Punching Above Their Weight: Opportunity And Challenges For Kiwi Startups

"This is hardly a real place."

That was our bus driver's comment as he escorted us from the Auckland International Airport to our hotel downtown, where we would have a few hours to settle in before beginning what would be a whirlwind tour of New Zealand. And he was right — the scenery made the country seem like something out of one of those Hobbit movies.

I was traveling with a group of investors and entrepreneurs on one of those Geeks On A Plane trips — this one organized by the New Zealand Trade & Enterprise commission as a way to show some foreigners from Silicon Valley and other U.S. tech what it was like for local entrepreneurs trying to make it on the global stage.

And indeed, over the week we saw many reasons why entrepreneurs would wish to begin building businesses there — mainly thanks to the picturesque landscape that prevails nearly everywhere you go. But Kiwis and foreigners who wish to be part of the startup experience in New Zealand should also be aware of the challenges those companies face.

Punching Above Their Weight

For a small country, New Zealand is trying hard to break in on the world stage for innovation, and in some cases is actually succeeding. The country has a population of about 4.5 million, which is tiny compared to 22 million in Australia, or the some 313 million who inhabit the US of A. The country's sheep outnumber the Kiwi population by seven to one, a number which has actually fallen from the 1980s, when there were about 20 head of sheep for every local resident.

But despite the lack of manpower, New Zealand has a decent history of innovation. Kiwis use a number of tropes to describe the inventive culture that thrives there. One of the favorites is the concept of "Number 8 Wire," which derives from a certain gauge of fencing that was popular around the turn of the century. While some other materials were sparse, fencing wire could be found pretty much anywhere, and the legend goes that it was used to fix any number of mechanical problems when the proper tools were lacking.

That leads to another popular trope, that Kiwis "punch above their weight." With a smaller population and fewer natural resources, the locals have found ways to remain competitive with larger developed nations. Much of that, Kiwis like to believe, comes from a combination of ingenuity and rugged individuality — a can-do attitude that they can get more accomplished with less.

State-Sponsored Innovation

While small, New Zealand has a few other things going for it: Having English as its native language means that it has easy reach to a number of global markets, including nearby Australia, as well as the United States and United Kingdom. And its proximity to other parts of Asia, as well as a free trade agreement with China, gives it easy entree into one of the fastest-growing markets in the world.

Knowing this, local investors and the New Zealand government are working to pump local capital into the region, while also trying to attract foreign investors to invest in Kiwi startups. There are a number of high net worth individuals in New Zealand investing locally, including Sir Stephen Tindall, who made his fortune as founder of The Warehouse, which is the local equivalent to Walmart in the U.S.

The government, hoping to boost its local startup ecosystem, has launched the NZIF Venture Capital Fund, which provides matching funds to accredited investment partners on a one-to-one basis. The fund manages $160 million in capital, with more than $136 million committed to date. It also has a Seed Co-Investment Fund of $40 million to put into small, early-stage startups.

Seeking Mentors And Foreign Investment

While there's a fair amount of local investment to be had, the truth is that the amount of capital and mentorship needed to start a truly global company is lacking in New Zealand. Like most business owners, New Zealand entrepreneurs tend to focus most on the opportunity right in front of them — their local market — before expanding overseas. But with 4.5 million residents, there's very little upside to focusing primarily on local Kiwis. Even expanding the addressable market to Australia means fewer than 30 million potential users for a new product.

Some of that comes from focusing on local opportunities rather than global ones: There are major opportunities for innovation in New Zealand industries such as local tourism, marine technologies, and agriculture, but not all of those opportunities will translate overseas. Even for large, global, consumer-facing opportunities, though, Kiwi entrepreneurs seem to hit a wall when trying to attract users overseas.

Mark that up, in part, to a lack of mentors and outside capital to help drive innovation abroad. While mentors such as TradeMe's Sam Morgan have emerged to help the next generation of tech startups to flourish, the startup scene there is still relatively young, with few exits to date, and therefore not a lot of experienced mentors to speak of.

Various organizations are seeking to change this by bringing in mentors from overseas and by getting Kiwi entrepreneurs to consider building companies for the world stage from the very start. There's the recently launched Global From Day One seed fund, for instance, which was recently launched by investor Sparkbox Ventures and the Icehouse, an Auckland-based incubator. And New Zealand Beachheads Advisory Board chair Wayne Norrie is trying to find ways to get Kiwi entrepreneurs to interface with those who have been successful overseas.

The Kiwi Entrepreneur Lifecycle

One of the things I noticed while speaking with entrepreneurs throughout the country — from Auckland to Wellington to Christchurch to Queenstown — was that those founding companies for the first time tended to be older than the entrepreneurs I'm used to running into in Silicon Valley. While I'm used to seeing serial entrepreneurs in their late 20s or young 30s, as well as a bunch of founders jumping on the startup bandwagon right out of Stanford, if not *gasp* high school, the Kiwi founders tended to have a few more years on them.

In part, that's due to what seems like the typical lifecycle of a Kiwi entrepreneur, which includes several years of working in a foreign country — or at least working for a foreign multinational corporation — before deciding to strike out on one's own. That's part of the typical "overseas experience" ("OE" for short), during which a young Kiwi, typically straight out of university, will travel for an extended period of time, sometimes working internationally as part of a working vacation in another country.

The upside of OE participants starting their own companies is that they tend to be older, wiser, more worldly, and have a better sense of markets overseas. They've returned to the New Zealand homeland for a reason — mainly due to the relative low cost and high quality of life — and are ready to settle into the next stage of their adult lives and careers. The founders I met, therefore, tended to be married with kids and pretty much settled down, when compared to their Silicon Valley counterparts.

The Threat Of The Three B's

One downside to resettling in New Zealand is that Kiwi entrepreneurs can be less focused on their startups and more focused on the abundance of local leisure activities. One of my American colleagues noted that Kiwis were much better at finding a work-life balance than entrepreneurs in the U.S. But the flip side to maintaining a high quality of life and moving to a place where leisure time is abundant and plentiful is that taking advantage of it means taking time away from building a world-changing business.

All of that brings us to the so-called "three B's," another popular New Zealand trope which I heard about during my short stay there. It refers to "the boat, the BMW, and the bach" — that is, beachhouse — which Kiwi entrepreneurs dream of having. This was one explanation for why some Kiwi startups seem to grow to a certain size, hit profitability, and then stall out rather than hitting some sort of exit velocity.

The belief is that once this ideal is achieved, few entrepreneurs have reason to press on and continue growing their businesses. Not only do those companies fail to reach their full potential, but the entrepreneur, once he or she has achieved that level of "success," is unlikely to start up a new business and attempt to do it all over again. Contrast that with the serial entrepreneurs we see building billion-dollar businesses in the Valley.

Bootstrapping By Any Means Necessary

Another pitfall that Kiwi startups seem to fall into is the desire to "do more with less," even when they might not have to. While several people during the trip bemoaned the difficulty of raising foreign capital to expand overseas, I also spoke with several entrepreneurs who seemed allergic — or at least averse — to giving away a piece of their companies when they were perfectly fine making do with what they had.

In many cases, that meant that they were bootstrapping until they could reach some metric at which point they felt they could re-invest in their businesses. Some were holding back until they hit revenue and others were going without until a certain level of profitability meant they could hire more engineers.

While there's nothing inherently wrong with bootstrapping or going without outside capital, it occurred to me that some of these businesses were operating with one hand tied behind their backs. Not every company needs to raise millions to grow or expand, but in some cases that lack of capital meant not rolling out new features due to a lack of engineering talent, or slow user growth due to lack of sales or marketing expertise.

A Kiwi Talent Crunch

One reason startups might not have been hiring as quickly as possible comes from another issue that New Zealand faces as it seeks to become a place for tech startups to grow and prosper — a lack of qualified tech talent. While Silicon Valley suffers from the high cost of talented engineers, New Zealand startups seem to be unable to find those who are even qualified. And even when they do, they have a hard time retaining them.

Behind availability of capital, availability of talent seemed to be the biggest concern among founders as they rounded out their teams. New Zealand just doesn't seem to be creating as many talented engineers as it needs, and those it does train seem to take their talents overseas to more compelling tech markets like Silicon Valley.

With limited talent available, the desire to hire whomever is available rather than whomever is right for the business is a problem. And the ability to retain talent can be a conundrum as well: New Zealand-based startups typically don't give up stock options to employees, even early employees or those central to the business, making them more difficult to keep on board.

Starting Up In Paradise

Over the course of a week, I met with dozens of investors, entrepreneurs, government officials, and employees of startups, all with various takes on how best to grow their tech scene and take advantage of the resources they had available there. But at the end of the day, much of the new Zealand pitch came down to the low cost of living and high quality of life. It was the tourism pitch, but applied to the ability to build a great business.

New Zealand might not have the low labor costs that benefit other developing tech regions, or the highly qualified talent that others lean on. But it does have a beautiful landscape, and lots of skiing, and hiking, and water sports, and other various activities that people might like. It has mountains and valleys and clear skies with stars. It has good food and good wine and very, very pleasant service.

"Could you imagine being here every day?" was the typical refrain. Why yes, I could. But I don't think that would make me a great entrepreneur. Ask any of the companies overpaying for office space in SOMA or overpaying for engineers in Palo Alto if they would swap places, and I don't think any would.

Because you can't create a successful tech startup on scenery alone, even if that's what brings many Kiwis back, and why they choose to build their businesses there.