Lance Wiggs

The New Zealand Venture Investment Fund was set up 14 years ago with the best intentions – to foster an early stage investment sector in New Zealand by being a fund of funds. It’s has $250 million for VC and PE funds, but only $129.7 million of that had been invested to June 2015 and $100 million of it is an underwrite facility.

NZVIF  later added the now $50 million Seed Co-Investment Fund (SCIF) which co-invests alongside accredited angel investors. As at June 2016 they had placed $38.2 million of that.

It’s been a long while since NZVIF was formed, but even with time the results to date for the fund itself are pretty unspectacular. When I as at McKinsey there was a phrase – “directional correct” – which meant that someone had tried to do the right thing, but ended up down the wrong path. Is NZVIF directionally correct?

The latest investment report to June 2015 is just released. (As an aside it is months late versus the June 14 report, which was released in November 2014.) Back in 2014 was Jamie Ball at NBR wrote a scathing summary, and this year gives little to cheer about again.

Let’s look at the two parts of the business, the fees on fees, the road ahead and some comments about whether this is personal.

1: NZ-VIF VC Fund of Funds

The VC fund portfolio reported $120 million invested into funds and a Net Asset Value of $93.2 million as at June 2014. In June 2015 that was $129.7 million invested into funds and a value of $99.8 million. That means they added $9.97 million in cash, but lost $5.17 million asset value, for a average rate of return of (1.74%) – or negative 1.74% – per year.

In comparison Punakaiki Fund has raised $12 million and has a net Asset Value of over$16 million, as we did this in less than two years. We use the same IPEV standards for valuation and our IRR for the original April 2014 investors was over 50% per year when we last officially released data in November 2015. It’s quite remarkable to think that Punakaiki Fund’s value today is already a sixth of the value of NZVIF’s VC fund as at June 2015, and we have not received any funds from the NZVIF fund of funds nor had over 12 years of investing returns for the fund.

NZVIF accepts that the early performance was poor, and breaks down their VC investments by vintage. The latest report shows that the original investments from 2003 to 2005 saw an annualised return of (5.47%), and a loss of 30% overall to June 2015. Looking at the two reports however I see that in 2014 NZVIF reported $65 million was invested in 203 to 2005, but in 2015 that historical figure has climbed to $67 million. The return was reported as a loss of 35% in 2014, so things are improving.

But that’s a lousy result overall. In 2003, for comparison, I was trying to buy shares in Trade Me, and Xero launched in 2006. I wonder if the conversation with Trade Me would have been different if I’d had access to a $10 million fund.

The second wave of investments, was from 2007 t0 2012 (2014 report) of 2007-2014 (2015 report). There were five funds in this cohort in 2014, and six in 2015. The annualised returns for NZVIF were 8% in 2014 and dropped to 4.36% in 2015. Neither of these are acceptable for early stage investors, and what’s happened is that NZVIF, under their mandate, had limited their upside by allowing funds to buy out the best investments for near the investment value. So for the rather late-stage investment in Xero by Valar, for example, the NZVIF money was essentially a free extension of their funds for a few years. Valar didn’t need extra cash to make a return, a great return, but it sure was nice that NZVIF was there to support this offshore fund. NZVIF unfortunately gets essentially no return from the deal, which is why I use the “buy-out adjusted” returns to the NZVIF fund rather than their unadjusted returns. Those unadjusted returns for the period were reported at 26% per annum in 2014, but fell to 12.67% per annum in 2015. That was a 2.11 return as at June 2014 and a 1.46x return as at June 2015, remembering that this is funny money, not reality.

As good as that sounds, it’s not great for early stage investing.

For comparison during the first 2007 to 2012 period I invested in Define Instruments (solid), 200Square (still selling houses), Pocketsmith (growing well over the years), Vend (over 600% returns, including more cash out than invested), Valuecruncher (failed), Lingopal (in quiet mode), and Pacific Fibre (we tried), as well as some sweat-equity firms like My Tours (doing very well), Groupy Deals (exited to Yellow), Powerkiwi (2nd in Deloitte Fast 50, contract bought out by Powershop), AllAboutTheStory (closed) and others. Later on I invested in Syft (4x cashed out return), and then Punakaiki Fund (52% up so far.) I just took a very brutal ruler to those investments, and valuing rather harshly the unrealised investments I still see over 400% or 500% return on investment (one company valuation could drive the that a lot higher). Of the over $900,000 off that I invested only $150,000 can be deemed a failure, and some of that is still being worked out.

So while I was making four or more times the money invested – the NZVIF fund of funds was actually losing money operating in the same space. And meanwhile other early stage investors with larger amounts at their disposal did extraordinarily well. Take a look at the shareholder registers for Xero or Vend.

Meanwhile NZVIF stated on page 3 of the 2015 investment report that “no private venture capital funds have been established over the last 15 years without NZVIF’s involvement.” At LWCM, the manager of Punakaiki Fund, we were somewhat incredulous to read this claim. We have not exactly been hiding under a (flat or otherwise) rock.

2: SCIF

The SCIF fund, which operates deal by deal, had invested $29.7 million to June 2014, and $38.2 million to June 2015. That’s an increase of $8.5 million year on year. Punakaiki Fund invested, for comparison, about $10 million in the 21 months since launch in April 2014.

SCIF is not self-limited by the same clawback mechanism, and neither, as I understand it, are the new NZVIF VC investments. That’s good.

The average SCIF investment per company was $310,000 in June 2015. That’s a lot lower than us at Punakaiki Fund, which is averaging near $700,000 invested and $1 million in asset value per company.

The SCIF returns are fairly sad though, with NZVIF reporting just 1.04% annualised return in June 2015. That’s even lower than bank debt, but at least it is positive. The SCIF investments vary by partner – they have 15 or 17 (depends how you count) and only 8 are delivering positive returns. I suspect one or two of those will be very successful, and the rest marginal.

Overall NZVIF estimates that the SCIF portfolio returns on investment will be between 0.8 and 1.5 times the money invested, by 2026. Read that again. SCIF is saying that after 10 years they are promising, at best, an annualised rate of return of 4.1%. This is not successful early stage investing.

3: The Fees on Fees

The returns from both parts of the fund are lousy – and I accept that NZVIF is trying as hard as they can to downplay the value of their investments and there should be plenty more upside. If their approach to valuation is, as they state, “conservative” and they are carrying assets at lower values than their co-investors then then everyone needs to re-read the IPEV guidelines, which are pretty clear on using fair values. (We use them at Punakaiki Fund too.) The accountants and auditors (Audit New Zealand) for NZVIF should have strong fairness opinions about the valuation methodology and the individual valuations.

However you cut it, the reported returns from NZVIF’s VC Fund of Funds and SCIF are unacceptably low for early stage investing.

But we have not yet mentioned fees. NZVIF’s 2014 annual report and 2015 Annual Report show that in NZVIF received $2.33 million from the government in 2013, 2014 and 2015, and they spent $4.4 million, $4.6 million and $5.3 million  in expenses in those three years respectively. A significant part of that, $1.9 million in 2013 and 2014 and $2.6 million in 2015, was for “fund management fees and costs paid to fund managers”. I don’t know what that means – was this for external people to manage their fund of funds? Or was it paid to the funds that they have invested in? Either way it doesn’t appear to be matched in the revenue line. Is it taken from the investment principal?

With $137,500 spent on directors fees, $1.33 million on employee benefits, $1.0 million on “other administrative expenses” and $120k on auditors the basic costs to run NZVIF (excluding the “fund management fees and some other items) was $2.58 million. That represents 1.9% of the funds under management, while the full $5.3 million of expenses represents 3.9% of the fund under management. I am not sure how this works, but I suspect (and hope) the the 3.9% represents both layers of fees – those incurred directly by NZVIF and those paid to their VC fund managers.

NZVIF is a fund of funds, and even the SCIF part relies on others to do the work. The VC funds that they invest in and the angel clubs and small funds that they invest alongside with SCIF charge their own fees beyond those above. The end result is that the overall fees to the investor (us taxpayers) are very high.

Investors don’t mind high fees when the returns are great, but in this case it’s tough to take. NZVIF is charging a lot more than a funds on funds investor should, and while they would argue that they perform a a lot more services than just funding, it’s hard not to point at the tepid results and ask questions.

I feel frustration that NZVIF is accepting and promulgating these low returns and high fees as acceptable for early stage investing. I understand their need to justify their mandate, but it’s arguably creating a chilling effect for newer funds, like Punakaiki Fund, to convince larger investors that the asset class is amazing. And it is amazing.

4: The road ahead

The good news is that some of the NZVIF investments are going better as at the end of 2015, but it’s unclear what the “buy-out adjusted” returns were at that stage.

It’s also great to see some new funds coming on line, with Chintaka Ranatunga looking to close GD1 II soon, and the ICEAngels closing a fund between $5 and $10 million, and others circling. But we are still hundreds of million short – at Punakaiki Fund we are overwhelmed with deals and could place $50 million easily within 3 months, if we had it.

NZVIF itself is in transition, and with a new CEO yet to be announced there is an ideal chance to make a solid change in structure and mandate.

Last year I commented to the NBR that I’d like to see five things:

1. Equality: Invest on equal terms to other investors into funds – with no buy-back provision. My understanding is that this has now happened.
2. Simplicity and speed: Impose no conditions on the funds, such as contract criteria, and fund structure, investment process etc. (The VIF conditions were dreadful). Invest or don’t invest based on the offer, and make decisions quickly. My understanding is that the terms are a lot better these days, but it’s still dreadfully slow for VC funds to raise money from all investors. 
3. Quantity: Have a strong bias to invest at least something into any local fund which is investing in the target markets/stages. Not done – we are still waiting for a call. I suspect this article will delay it further.
4. Performance-led: Invest small amounts at first into many funds, and reinvest progressively larger amounts into funds that perform. Not done – the GP/LP structure used by funds means VIF can only invest in lumps when new funds are raised. This can take years.
5. Reporting: Commission outside experts to deliver reporting on the overall early and growth-stage funding markets in NZ, placing the NZVIF funds in the list next to private investors and non-aligned funds. Not done, but it is good to see the second investment report from NZVIF. I expect the numbers will get better.
6. and a bonus 6th: Report NZVIF progress to the public on a deal by deal and fund by fund basis, with ability to do so as a pre-requisite for any investment in a fund. Not done – and to be fair this is hard as companies don’t like releasing results.

To those I would add three new suggestions.

1. Lower the management costs for NZVIF to say 0.5% or 1% of assets under management, more normal for a fund of funds. Ask the leadership to restructure accordingly. That means an annual budget of $650k to $1.3 million, well under the $4.6 million today; or
2. Pass the entire fund to an existing government-owned professional fund manager, and if the government wants to invest in more funds or deals then the fund manager can allocate the funds. The Superfund is the perfect vehicle for this (ACC is an alternative), but the asset class is very small for either shop. One option is to move say two people from NZVIF into Superfund and have them managed there; or
3. Run a tender to ask for proposals to run the fund and pass the fund to the private sector. Selected the manager based on the response in costs and evidence that new ownership would drive higher returns for the fund.

The final alternative is to keep going, but it should be clear by now that more of the same is not necessarily the best course.

5: It’s not personal

I commend everyone inside NZVIF and in the funds they have invested into. Everybody works hard to change NZ’s investment climate and to deliver returns for investors and founders. Some people in the ecosystem have gone well above and beyond.

This is an attack on a dated mandate for NZVIF, a structure that is unwieldy (though getting better) and in an ecosystem that has marched far ahead.

As investors, advisors and taxpayers we should be unafraid to call out when we perceive there may be an issue, in this case with a business. It can make things tough when people don’t understand that this elephant hunting is never personal, but over time essentially everyone respects that things do need to be called out, and an intervention is better than no intervention.

In this case I’d really like NZVIF to succeed, and I’d really like to see a lot more funds in our ecosystem – we need them. But at the same time we need to broaden the ecosystem away from NZVIF. Punakaiki Fund has shown that it can be done from the ground up, as have many high net worth investors, while Milford Asset Management have done the same as a larger investor top down.

The high growth investing ecosystem still needs to earn the right to have the major brokers and banks get behind the space, and the only way we will do that is to show consistent and strong returns, resetting the standard for what proficient early stage investing can achieve.

I love it when investors in our ecosystem make great returns. Here’s to the early investors in Diligent, the folks who backed Xero pre-IPO, the few and the brave behind Adherium and the countless quiet investors who back the thousands of companies we never hear about. Let’s keep investing into great companies.

And let’s hear it for the founders – all of this energy is focused on helping founders start and accelerate the growth of companies. We have an abundance of founders and great companies in New Zealand – we need to get on with giving them what they need.

Chris Humphreys and I will be presenting about Punakaiki Fund tomorrow, Thursday, 6pm at Deloitte Auckland, 80 Queen St. Many thanks to Deloitte NZ for providing the space and to Snowball Effect for arranging this.

Signup here – space is limited.

The presentation is targeted at eligible investors who are interested in our latest offer. You can read about the  Punakaiki Fund Wholesale Offer on Snowball Effect, or download the Information  Memorandum. Come with questions.

Punakaiki Fund had assets of $15.16 million, as at December 31st, 2015, including $750,000 raised in December from this offer.

We have confirmed applications this round, including $462,000 via Snowball Effect, for just under $1 million more, giving a total of $1.71 million. The offer closes on Sunday.

The more we raise, the more we can help the 14 companies we have already invested into already, and the more we can place into new companies. We invest into companies that are growing – combined annualised revenue for the last quarter from the 14 companies was over $55 million, and 10 of those have annualised revenues of over $500,000 per year.

Our aim is to help grow outstanding New Zealand companies, and to generate great investor returns as a result.

 

New Investment: Mindfull Group

At the end of last year we invested into Mindfull Group, and Punakaiki Fund now holds 20% of the shares. I have joined the owners Belinda Johnson and Richard Johnson on the board of directors.

CEO Belinda Johnson and CTO Richard Johnson are a high energy duo, and I have been very impressed at the pace of change that they are leading with the company. That includes a restructure of the firm to be based around their core business lines, moving their Auckland offices to consolidate into one location, restructuring the balance sheet and making a senior hire to drive US sales.

Mindfull Group specialise in business analytics, providing software and consulting to 300 clients, including some of New Zealand’s largest companies, and some large global companies as well.

They have consultants based in Auckland, Wellington and, now, in Portland, helping companies with financial performance management, predictive analytics and data warehouse solutions. Most of their consulting and software sales business is built around IBM Cognos TM1, a budgeting, planning and reporting tool for medium (large in NZ terms) sized businesses.

Mindfull Group have also developed software that extends the TM1 platform (and other platforms in the future for Qubedocs), including Qubedocs, an automated documentation tool sold globally and Mi Bi, a cloud based Business Intelligence tool that allows smaller and mid-sized businesses to budget, forecast, report and do cashflow modelling on the IBM toolset. Mindfull also provide local sales and consulting services for WhereScape, a New Zealand developed and created data warehouse automation tool that is gaining global traction.

Mindfull are a very professional firm, delivering high value solutions to their clients. We are investing to help them accelerate their product development and expansion offshore, and remain comforted by their strong and growing business here in New Zealand.

Another round for Melon Health
We are participating in a rights issue for Melon Health, who are raising funds to help them deliver on a number of compelling opportunities developed in 2015. This round raises the valuation of Melon Health slightly to reflect that progress, which includes pilots in three countries (one is nearing completion), being selected and completing the Techsters and Mayo Clinic partnership programs, and general traction on major sales.

At the end of last year we extended our wholesale fundraising offer until 31 January. While that was a bit over five weeks in time, in our summer season it’s really only a couple of weeks of business time. 

Meanwhile however most of the companies we have invested are continuing strongly, most with steadily growing recurring revenue, and many companies delivering record months and quarters yet again.

December2015/January 2016 Offer progress

We issued the first $750,000 worth of shares before the end of 2015, and have received a total of over $1.35 million in applications. We also have indicative commitments that will bring the total to over $1.5 million.

The offer is priced at $16.50 per share + $19 September 2016 option and is available to eligible investors only.  

Read and apply online at Snowball Effect (easiest): https://www.snowballeffect.co.nz/punakaikifund
or
Read the IM :  http://punakaikifund.co.nz/files/PunakaikiFundIMDec15.pdf
Application form: http://punakaikifund.co.nz/files/PunakaikiFundApplicationDec15.pdf

We have plenty of opportunities to reinvest in companies we have already invested in, and would like to be able to invest in other companies as well. The more we raise, the more we can help companies grow, which in turn will increase the net asset value per share.

Almost all of the applications to date have been received directly by Chris, rather than through Snowball Effect. As a result the Snowball Effect offer looks a bit light, but it is the easiest one to apply through as it is an online process.
 

Trade Me has announced that it is changing its auction fees from February 1 – and quite a big change at that. Let’s look at the changes from the old fees to the new.

Listing (Upfront) Fees

Here is Trade Me’s page on the change.

The first change is important – making extra photos free. That’s a great step as more photos per listing means much better listings and therefore a better sell-through rate and more success fees. I am surprised but not shocked given the current policy at  the number of listings on Trade Me that have just the single free photo. From research we did 10 years ago we knew that listing with multiple photos are much more likely to sell more, and Trade Me will make a lot more money from increasing the number of items sold and therefore getting their success fees up than a few 10c up front fees. So I expect, and Trade Me wll be a lot les bullish on this, to see the overall sell-through rate to increase substantially – by 10 or 20%, or perhaps more for the affected listings.

This change will improve the marketplace experience for everyone – buyers can see the products better and make more informed bids and sellers can provide a far better story about their product, and only pay if it sells. Overall this will encourage the right behaviour across the general items part of the site, and we can expect to see listings with far more than one or two supporting photos as the norm.

Placing the end user experience first is part of Trade Me’s DNA, and it’s good to see this move. For me it’s a signal that things are changing within Trade Me, and that’s got to be good for everyone.

Success Fees

This change has two sides to it – removing or lowering fees for tiny sales prices and sharply increasing the take rate for sales above $200.

Lowering the fees for tiny sales

The minor change is that the minimum fee of $0.50 is disappearing, and also that no fees will be charged for sales under $1. That’s nice, and while it is tiny revenue per item for Trade Me there are a lot of items affected.

The effect of the change then is that for items under $6.39 in sale price the final value fee will drop from a $0.50 flat rate to 7.9% of the price. I am going to guess (and I’m not looking at any historical data to educate that guess) that the bulk of these cheaper sales are at $3-6 anyway, and so the average margin may go from $0.50 to $0.25 or $0.30. Let’s use $0.25 as our estimate, a drop of $0.25 for every listing sold for $6.39 or less.

But given the exorbitant current fees, there are most likely a vast number of listings that are not being placed on the site as the fees are too high versus the sell price. Like the photos change I expect that this will have a very positive effect on the marketplace dynamics, with a much larger number of listings being placed. Trade Me will have to make sure that people don’t try to charge ridiculous shipping fees to compensate, and may need to work fast to manage the potential influx of listings in certain categories. Both are good problems to solve.

So there will be more listings, and therefore more sales, albeit at lower fees per sale. However some of those small item sellers will buy upfront fees, and many of those small items will sell for greater than the seller expects ($1 auctions are almost always worth it).

Trade Me say that 20% of typical sales would experience lower success fees – and those are the ones in this under $6.39 category. I’ll get back to these number later.

I’m going to estimate that the number of listings, and sales, in this category (under $6.39 sale price) will lift by 25%. That’s probably a lot more bullish than Trade Me, but I don’t have report to a stock market. It won’t happen, if it does, instantly, but let’s see how things progress over the year.

Like the photos changes this passes the “is this the right thing to do?” test, which tends to deliver value to members and Trade Me alike. And again another sign that Trade Me is accelerating into the right direction.

Increasing the take rate for larger sales

For a sale prices between $6.39 and $200, which is 74% of listings, there will be no change in their fee. (Mostly – we also need to add sales with a price of more than $5,158, but that’s trivially immaterial.)

What is material are fees for items that sell for over $200 and less than $5,158, which will see price increases. The best way to describe what is happening is with a chart:

The old price structure lowered the success fee rate in 2 stages as the sale price rose, reaching the $149 maximum fee at a sale price of $5158.

The new price structure does not lower the success fee rate, and so it reaches the maximum fee of $149 at $1,886. At that sale price the seller will pay $149 in fees, whereas before they would have paid $86.82.

I think this change, which simplifies things for everyone, is overdue. Why should sellers of large items pay less commission? After all the same psychology works – if you have just sold something then you don’t mind paying a low commission.

This doesn’t affect the traditional seller of second hand goods, who just wants to maximise price and does not mind paying commission, as long as it is fair. It also shouldn’t affect most sellers of higher value items that they make or source themselves, who should be entertaining healthy margins and who have control of their sale price. However it does affect large sellers who are selling relatively generic or popular goods. For these sellers, who sell things like mobile phones or beds, may be competing with The Warehouse or other websites. A 7.9% margin could be very high, perhaps too high for them to make a profit.

Trade Me already gives large sellers a discount (15%), and the very latest probably have individual deals, which probably (knowing Trade Me’s frugalness) don’t amount to much more. For this change the Trade Me Community has noted that some large sellers are being offered discounts in other areas – such as free Feature listings for a few months. Exactly how this will pay out – I don’t know, but bigger sellers who sell items over $200 will not be very happy.

However bigger sellers, like most on the first page of the Trade Me Stores page, who sell low value items like books will be minting a lot more money. Booksellers will no longer be paying the 50 cent minimum fee, and will be able to put more photos up for free. I expect we won’t hear much from them but they will be very happy with this change.

I also contend that the ecommerce market has changed significantly over the last few years, and that people shopping for the lowest cost generic products may not be looking on Trade Me any more – but on other sites like AliExpress.com. Indeed Trade Me sellers can arbitrage between AliExpress (or even The Warehouse) and Trade Me and make margin – as Trade Me buyers want it cheap, but they also don’t want to fuss with external complexity. Trade Me makes it very easy for kiwis to but and sell – and long may that continue.

Clearly revenue will increase from this part of the price change, with, Trade Me states, 6% of sales expected to have increased fees. Those sales are priced between $200 and $5,157, but that is deceptive, as the vast majority of sales happen closer to $200. Here’s what it looks like in a zoomed in chart. The red line is drawn by me based on experience not data and is not scientific but looks about right.

While the margin between the old blue and new orange fees in the bigger chart has a straight average increase (the distance between the lines) of $29.50 or so, it’s clear that the weighted average will be a lot lower, so the average may be closer to $2-$7 per listing.

That’s still significant as we shall see. Meanwhile the average listing price is rising, and the number of more expensive (over $200) sales is rising, so we can expect that this sets Trade Me up well for the longer term. Put another way, as inflation lifts prices Trade Me will make more money versus today, much as fixed tax brackets increase average tax paid as wages and salaries rise through them.

I don’t see this affecting volume to much, but there is a risk that some sellers will slow trading. Trade Me will be nervous about that, but ultimately if they can deliver the sales, and they can, then the sellers will stay and probably just pop their prices up slightly to compensate. I expect the community will grumble and then just keep going.

Impact on Revenue – Assumptions

Any model we build on the revenue impact hinges on a few key assumptions, and I will be making some large ones below. Sadly Trade Me does not report that many key metrics – I would like to see them take a more proactive approach as Xero does, and help analysts build their models. The estimates of course have a large margin of error.

Number of new listings: In an interview recently Jon Macdonald stated there were about 300,000 listings per day, which is 110 million general listings per year.

To check that – we know that Trade Me just hit their 1 billionth listing. By searching for listing numbers I found the 826 millionth listing was on Jan 1 2015, and the 1005 millionth listing was a year later. So that’s 179 million listings in a year. That includes motors, property and jobs, which, by my count right now represent about 10% of listings today. So even if we use 150 million listings a year there is a big difference over Jon’s quote. However let’s go with Jon’s 110 million listings a year and put the difference down to automatic new listings created when larger sellers sell many items from the same listing.

Number of listings with paid photos: I’m going with 10%, which in my very cursory scan of Trade Me feels about right. Frankly I could do a much better scan but that takes a lot of time I don’t have. (Someone could use the API to do this perhaps)

Sell through rate (sold listings): The sell through rates vary by product category. For our purposes we are interested in very low value and very high value goods. But let’s start with an overall estimate, because the arithmetic mean of the list – at 12% – is probably not that useful.

Trade Me made $64 million in revenue from general item sales in 2015, which is split between up front fees, premium fees and success fees. If we estimate (and it’s a guess) that $45 million of the $64 million was from success fees, and if we take an average of 7.0% success fee for each sale (another guess), then this implies about 10.7 million items sold, or 9.72% sell through rate. That feels about right.

Low value categories include books, CDs, DVDs and so forth. These sell at very low percentages – just 1% for Fiction and literature, Non Fiction and Children & Babies books. Similarly CDs sell at 4% and Trade Me avoids publishing the results for DVDs.

The question is whether we should use a different sell-through rate for these items, and I believe that we should for the base case, and will choose 5%.

Meanwhile 20% of all items 10.7m items sold are under $6.39, so that’s 2.14 million items a year.

High value categories, between $200 and $1800 include mobile phones, gaming consoles, furniture and a host of other things. Sell through rates for phones are, amazingly, 33%, while consoles hover around 13% for new ones and 5-9% for older ones. Beds and furniture are over 20%, which is amazing as well. But overall let’s recognise that the average for all goods is 10.7% and go with that.

6% of all general item sales are in this category, which means 642,000 items sold a year.

Revenue impact estimates

1: Free Photos

As discussed above I believe that the move to free photos will lift average sell through rates across the board. Even Trade Me would be uncertain about the impact here, but I’m going to be firm that it will left sales across the site by 10%.

That’s a big number – 10% x $60 (average sale price) x 10.7 million is $64 million in extra Gross Merchandise Sales, $5 million in success fee revenue. It’s probably not going to happen at once – but I’d give it a year.

But we also lose money from the photos, which at 10% of 110m listings is 11 million listings. If we assume an average of 2 extra photos for each of these then that’s 11 million x 20 cents, or $2.2 million in lost fees.

So overall let’s say that this will initially lose money, but over time will make over $2.8m extra per year, and I contend that this has significantly higher potential.

The sell through rate is a critical metric – and if items sell more easily then the entire Trade Me engine works better for everyone, and that will create even more listings and sales. There is high potential here.

2: Cheaper low value item success fees  

Revenue lost: we will see a loss of, say, 25 cents per item on the 2.14 million items sold in this category, or $535,000. That’s really not a lot.

Revenue gained: I estimated that the number of cheaper listings will rise by 25%, and I also estimate that the sell-through rate for all these listings will increase – as the pricing can be sharper. Let’s estimate that sell through rate will move from from 5% to 6%. The overall effect will therefore increase items sold from 2.14m to 2.94m, which will deliver $735k in new revenue.

These are relatively small numbers, and close enough, so lets call this one neutral overall.

3: More expensive high value item success fees

Revenue gain from single take rate: I see a gain of, say, $5 per item sold in this category, or $5 x 642,000 = $3.2 million. The uncertainty here is that $5 – which I guess Trade Me’s own estimate will be lower. But I really like the potential here as Trade Me is trending towards higher value items.

Overall result

The overall estimated change will be in annual revenue, EBIT and Net Profit before tax – as there are no costs associated with a price change. Adding up the above we see a total of over $5 million per year. I suspect that Trade Me’s own estimate will be closer to $2 million, but I also suspect that over time the actual return will be a lot higher. Let’s see.

A change of $5 million would lift 2015 revenue of $200m by 2.5%, EBITDA of $134.4m by 3.7%, and, most importantly, profit before tax of 111m by 4.5%.

In theory this price increase should lift the value of Trade Me itself by the same as the effect on profit, (4.5%), as these changes in profits will be lasting.

That’s a lot – do I have my numbers right?

Possibly not – do your own calculations and I am not your financial analyst.

• I’ve made mistakes before (when valuing Xero) and would not be surprised to see them again. I am not trading on this and nor do I own Trade Me stock.
• This could be higher. The effect on sell through rate could be a lot higher, the margin between old and new prices for expensive sales could be higher and the estimates of loss of revenue from photos could be overestimated – and so on.
• This could be lower – the photo revenue loss could be a lot higher, the margin between old and new prices lower and the loss of income at the lower end could be worse.

However let’s remember that the price increase was notified to the NZX and ASX markets on Monday, which companies should do when they have a material announcement. So maybe Trade Me is aware of the impact.

The Trade Me share price barely moved in either country, so the market has not really adjusted to this, if it is that material.

In summary

In summary this is a fantastic move by Trade Me. Many sellers, almost all really, will be very happy, and the marketplace itself will use a lot more activity. And then there is that increased revenue.

 

Let’s leave the last word to suicidemonkey from the Trade Me Community:

“suicidemonkey quoted another poster:

“About time we find an alternative to Trademe. They know they’re the monopoly and they are taking advantage of that. Disgusting.”

suicidemonkey’s Response:

This complaint has been around for at least 10 years. In that time several other sites have started up then eventually folded. Feel free to try again, but the odds are not good for you succeeding.

Solid progress continues
We have now received over $1 million in applications for the the December 2015 Offer, with over $800,000 received directly and $231,000 via the Snowball Effect Wholesale Platform.

Offer Extended until 31 January
We had a good number of investors and financial advisors, along with Snowball Effect, ask us for more time. Some investors want to read the material over the break, others have found that their advisors have taken the normal extended kiwi summer break until late January and others need to move funds which are tied up elsewhere. Given the length of the summer break the directors of Punakaiki Fund agreed to extend the offer until 5pm on 31st of January.

The extension is, however, subject to no material change in the portfolio. If, for example, one of the companies we invest in has a large event (like a investment transaction or major customer deal) that changes the value of the portfolio, then the directors reserve the right to close the offer at that point. So do get your applications in early.

Second New Investment
We can now announce our first follow-on investment with Raygun, who supply a SaaS product that tracks software errors and user progress in real time. Raygun was one of our initial four investments, and their progress has been very strong since that investment. Punakaiki Fund is contributing around 20% of this round, and the funds will be used to fuel Raygun’s expansion into the US market. Founder John-Daniel Trask will be moving to the US in the first quarter of 2016.

The new valuation for Raygun is already factored into the share price for this offer.

Third new investment
We are very close to contract signing but still not quite done on our third new investment.

Mobi2Go second tranche investment

We have also surpassed the capital raising threshold required to trigger the second tranche of Punakaiki Fund’s investment in Mobi2Go. The second tranche investment with double our investment in Mobi2Go and will be made in the early New Year. We are very encouraged by Mobi2Go’s progress since our investment, and they have a very strong pipeline of customers to continue their growth with next year.

The Offer

The details of the Offer are in the latest Punakaiki Fund Information Memorandum, and Exempt Investors (details of what that means are on the form) can apply using the Application Form.

Our thanks to everyone who has supported us in 2015 – we wish you all the best for the Christmas and New Year break and look forward to a prosperous 2016.

Here’s a bit of cheer from RedSeed – along with some nice statistics.

We’ve just launched a new wholesale offer to investors for Punakaiki Fund. It’s available only to Exempt investors, as we hit the legal limit of $2 million for crowd-funding investors back in June.

There are two ways to invest. The easiest for new investors is through Snowball Effect’s wholesale platform, or you can download the Information Memorandum and the Application Form and apply directly.

Progress

After the June crowd-funding and private offers we made eight new investments, placing five as follow-on investments with existing Punakaiki Fund companies and the other three with Vend, EverEdgeIP and Mobi2Go. We still have a couple more to announce.

We’ve also welcomed a big step up in governance, with the shareholders appointing Mike Bennetts (CEO Z Energy), Bryan Hutchins (Real Journeys) and John Berry (Pathfinder Asset Management) as directors. All are shareholders themselves. The directors (including myself) later appointed Mike Bennetts as Chair of Punakaiki Fund.

We are delighted with the progress that the companies we have invested into are making. The thirteen companies we have invested into  collectively had over $40 million in annualised revenue in September 2015, growing in aggregate by over 94% from September 2014.  Ten of those companies have over $500,000 in annualised revenue, with seven over $1 million and three over $6 million. All but one employ more than five people.

Our shareholders are seeing the benefit of that underlying revenue growth with their unrealised returns. Based on the share price in this December 2015 Offer the original investors from April 2014 who exercised their options are seeing a 49.5% annualised return (IRR), while our December 2014 investors who exercised their option are seeing a 43% return. Like that offer in 2014 this Offer is for a Share + Option, priced at $16.50. We’ve used the share component of that, or $16.17, to calculate these returns. That $16.17 is well up on the $14.50 per share price we saw at the June Snowball Effect Offer.

Read the documents

This is an investment to Exempt Investors, who will be well used to the advice to read the documents and see advice. Here again is the Offer on Snowball Effect’s wholesale platform (much easier), or download the Information Memorandum and the Application Form from us.

 

Christchurch is a hive of activity at the moment, a combination of the old, the destroyed, the temporary and the new. It’s a place that will energise photographers – so much is going on that it is hard to know where to look.

Definitely worth a visit, and the accommodation shortage issues seem to be sorted now.

In the last 50 years New Zealand has done a wonderful job of diversifying our export markets for food and beverages, a process somewhat forced by the UK joining the EU in 1973. We are in a strong position.

China is the biggest growth market for us – in both dollar and in percentage terms. That’s been a wonderful story of the benefits of our very early free trade agreement with China.

We are not the only food producer of course, and the giant exporter to worry about is the USA. Their absolute and percentage growth rate of exports is vast, and with TPPA they now have the ability to break open markets. In dollar terms the TPPA, which does not deal with their massive trade-supporting farm subsidies, will mainly be for the benefit of them.

The USA’s food system is largely one of production prioritised over quality, with hormones and antibiotics added to animals producing meat and milk, subsidised corn and sugar quotas leading the prevalence of high fructose corn syrup (HFCS) and outcomes of obesity, poor health and antibiotic resistant bugs.

New Zealand can’t hope to compete on quantity with the USA, and while our food quality here is still pretty good, one downside of these trade agreements is that people in NZ will increasingly be offered cheaper poorer quality food sourced from offshore, and that will lead to worse health outcomes for NZ (which in turn will drive worse economic outcomes).

We can and should maintain and even lift our food quality standards – but can we do so under our free trade agreements? An infamous example is Mexico being forced to open their soda market to the subsidised and cheaper HFCS sweetener. Meanwhile the US fiercely protect their own sugar producers, largely because of expat Cuban sugar growers in Florida – who wield great political power. This is at great expense to their people – with prices of refined sugar are 95% higher than global prices, and along with the subsidised HFCS that means  HFCS has a large market share as sweetener in US processed foods.

The eventual result between Mexico and the USA was a negotiated settlement whereby the US largely maintains their highly protected sugar industry and Mexico still copes with HFCS imports and substitution of sugar for HFCS. A close read of the article on the settlement makes is somewhat disturbing as we consider the impacts of TPPA.

All these fascinating charts come from the MBIE funded Coriolis Investors Guide to the Food and Beverage Industry, a worthwhile effort.

However i is a little misleading when assessing NZ’s potential to grow food production. For example, the chart below compares food production per square km between countries with varying demographics, geography and protected lands. (Other charts show production per population – again not a useful metric)

The key differences between the Netherlands and NZ go beyond our rugged terrain and highest point of 3,726 meters versus the famously flat Netherlands and a highest point of 894 meters.

The Netherlands, data from the World Bank shows, has just 11.1% of land covered by forest, but NZ has 38.6%. Meanwhile 38.6% of land in the Netherlands is arable, while NZ has just 2.1%. Are we to chop down forests?

I do not doubt that we can get more production out of NZ, even if we don’t touch the forests. But that will need to be balanced with efforts to increase positive  environmental outcomes and margins, and our resources are not as limitless as the chart above implies.

Out food is seen as cheap and safe by markets.

This is a problem  but a good one. It shows the opportunity to receive considerable margin by moving to the prestige position.

How do we do this? The answer starts at the farm. My favourite case study recently is Lewis Road Dairy – who charge outrageous amounts for their milk products sourced from an organic farmer. Their products are often sold out, and Fonterra eventually responded <correction – it was Goodman Fielder. So Fonterra is still left well behind> to Lewis Road by providing their own Puhoi branded organic milk. That’s good news for everyone, and now the real switch needs to happen at the farm level – with higher prices for organic milk (or milk/meat without palm kernels feed) driving farmers to switch their behaviour. These higher quality products sell locally and globally at super-premium prices, and there is considerable potential for New Zealand to capture and own the space globally.

What can we do as consumers?

As consumers we should demand quality foods, and we should be asking or insisting that our food quality standards remain high. Lets not allow hormone-filled meat into NZ, or dairy products produced by cows stuffed with antibiotics. Let’s reward good behaviour – e.g. by supporting McDonalds’ efforts to increase their food quality, by paying more for organic (and much tastier) food, and even switching supermarkets, as we did from the sadly declining Victoria Park New World, when high quality food disappears from shelves.

What can we do as investors?

This is something that entrepreneurs and investors can get involved with, as Lewis Road (and Firstlight Foods and others) have demonstrated that the incumbents, who are focussed on volume, can be disrupted by smaller producers and marketers. Eventually the bigger producers will lose their suppliers, or they will have to switch to higher quality inputs. We all know that a fancy packet, Silver Ferm Farms, does not change the quality of the contents.

At the back of the report is a hit-list of 200 companies. Private equity and other offshore money has made a few plays, but there are a substantial number of very high quality companies that are tightly held. Some of my favourites, such as Balle Brothers, and Dairy Goat Farm, will never sell, but there are plenty of opportunities for those with very large check books. Sadly those investors are mainly from offshore, and NZ has very little capital at work to support high growth businesses of any type. But that’s another issue.

Yes we can

It might take time, but the report does show that the farmers and growers will respond to market demand. The challenge is whether we can, as a society, help our food business ecosystem accelerate the change to owning the global high margin premium food position.

 

An update from Punakaiki Fund. At our September 30th AGM we elected three new directors – Mike Bennetts, Bryan Hutchins and John Berry. We held our first board meeting earlier this month. It’s a great board, and we continue to be also inspired by the founders and staff from the companies we have invested into. Chris and I have also moved into an office in downtown Auckland – a significant step after working from home for three years.

Update:

The directors elected Mike Bennetts as Chair of Punakaiki Fund. Mike brings considerable governance and executive expertise to the boardroom, and, along with the other directors, is an investor in the fund.

The board also determined that the Net Asset Value of the fund at the end of September was $12.3 million, or $14.60 per share, up from $14.14 at the June fundraising.

The Net Asset Value generally changes only when there are investor transactions within portfolio companies, and with some of our larger investments it has been a while between funding events, so Chris and I see considerable value beyond this.

The board has provisionally approved that LWCM make an offer to qualified investors before the end of 2015, most likely at a price of $16.50 per share.

Flounders Club is a periodic gathering of Auckland-based founders of companies, generally very high growth and relatively early stage.

It’s not actually a club – but simply an event focused on learning from other founders (rather than advisors or other boring speakers), and on meeting other people like yourself who are going through the start-up journey.

There are also two smaller Flounders dinner groups that meet about every month, and the ambition is that more of these will be created as well.

The event is by founders and for founders, and while food and some beverages are served the main value is that everyone in the ecosystem is getting better.

The Next Event

The next event is on Tuesday 10th at 6pm. There will be 3 guests up front as normal – this time they are Lance Hodges – ex VP of Product at Vend and co-founder of HopVentures, Josh Robb, who is VP of Engineering at publicly listed PushPay and coping with outrageous US growth and Belinda Tuki, a 2nd time founder who is rapidly growing The Honest Food company.

The speakers are more there to provoke conversation – we learn from them, but also from the interaction with the audience during and after their talk.

Get in quick

The next event is at GridAKL on Tuesday 10th at 6pm. Sign up now.

Auckland, 13 October 2015– Punakaiki Fund Limited, an investor in growth stage technology and software companies, has appointed three new directors at its recent AGM.  As it gears up for growth, its 475 shareholders have appointed Mike Bennetts (CEO of Z Energy), John Berry (co-founder of Pathfinder Asset Management) and Bryan Hutchins (director of Real Journeys).  All three are shareholders in Punakaiki Fund.
 
According to founder Lance Wiggs, the expanded board brings exceptional governance, commercial and capital raising experience, as Punakaiki Fund continues to raise capital and invest in more NZ high-growth technology companies.  With its last latest option round projected to raise over $1 million, the fund has successfully raised over $9 million from wholesale investors and through crowdfunding platform Snowball Effect. The fund’s assets are invested across 12 exceptional high growth companies, with two more investments pending, so Punakaiki Fund investors have a strong position in New Zealand’s high growth technology sector.  Berry says “Punakaiki Fund invests in exciting, often early stage, companies.  We look forward to giving more NZ investors the opportunity to take part in its growth.” 


About Punakaiki Fund
Punakaiki Fund invests in early stage and emerging New Zealand internet, technology and design-led growth businesses, generally well before they reach the public markets. 
Launched in April 2014, Punakaiki Fund currently has assets of over $12 million under management, including investments in Vend, Onceit, Vibe Communications, Raygun.io, Timely, RedSeed, Melon Health, EveredgeIP, ThisData, Influx, Boardingware and Weirdly.

 

The global stock markets are in turmoil. There are rumblings from China, Europe and the USA. Are we in the middle of  another crash – or is this just market turbulence? Whatever it is, we’ve seen this sort of thing before, and we should brace for the potential bear* market. It’s also just good business practice to be prepared for a downturn.

So with that in mind, here is what we potentially could expect to happen during the next few weeks and months and maybe (but hopefully not) years.

1: A global sell-off in shares will continue off and on. Shares will go up, shares will go down. Nobody can predict what will happen but the drops and rises means that investors in all asset classes are going to be more fickle.

2: Some companies with poor fundamentals (bad numbers, lousy products, poor growth, high debt, no customer lock-in etc.) will be exposed and some of them will go bust, as they will fail to raise equity and lose access to debt.

3: “Growth” (smaller, earlier stage) stocks tend to get hit a lot harder than “Blue Chip” stocks during market falls. The conventional wisdom is that you want to own mass-market breweries and sell high tech. (Growth stocks have higher Beta – volatility versus the market – and so are hit harder on both the downside and the upside. Xero’s share price exhibits  this extra-volatility versus the market)

4: Valuation multiples (versus EBIT, Revenue etc) will fall, especially for growth stocks, which will in turn change rules of thumb for a while. 

5: In the high growth ecosystem in NZ this means that it’s going to be a lot harder to raise money for early stage companies that are not exemplary, because investors get scared overall.

6: Meanwhile NZ as a distant and small market internationally may suffer from withdrawal of offshore funds.

7: Early stage valuation multiples for companies will go down, because and some will fail to raise at all.

8: It will be harder for funds with poor track records to raise money as well. On the other hand if you have a fund with lots of money then the investing will be good.

9: Revenue per customer will be lowered by the general downturn in business and consumer confidence. The number of customers may drop, and the risk of slow or no payment events rise.

10: M&A activity will occur, and at low prices.

11: The NZ housing market is not immune to a general market drop.

Advice to businesses

Make sure you can get to cash-flow positive on the funds that you have. Nobody can be sure that the next round will be there, and if it is then the valuations might be horrible.

Operate with a margin of safety, and be able to cope with a downturn in customer growth, upturn in churn and lowering of per-customer metrics. This is no time for flaky start-ups, and customers won’t like that either.

Tweak your selling proposition by emphasising how you will help your customers survive and prosper through potential tough times, for example how you will help them save dollars and grow business.

Advice to investors

That’s a trick heading – I’m not allowed to give advice under NZ law.

Punakaiki Fund

Punakaiki Fund will always try to support worthy companies and we will very much want to have funds to invest during tough times.

We remain very positive about the strong fundamentals of the companies we have invested in (they have revenue based on helping customers save, grow and achieve better outcomes) and future investment opportunities.  

 

 

*Bull Markets are when market sentiments are positive and prices are rising, Bear markets are when investor optimism turns into despair, as the prices fall.  The trick is to be positive when others are most negative – and vice versa, as this ‘contrarian’ thinking is where the bargains are picked up as the market turns. 

Here’s the latest chart of how we use energy in New Zealand. It’s from the excellent Energy in New Zealand 2015 publication from MBIE. As y Luca see we are edging up towards 600 PetaJoules.

 

Transport, in purple, makes up 36% of our energy use – and that’s essentially all petrol and diesel.

What if we could halve that, losing 18% of our power requirements? We can. Shifting all of that hydrocarbon burning from vehicles to large efficient power plants and then transmitting the resulting power as electricity to electric cars would halve the fuel needed for transport. Here’s a good explanation, using US examples.

In New Zealand we are grateful to have 80% of our electricity generated from renewable sources, and so we can save even more fuel. We can also build more of the lower cost steady state geothermal plants rather than expensive per MWH gas-fired plants, saving even more. We can more quickly adopt the trend towards micro or distributed generation, which, along with the battery packs like the Tesla ones that Vector will market, will allow us to essentially charge our vehicles free of operational costs.

It’s an intriguing vision of the future, and it’s one that is going to happen given the forces of economics. For now the prices of fossil fuels are very low, but over time the prices of solar and battery technology will become too low to ignore, and we can expect the prices of fossil fuels to be volatile, as they have always been. At the same stage the inherent advantages of electric cars – faster, quieter and safer, and a lot cheaper to operate – will become so obvious that we will all begin to switch.

New Zealand’s government is apparently chasing US companies to promote NZ as a test bed for autonomous vehicles. Perhaps we would be smarter to start by promoting New Zealand as the best place in the world for electric cars. And the easiest way to do that is by introducing a substantial carbon tax. As Gareth Morgan Foundation’s Geoff Simmons explains, even six major oil compares (and Z Energy seems to support this) demanded of the UN

“we need governments across the world to provide us with clear, stable, long-term, ambitious policy frameworks. We believe that a price on carbon should be a key element of these frameworks. ”

And Geoff helpfully points out France’s “climate plan which will boost their carbon tax to €56 by 2020“.

NZTE (this time joining forces with Callaghan Innovation and the Asian Business Angel Forum who are looking after different categories) are once again helping companies get ready for investment by using a showcase event as a catalyst.

The last one of these was in March 2015, held for Agri-Tech businesses during the Central Districts Field Days, which is in Fielding. This built on a showcase during the Fieldays near Hamilton  in 2015, and has delivered substantially better outcomes for the companies. We are all learning, and the showcase promoted a lot more interaction between high quality companies and pre-qualified investors.

Companies in the program receive three things:

1: Workshops and coaching to help with becoming (more) investable, learning the investment process and about investors, understanding and telling your story and help with compiling a deck and a pitch. This work is done by NZTE capital specialists and external practitioners such as myself. I suspect that most of the value for the program is in this stage – helping companies get ready for investment.

2: Presence at the showcase in Queenstown on the 14th of October, including a booth, most likely, and time for 1-1 conversations with investors before and after the showcase. And of course the chance to present to (and introductions to selected)  200 or so qualified investors, many of who are from offshore.

3: NZTE help with identifying, following up and closing with investors. This, along with help with 1-1 meetings at the event is a very valuable part of the process.

NZTE have been very generous with their time, help and investment in the event in the past, and I suspect the same will apply again this year.

The showcase is a catalytic event – it helps companies move much faster in their process to become investable so that they are introduced to investors in a ready state.

Criteria and Action

NZTE are looking for technology focused companies raising between $1 and $5 million, who ideally already have credible founders and people around them – such as lead investors, advisors, deal-makers and/or board members. Also ideally you’ll be operating in international markets, especially USA and SE Asia,  as many of the investors will be from there.

There are only five slots – so get in fast and fill out the PeakApplication, returning it to bbc@nzte.govt.nz.