenz.

We have a new breed of New Zealander and New Zealand companies who are leading the charge. It might surprise many that NZTE and MSI know about and has assisted many of them. I have been lucky to see a few as part of the Better By Design program. It’s no mistake that Icebreaker’s Jeremy Moon is Chairman of that Better By Design program, and the results of the companies who have been through are often amazing.

The Better By Design program was launched under Helen Clark’s Labour government, and is supported and being enhanced by National’s Key government. I expect it will keep getting better and better over time, as successive governments and government employees like NZTEs Peter Chrisp keep the changes coming. Do check out some of the inspiring success stories.

In the high tech sector we have an array of successes, and emerging successes. From likely the world’s only online electricity marketplace to Xero, Litmos and Vend we are leading the way in new areas. We can do this in NZ due to the power of the internet, relatively lousy as it is, and a large an growing group of amazing technical and design led entrepreneurs.

Enough. It’s a story worth retelling, but I feel like a broken record. It’s beyond time to recognize that, in the midst of global economic and local earthquake turmoil, we are doing all right. We can always do better, but let’s celebrate what we have as well.

Brass Monkey 2012

Some pictures from this year’s Brass Monkey. We were a little early for the snow this year, and the weather was basically perfect.

This one of me was taken by Mike Nash:

Ruapehu – on the way South from Auckland.

Kapiti – from Waikanae Beach

One of the entertaining Interislander passengers. We always seem to meet interesting folk on the way over.

Ferry piece

Ready to ride out

Leaving Blenheim

Above Tekapo (click images for much larger versions)

Latte drinking sophisticate

On to the gravel

;

;

Not the best way to cross the bridge

I’ll leave it there for now.

IPOing in NZ – notes from the NZX and Xero presentation

The NZX and Xero, along with Cameron partners and Bell Gully held a “Masterclass” on IPOing in NZ yesterday. Xero CEO Rod Drury wears two hats, as he is also a director of the NZX, but they were also represented by Tim Bennett, the new CEO and Andrew Harmos the chair. Ross Christie from Cameron Partners and Dean Oppenhuis from Bell Gully put their side of the story.

Here are my notes from the event, but you can also simply read the slides (Xero blog) Rod et al. used.

Should I list?

Advantages of listing that Andrew highlighted were providing capital and liquidity for investors/founders, transparency, ability for punters to invest.

Later on Rod put up a slide with: providing capital for growth, giving objective market value and market for shares, employee commitment, raising corporate profile, enhancing credibility with customers and suppliers and creating ability to make future acquisitions.

The negative issues with IPOing and plublic markets were not really covered, but to me are profound.  While it may create liquidity for employees and investors, the constant tracking of the daily movements of the stock price can be distracting for the team. How did we think the mood was inside Facebook as we met, after 10% then 7% daily price drops from the IPO? Stock markets tend towards driving the perverse incentive of  short term numbers, making them seem more important than long term ability to conquer a global niche, or doing every thing for customers. Great companies can rise above that, but I do feel that Xero, for example, is underinvesting because of pointless bleats from some shareholders who want short term profits.

Overall I see that IPOing on the NZX is a much better option now than it was 5 years ago, but it is for certain companies only. It’s great if you are already a success story, and need more capital to keep feeding a growing machine. It’s lousy if investors here are not sophisticated enough to understand your industry or business model. Xero has come a long way with investors, but it still amazes me that many local investors do not see the method behind their model.

Another downside is that continuous disclosure can be painful for companies. There are rules about what they can and cannot talk about, and the channels for releasing information. Not many companies can be as disciplined as Apple when it comes to talking to markets, but we are ‘lucky’ here in that we only require 6 monthly disclosure. The legals and logistics can be painful, but the worst thing is that you end up taking about yourselves and results too often, rather than focusing on the customer and products. All material releases need to be through the NZX rather than through other channels, and this can be a pain, although Rod also sees this as saving on PR.

Xero has been public for 5 years now delivering an impressive 33% annualised return to shareholders since 2007. Their market cap is now over $400m, but still small compared to the froth of Square at billions in valuation.

From NZX perspective Trade Me and Summerset raised about $500m between them last year, with both going on to deliver raised share prices. Both were sell-downs by a parent who still holds a majority stake.

Rod’s History

Rod and his partners sold Aftermail for $15m plus earn out which they never saw, and thought he was doing well. However shortly afterwards the Trade Me sale hit, setting a new benchmark set of what great looks like. He saw that as a challenge, and saw also that the next company would need to address a global market.

With Xero Rod wanted to ramp up from day one, with 50 staff working from the start. While with SAAS the money would come in from customers on time,  the payments were always going to be in smaller chunks, customer by customer, month by month. With 50 staff the burn rate would be about $500,000 per month, so Rod saw he needed to raise  $15m to raise. The VC industry here was too small and immature (my words) to deliver that, while VCs from the US West Coast were not considered for a couple of reasons. The IPO raised $15m for 27% of the company, selling on the growth potential and selling that all portfolios need a higher risk/return propositions. (Rod says you couldn’t buy risk at the time on NZX, but he was probably not thinking of finance companies in that way – plenty of risk there).

Rod went all-in with Xero – put $1m of his own money in up front, and being the persona with the most at risk. Xero had to have 100 customers before listing, stock exchange rules, and so there were a lot of cousins, family and so forth using Xero. The IPO process involved a lot of hustling, a lot of go/no go milestones, a lot of debates about the speed, with Rod as the most bullish.

Getting ready

An IPO is a big event, and life after an IPO is forever changed. The company needs to prepare for greater disclosure, and put a lot of time into preparation and IPO process. They need a highly probable growth plan, decent corporate structure with good people, a good story and the ability to convince an iBank or broker to help prepare for and promote the IPO.

Rod was very demanding in speed and expectations. He also worked his existing media connections, meeting journalists and investment brokers who write articles seeking advice and involving them in the story. They needed more profile building, and so Rod wrote a whitepaper on broadband (on Xero formated letterhead) in particular. That particular paper went a long way. Being public is a necessary evil, but in NZ you can get in the public eye very quickly.

Key Rules

Generally there is no minimum amount to raise for an IPO, but guidance is to get 24 months of capital. On the other hand be careful in setting a minimum as you have to return the checks if you don’t make it. There is no requirement to state a maximum, though state it if you have one. State how you will deal with over subscriptions.

At least 25% of the shares after the IPO need to be with minority shareholders who have <10% of the shares (“the public”). NZX will waive this and other rules sometimes.

Prospectus and disclosure requirements will be replaced early next year after new regulation, though the feeling was that not a lot would change here. Companies need latest accounts that are audited and a summary of previous 5 years information. For those contemplating an IPO it is best to get into auditing accounts each year. A risk section boilerplate and specific risk section are required in the prospectus, as well as a forecast for end of next period plus one more period also required.

That prospectus is signed off by directors, who assume some pretty heavy liabilities if it is hogwash. The board itself needs to have at least 2 independent, defined as <5% and non-executive, directors for boards of 8 or less, and 3 for larger boards. Rod sought people who were well known and could help, with Sam Morgan in particular on the board before the IPO.

The directors and shreholders are typically prevented from selling shares for a lock up period after an IPO.

An NZX approved sponsor/organising participant is required, with sponsor investment banks working with brokers to sell through.

Xero shopped around, ended up choosing First NZ Capital and kept presenting to them, nagging them into it. There was not much money in it for NZFC to do small IPOs. Then Rod and co. presented to Rob Cameron from Cameron partners, and he just got it. Xero  engaged Cameron Partners to work on Xero side, do the work for FNZC to take on. Rod sees that smaller companies need investment bank to guide the process. Cameron Partners did Ecoya as well, and got FNZC and Craigs NZ to push shares to the market.

Pre-IPO planning

Ensure a high quality management team is in place and any outstanding issues like shareholder loans, litigation are dealt with. Get a PR strategy prepared, remembering that the IPO process requires a quiet period. You can say “we have an IPO” and separately you can “raise the profile of the company”, and journalists have to connect the dots. It’s a bit asinine, and Mighty River Power has just been granted an exception on this one, and forthcoming rules will be a lot easier. The new rules will just make sure you cannot say anything misleading or deceptive, and are consistent with prospectus.

Ross says it took 3-4 months to get to market, with a lot of investor meetings along the way, and the prospectus delivered at the end.

Due Diligence is a necessary part of the process, as you are making claims that need to be backed up. Form a Due Diligence committee, basically a  a board sub committee with investment bank representative and lawyers in it. The due diligence lawyers need to have reasonable grounds to believe statements in documents are true. Dean Oppenhuis broke the DD process into initial due diligence on the company, writing the IPO documents/risk report and financial forecast verification. Lawyers will look at all legal documents, such as contracts, in the first phase, so make sure they are clean. They will also interview management, using a detailed and customised questionnaire. They will ask management to verify statements made in financial forecast – so back key claims up by independent evidence. They will issue verification certificates, certifying that there is nothing false or misleading in the documents.

The verified document goes to NZX for approval, with a good degree of supporting documents, and once approved the IPO is good to go.

Well not quite. You still need to do the rounds of investors, and despite the existence of advisors, the lions share of the work will fall on the CEO and team. It is important to have very good advisors in general though, and you will need a lot of them. My own take is always that a deal happens when everyone in the room, including advisors, is smiling.

To get investors you need to knock off some key issues, including offer structure, financial information, capital structure and dividend policy, valuation and equity story and pre marketing.

Offer Structure

There is always a tension between the raise amount and price, and you need to get a balance. I increasingly believe that  it is smart to always make sure that investors see a bargain, and to value the cash being invested highly. Being greedy and having a price that is to high might make it harder to raise money in subsequent rounds.

Building a book, where you get investors to name a price, is for later stage companies only, such as Trade Me. The were apparently very happy with the price set by investors, and were oversubscribed. However start-up companies like Xero are better off with a fixed price approach, asking investors simply are you in or out.

Regardless of all the marketing efforts, Rod did say that it all comes together in the last 2 days.

Staff and management

Trade Me gave a lot of thought to executive and employee components of the IPO to make sure they were personally aligned to deliver forecasts.

Xero meanwhile had some directors who could invest directly, and gave loans to others so that they were invested as well. They sold as much as they could to staff at pre-IPO rates.

Financial information

Make sure forecast period is appropriate as a long one increases prospectus risk for directors. Some of the detail about how the numbers work might be commercially sensitive.

Capital structure and dividend policy

Investors like conservative structures rather than optimal structure. Investors like dividends, but the market is beginning to understand, with Xero’s burn money to increase revenue approach becoming obviously good for them.

Valuation and  equity story. The key is to have a strong IPO story. Develop an IPO story and investor presentation, and show momentum building through the process. Get analysts to cover the company, now that we have one or two. However you basically need to build your own investment book and brag about that.

Market considerations

Trade Me cross listed into the ASX, which avoid the small size of NZ market. The NZX guys think, naturally, that this is not really necessary, but it is still hard for people in Australia to physically buy NZ shares.

Over the last 5 years things have changed in international funding, with VCs and Angels taking up a lot of the early stage funding requirements. That means the larger and smarter players are looking offshore (from the US), and Xero is one company in the target range. Rod is now more comfortable to stay on NZX for a while longer, 3-5 years, but Nasdaq an option later. NZX market more accepting of an early stage listing.

One comment Rod made stood out – launch the IPO knowing it will work.

Costs

Costs are non trivial for an IPO, but you can back load them so they come out of the capital raised. The costs are higher as a percentage for smaller IPOs, say 6-7% of funds raised for them versus 3% for larger raises. (Facebook was ~1%). Rod says you need to budget a $50-100,000 retainer per month for advisors as you go through, and pay the rest when you deliver. The second raise once you are listed is fairly cheap, say 2-3%.

For their retainer the investment bank gives credibility, but also writes the offer documents and so on.

After Listing

After listing you become a “real company” and it’s easier to build a global business. Xero management tend to be older than peer companies and investors in Silicon Valley, and see they are doing well versus them.

Xero’s IPO was at $1, but the second was $0.90 which is when Craig Winkler (MYOB founder) invested heavily. That was almost 2 years later, with a GFC in between and the share price had not exceeded $1 for most of that time. After the Winkler raise the Xero share price stayed at about $1.50, until Peter Theil invested another 2 years later. They raised more again this year at $2.75 per share, and the share price has risen nicely subsequently. Xero has used shares and cash to purchase 2 companies.

Key rules once you have listed

Companies can raise up to 20% of equity without shareholder approval in any one year. Shareholder disclosure is required for ownership over 5%, while you can issue employee share schemes of up to 3% of issued capital each 12 month period. NZX has a share purchase plan (rights issue) which cuts down on documents and allows up to $15000 per shareholder. These are usually taken with larger investor coming in and are typically done in 21 days.  (I have an issue with these as the larger placement can dilute existing shareholders with more than $15000 pro rata share.)

Investor relations. Get out there and talk to people, have a thick skin, but continually thank shareholders. AGMs are a good opportunity to sell the message to investors so make them high quality. Regardless of the PR efforts there will still be millions who have never heard of you – something we can forget in the online community. Keep marketing announcements factual and blog posts more

Rod talked about, and it is clear, that Xero is on a different curve now, and has a professional team to deal with the public company compliance, employees with ESOP and so on. They bounced through the awkward start-up phase into the professional phase courtesy of the IPO. I wouldn’t think that many others could manage the IPO trick so early, but it is certainly a much better opton than I had thought in the past.

Well done to NZX, Xero, Cameron Partners and Bell Gully, not only for the IPO but also for an excellent session.