What can we learn from Wynyard’s Voluntary Administration?

It is sad to see that the administrators called into Wynyard Group today. This should never happen, especially to what was a very well funded company.

The cause is made pretty clear from the revenue and expense chart below:

(Source – Wynyard annual and interim reports. Please don’t quote this – the 2016 half year numbers are annualised, not all the years overlap as they changed their year-end date, and this includes depreciation but excludes interest and tax)

In a high growth company the norm is to raise money based on future revenue growth. If that growth does not transpire then the value of the company falls, and sharply. Wynyard’s share price fell 88% before the trading halt as a result of promised growth not appearing.

The right thing to do is pretty obvious, but hard, and that is to stop the red bars’ steady march upwards before the funding runs out. However the more palatable alternative is to keep raising money, but that gets increasingly tough when the investors do not see revenue growth, as Wynyard found out. As you keep flailing the investment terms get increasingly toxic, again as Wynyard found out.

Wynyard’s revenue guidance excludes a huge potential government contract, and that is likely in jeopardy now, as are all existing contracts, which I would expect may have out-clauses that speak to one party being placed into administration.

The tough decision that was not made

The board is to blame here – not the management team. The board failed to plan for the contingency of the growth not occurring, and the expenses should have been dramatically reduced so that the funding could last longer, or forever.

The company had $14.7 million in cash, $8.9 million in receivables and $12.8 million in payables at the end of June 2016 – net cash of $10.8 million.

But they also reported negative operational and development cash flow of $28.8 million in the 6 months to June 30, 2016, and despite raising funds then they really should have panicked.

That same interim report, dated 6 weeks ago on 12 September 2016, noted:

 “it is the considered view of the directors that the Company and Group will have access to adequate resources to continue operations for at least a period of 12 months from the date of signing these interim financial statements.”

But later noted, :

“The directors are in the process of undertaking a strategic review of the Group’s operations and product portfolio. This review also includes an assessment of the plans should one of more of these material uncertainties result in an adverse impact on the forecast cash position of the Group.”

That second statement is normally code for major changes, including redundancies, in a business. But while the investor presentation released at the same time as the interim report  itself showed that Wynyard had already reduced staff from 306 to 250 FTE, it is clear today that the process had not continued, at least not aggressively enough.

At over $20 million in annual revenue and $10 .8 million in cash Wynyard easily had enough funding to support 150 highly professional people, but not 250 people and their associated spend. The board needed to make the cost cutting decisions earlier, well before administrators were called in to make it for them.

Meanwhile the staff who would have been let go can be easily placed elsewhere in the vibrant New Zealand high-growth ecosystem, and it serves them and other staff poorly to let the business go to the accounting-based administrators.

I have been upset about this happening with other companies, and I consistently blame the boards of directors for this failure. It’s not an attack on the individuals, though in this case we see that there has been some recent churn, perhaps over this issue. I am sad but not surprised that this relatively new board chose the nuclear option, as it seems they had run out of time to chose the cost cutting approach, and their potential creditors were offering toxic terms.

What to do when times are tough?

I have some experience here – as currently I’m a director for 15  high growth companies, and an investor in more either directly or through Punakaiki Fund. It is very normal, in the high-growth space, for companies to go through periods where cash management is critical.

In these times the board, and that means the founders as well as the external directors, need to make tough decisions. That usually means reducing the number of staff, the costs of the founders themselves and reducing scope to make the company viable. I’ve been involved in these processes many times, and a smart board does it very early if not constantly. (It’s a lot easier to bear also when the directors are not paid – something to watch out for in very early stage companies.)

I’ve always been really pleasantly surprised at the support the company and founders are given when this is done well – staff generally understand that in high growth businesses things are uncertain and that the company needs to survive before it can thrive.

It’s always possible to survive – if a company has enough revenue, and even then a company with revenue less than one person’s salary can always be run as a supplement to that person being employed elsewhere.

The flip side of this is managing growth – a high growth company needs to change quickly to keep in control as their revenue spirals upwards. That’s a much more fun problem to solve.

As an investor I like seeing companies that have been through the fire of a financial crises, or who have started with essentially no funding. Those companies have worked out exactly what is and is not required to survive, and any funds applied are put to good use.

Wynyard’s origins as part of a larger concern perhaps meant that they have never experienced this, and so their burning moment is altogether far too public. Let’s hope that from the ashes we can see emerge a smaller but much stronger company.

Posted in NZ Business | 2 Comments

Punakaiki Fund 2016 AGM and September Roadshow

We held our Annual General Meeting for Punakaiki Fund on Thursday last week, with over 70 people attending and chaired by Mike Bennetts.

The group saw presentations from founders or senior staff from  Weirdly, Vibe Communications, Vend, Onceit, Timely, Mobi2Go, EverEdgeIP, Mindfull, Redseed, Populate, and Linewize. We also presented briefly on the other companies where we have invested.

Once again there was some good questioning from investors, and we had a lot of positive feedback about the event. We also had a number of people ask for live streaming – something which we will consider for next year.

In the formal part of the evening, which we kept short, we were very pleased that Mandy Simpson, currently COO of NZX, was voted onto the Board of Directors.

The official results are below.

September 2016 roadshow

To give existing and potential new investors a chance to hear more about the fund, and to ask questions in person, we were holding a series of events this week. These will cover the AGM and the likely terms for our proposed offer, which we are planning to launch in the next 2-3 weeks.

Monday 26: Taranaki – get in touch with chris@lwcm.co.nz
Tuesday 27th: Wellington. 5:30pm at the Z Shed, 3 Queens Wharf
Wednesday 28th: Nelson – get in touch with lance@lwcm.co.nz
Thursday 29th: Christchurch – 5:30pm EPIC, 76/106 Manchester St.
Friday 30th: Dunedin – 4:30 pm, top floor John Wycliffe House, 265 Princes St.

All existing and potential investors are invited, and we welcome any  media as well.


2016 Annual Meeting – Official Results
The following resolutions were put to the shareholders of Punakaiki Fund Limited at the Annual General Meeting held on Thursday, 22 September 2016:

1. That Ms. Amanda Simpson be appointed as a director of Punakaiki Fund with effect from the close of the AGM.

2. That Graeme Lance Turner Wiggs, who retires by rotation in accordance with clause 14.3(d) of Punakaiki Fund’s Constitution and being eligible, be appointed as a director of Punakaiki Fund with effect from the close of the AGM.

3. That Ernst Young continue in office as the auditor of Punakaiki Fund, and that the Board be authorised to fix their remuneration for the forthcoming financial year.

All of the resolutions passed, with the summary of the votes below.


Posted in Punakaiki Fund

Learning from Theranos

The last round of VC investors into Theranos makes for somber reading. In March 2015 Theranos raised an estimated US$573 million for their 6th round, making a total of $750 million raised. Their 7th round, for $200m, has apparently blown up before completion. Theranos was selling a blood testing service that apparently needed tiny amounts of blood to work.

The 5 investors from March 2015 should be deeply ashamed, as should those who almost committed in the 7th round.

Theranos last round

(Source: Pitchbook)

The Wall St Journal broke the story first, and a few weeks later it seems clear that their blood-testing technology is hokum, their partnership with huge pharmacy chain Walgreens now dissolved and the company under criminal investigation. The reputation of once superstar CEO Elizabeth Holmes is in tatters.

It’s every investor’s nightmare.

So how do you stop this sort of dumb investment happening?

At the earliest, and every, stage in investing the investors need to do their work. That means an end to end look at the company, and not just at the numbers and forecasts. Too often investors think due diligence should focus on tiny, mainly financial, details and they miss out on the obvious flaws.

My favourite example of investors missing the obvious was NZ Telecom’s sale of Yellow Pages for NZ$2.24 billion in 2007 to sophisticated private equity investors. The investors certainly looked at the numbers, but failed to look at the end users – who were already rapidly migrating away from paper pages towards online and mobile services. The result was huge losses for those investors – huge and very obvious losses for anyone that really thought about the future of phone directories.

For IP-related companies like Theranos it’s easy to talk fast and show the magic, so  you want to be investors who really understand the technology, and who can actually walk the floor, talk to the scientists and technicians, look at the patents and make sure it all works as they say it does. It’s clear several rounds of investors didn’t really do their job here.

With pre-commercial IP, which we see at Return on Science, it’s expected that there is a lot of uncertainty and  “I don’t know” answers about the business model, and how the IP will work in practice. That’s why around the table of the Return on Science investment committees are almost always at least some people who understand a particular technology and business being presented as well as people who understand investment, and usually both. Those committees are only recommending relatively small grants though – generally not even 1% of the the US$7m first round that Theranos took on board.

So we should look at the size of these Theranos investment rounds below and ask whether any investors knew what they were doing, or found it worthwhile commissioning independent experts who knew what they were doing to pore over the technology and industrial processes. Would you would commit these funds without a deep understanding and confidence in the technology?

Theranos rounds

(Source: Pitchbook)

Investors do take risks, but we should also seek to minimise the risks to the controllable things. For Theranos the earliest investors would expect to have a real risk of losing everything, and should have dived deeply into the IP, but were also backing the CEO and the team to execute well. The latest investors are no-doubt highly surprised that they will lose everything (it seems) and relied on the CEO and board telling the truth. It’s a shocking situation and yet they will all be asking how they could have prevented the loss.

It’s not often, I hope, that a company is built on what appears to be layers of fraudulent behaviour (that’s what the criminal investigation is about), and it’s a nightmare for investors when the layers of trust fall apart. So what can we learn?

3 Quick Learnings

So what I take from this is a reiteration of a lessons we should all know as investors. I’ve learned all of these the hard way, luckily with my own money rather than other people’s:

  1. Do your own work: Don’t rely on other investors or advisors when making an investment commitment.
  2. Look to the facts: Be extremely wary of investing in people who talk well but don’t deliver results, and actually touch the merchandise – visit the engine room of the company and make sure everything smells properly.
  3. Treat every round as a new investment decision: Do not assume that because you or others have invested previously that the company is a good investment.


Posted in NZ Business | 1 Comment

20 Obvious things for Auckland and time for a new Council

We can easily forget that most people don’t read Transport Blog, find The High Cost of Free Parking obvious or understand that great cities are great to walk in – and lousy to drive in. Many of us have lived overseas though, and we just tend to forget just how things worked over there and what is missing here. 

So here are 20 (not so) obvious things about cities, and Auckland in particular, that we should all remember.

1: Many people living in a small area makes for a better life for all. It’s more efficient, more fun and increases business, and that’s why people choose to live in big dense cities.

2: Large roads create moats that block parts of cities from each other and we risk losing the benefits of urbanism. Many of the motorways that carved up cities overseas are now being removed, and the same applies to ports. 

3: Parking spaces not only take up valuable land, but they also reduce the positive effects of urbanism. They are expensive and should be removed or charged for accordingly. 

4: All the great cities of the world are horrible places to find and pay for a car park. That’s a design feature, as they prioritize walking and public transport to cope with the demand for moving people.

5: Public transport takes cars off the road and increases, dramatically, the ability of a city to deliver people to and from work and shops, and with very limited use of land. It is far cheaper, based on both marginal and capital costs, to move people with public transport than cars. 

6: An empty rail line or bus lane is a good thing – the point is to make their lanes congestion-free so that riders can get to their destination faster.

7: Removing cars and car parks, broadening footpaths and installing shared spaces increases business (significantly) to the local merchants, and makes for higher value commercial buildings as well. People want to be in spaces that are friendly to people.

8: Apartments can be awesome places to live – and they should come in all shapes and sizes to cater for all stages of life. They are also intrinsically cheaper to build, supply with services and, with urban density, commute and shop from. You can generally survive without a car.

9: Driving to work is a horrible experience versus walking, riding and public transport – in that order. If you have the other options then take them.

10: To get people out of cars and onto cycleways and walking we need to provide pleasant and safe environments for walkers and cyclists. It’s not enough to do big projects – we need a network from homes to school, shops and work.

11: Driving kids to school is a confidence trick – switching back to kids walking and cycling will make everybody safer by removing cars from the streets, making kids healthier and providing critical mass of kids to react to and prevent any low probability but newsworthy predators. But we need to switch entire schools at a time to make this work. We also need to be smarter about buses for schools.

12: We make personal choices for transport that are not our own best interests, such as choosing to drive (and be traffic) rather than, say, walk. The right economics, such as variable tolls and parking charges and cross-subsidization of public transport nudge us into making better choices and save money for everyone. 

13: New Zealand has one of the world’s most efficient domestic airline systems. Getting from the airport to Auckand city though is embarrassingly poor – great cities  offer rail or light rail. 

14: Autonomous cars are still cars, and risk clogging the roads even more as they reverse commute after dropping passengers. Autonomous taxis are still taxis. Neither takes cars off the roads – people will still want their Toyotas, Fords, BMWs and Mercedes Benzes with their stuff inside, while those shared cars will need constant cleaning. 

15: Auckland has the potential to be one of the world’s great cities. We are rapidly building in population, especially downtown, and we need to invest to grow. That means increasing our debt funding, making sure the rates are set at the right level (they are amongst the lowest in NZ), building smart infrastructure to allow for density, removing trucks and cars by providing better alternatives and unleashing bigger buildings in and around downtown.

16: Allowing bigger buildings in your property zone will increase the value of your property – a lot. That’s free money. You may even find a developer who will buy your place for a lot of cash and give you a free apartment in their new development. 

17:  In large cities the houses with backyards, as we have in the leafy inner city suburbs, belong to a few extremely wealthy families. In Auckland the pressure is building to convert those houses to much higher value apartments. 

18: Global warming will make beach front property more marginal – but property overlooking the coast will always be valuable. 

19: Induced demand, where if you build it they will come, applies not just for roads, where new roads rapidly get clogged, but also for rail, light rail and bike lanes. The latter also increase the value of surrounding property. Build the bike lanes and they get used, and the evidence is clear to see. 

20: In short Auckland needs to maintain or increase rates as a percentage of home value, borrow more, unleash the ability to build bigger commercial and residential buildings, invest heavily in public transport including rail, light rail and bus lanes, expand the walkable areas and cycle lanes, look to move the port within 10 years, say, increase the cost and reduce the supply of parking and work with schools and businesses to acelerate the transition to walking, cycling and public transport. And they can use an abundance of evidence from Auckland and offshore to make these decisions.  

The reason Auckland is doing so well is that the current CEO and people that work for Auckland Council and aligned organizations as well as the private sector are working hard to achieve these goals. The central government is also largely aligned. The results, like the crowds in Britomart and Wynyard Quarter, the number of cranes downtown, the rapid rise in public transport, walking and cycling and increase in collective prosperity and delight in the inner city are clear for all to see.

However we need a Mayor and Council that support growth, that support investment and that support rather than constantly undermines the largely excellent work done by Auckland Council. We need Councillors who not onlread their papers (and many don’t I’m told), but who also read and understand the vast body of work and international experience on urban and transport planning. We need Councillors who use, as National MP Simon O’Connor recently said to Parliament, reason, evidence and experts inform and make decisions. We need a Mayor and Councillors who are positive about the future of Auckland, who are inspiring and who have the skills and experience to do the work. 

We don’t need Councilors who are sports or media celebrities with no real qualifications for the role. We don’t need Councillors who say no to every proposal without reading or turning up to resident events. We don’t need Councillors who undermine the CEO and Auckland Council, such as those who voted against he Unitary Plan submission. 

It’s time to professionalise Auckland Council. Let’s make sure that there are enough high quality independent and party aligned candidates for all electorates. And if you are considering standing on the sort of platform outlined above – then please do so. I’m willing to help.

Posted in NZ Business | 2 Comments

Do we live in a tax paradise?

For a society that provides a full range of services aren’t we remarkably low-taxed in New Zealand? I was comparing notes with my Australian-based brother this week, and the differences are stark.

Our top income tax rate is 33%, and we have no capital gains tax, while property rates (for me in Auckland) are just 0.29% of assessed value. We also have GST of 15%.

In Australia they pay 49% top tax rate (45% + 2% +2%). They also pay tax on any capital gains – the net capital gains are simply added to the taxable income, but net capital losses can’t be deducted from income. The family home is exempt from capital gains, but ordinary investments are not. You can get some relief by placing your money into a super fund – and you can self-manage this – but money going in is still taxed at 15% and is limited. If you contribute too much then the excess is taxed at 47%, and if your total income is over $300,000 in a year then there is another 15%. GST in Australia is also more complex than here, though lower at 10%. 

Whew – as you can see it’s also a much more complicated system – you’ll probably need a lot more expensive advice than here in NZ.

In the USA the top tax rates are over 40% just for the federal component, then you add state tax, not to mention health insurance and all the other things that their state does not provide. It gets over 50%. Sure their system is so rigged and wretched so that the effective rate for the wealthy is lower – so be prepared to pay a lot to a CPA as well. Let’s not get started on the absurdities of cascading regional taxes, nor regional taxes on  goods and services. It’s all incredibly expensive, complicated, and biased towards the very very wealthy. 

I like it here – our tax system is understandable and efficient. Sure we can do better, but it’s worth pausing now and then to say “well done” to a series of governments. 

Posted in NZ Business | 4 Comments

Punakaiki Fund invests in NZ Artesian Water

Crosspost from Punakaiki Fund.

New Investment: NZ Artesian Water

We’ve seen plenty of headlines recently about offshore companies bottling our water and making fortunes. So when I met Nelson-based Kiwis Andrew Strang and Wayne Herring through a Better by Capital engagement, I was eager to see how their New Zealand Artesian Water business (NZAW) was progressing. The answer was “very well”, and that they were actively looking for funds to grow.

We are very impressed by their supply strategy – working closely with the Tasman District Council – their product and their plant, as well as their plans for expansion. Their premium alkaline water, E’Stel, comes in elegantly designed bottles and also in boxes, and is mainly sold into China, although NZAW has supply contracts across the world. They have also developed a new blended-water product for China aimed at mothers using infant formula. For now their primary challenge appears to be scaling the business to deliver on sales demand. Investors living in or visiting the South Island can help with that demand – E’Stel is available at selected retailers there.

The brothers-in-law have a background in West Coast mining, and Andrew also has a background in the high end fashion and jewellery business and a lot of experience in Asia. Their unusual combination of experiences, combining New Zealand’s natural resources with fashion sense, trading in Asia and grit started to pay off from when the Prime Minister opened their plant in March 2015, and since then the company has grown quickly.

Andrew and Wayne know how to get things done, and their story will continue to attract attention as their business grows. We are delighted to be able to join them on their journey.

The investment
Punakaiki Fund has invested in a 11.8% shareholding in NZAW, and has options to bring the shareholding up to 20%. I’ll be joining the board of directors (as I will also do for Linewize).

But is this hi-tech?
We set up Punakaiki Fund to invest in all sorts of high-growth companies, but in particular those in technology, internet and that are design-led. We increasingly believe that quality high-growth companies combine most or all of these elements, and NZAW certainly uses design and technology to gain an advantage. Their bottles, for example are square-based and round topped, but with a curve and thickness that means they not only look good on the shelves, but they also stack higher in shipping containers and are reusable. Their infant water is a designed product – building on MIT research to deliver the optimum product for babies. Most of all though we see that their growth prospects are very strong, and that our funds will help them a lot on their journey.

Posted in NZ Business

Punakaiki Fund invests in Linewize

Crosspost from Punakaiki Fund.

New Investment: Linewize

Managing Internet access is hard – do you allow staff or your family to view the unfiltered internet, or block everything except for approved sites? It’s even harder at schools. On the one hand, you don’t want students accessing inappropriate content, or spending their time and the school’s bandwidth frivolously. On the other hand, you don’t want to restrict their learning opportunities, for example by blocking information on breast cancer. You also want to teach students how to think critically about their own activity so that when they leave the protective environment of the school they’ll have the skills to keep themselves out of harm’s way.

That’s where our latest investment, Linewize, comes in. Their internet firewall, management and control service is easy to use, administrated centrally and gives teachers discretion about what is or isn’t allowed. It runs on just about any hardware, integrates with Google Apps For Education, is really cost effective, and most importantly, help students learn from their choices.

Linewize have sold their open source firewall and cloud-managed service solution to over 200 New Zealand schools so far, and they have done so when their main competition, Network for Learning (N4L) provides a free alternative. Linewize are winning because their solution is easy to install and manage, and it gives teachers the control they need in the classroom. They are also pushing offshore and have good early traction, and our investment will allow them to accelerate these efforts.

Linewize prices start at $75 per month for tiny schools and increase with the number of students, with a lower price per student as the roll-size grows. The product is mainly sold through a 20-strong growing network of resellers, who also install and provide the first latter of support for the product and service.

Scott and Michael
Linewize was founded by Michael Lawson, CTO, and Scott Noakes, the CEO. I’d heard about the company originally through judging the Hi-Tech Awards in early 2014, and again for this year’s awards, where they were a finalist in they category. Scott and I talked at the Hi-Tech Awards gala evening and after a series of meetings and exchanges we came to an agreement on the 31st of May. Since then we’ve worked through the legal process we all eventually signed a week ago.

Our investment will primarily help to accelerate sales, particularly into international markets and looking to double their New Zealand market share.

The Investment
Punakaiki Fund made identical investments into the two Linewize companies – Linewize Limited and Linewize Services Limited. The fund now owns 8.05% of each company and has agreed to invest another tranche, subject to fund raising, to bring the ownership up to 20%.

Posted in Punakaiki Fund