Chapter 4

A new environment for digital start-ups

Chris Gardner

Digital start-up problems

International growth has been an issue for Kiwi start-ups for decades. A lack of venture funding, filling the digital skills gap and a lack of global thinking have been the biggest constraints faced by New Zealand’s digital start-ups for a long time. Finding enough venture capital funding to back incredible ideas is the most common problem.

‘We’ve been working in the start-up space for decades,’ said co-founder and director of Waikato software specialist Company-X David Hallett.

‘Many of the people that we’ve dealt with have sold their houses’.

The founders of digital start-ups have also struggled to find the right people to join their new teams. Globally, demand for people with advanced digital skills is greater than the supply of qualified employees, this was confirmed in the report published by the New Zealand Digital Skills Forum and NZTech in early 2021. The gap will continue to grow. The report said 149 million new digital technology jobs were predicted to be created globally by 2025. The global lack of attention to upskilling will continue to create a gap between workers and jobs.

Hillfarrance Venture Capital founding partner Rob Vickery.

‘The ability to build a world-class team is a major constraint,’ said Waikato-based Hillfarrance Venture Capital founding partner Rob Vickery.

Vickery, who named his venture capital fund after his home village in Somerset in the United Kingdom, immigrated to New Zealand in late 2020 after a decade in venture capital in Los Angeles, USA.

‘As demand continues to grow, the ability to grow a world-class team is going to become more of a bottleneck,’ Vickery predicted.

Filling the digital gap has been a daily reality for Company-X for the last decade, and with co-founders and directors David Hallett and Jeremy Hughes long before.

‘In the last ten to fifteen years the likes of Amazon and Google have become talent vacuums of really high-level New Zealand graduates,’ Hughes said.

Company-X co-founders and directors Jeremy Hughes (left) and David Hallett.

‘The best ones disappear overseas,’ fellow co-founder and director Hallett added.

Thinking global is a challenge for digital start-ups that have emerged from a New Zealand market no bigger than some world cities.

‘Audacity of vision is vital — thinking globally right from the beginning,’ Vickery said.

How COVID-19 changed everything

The COVID-19 pandemic changed everything in 2020.

New Zealand’s handling of the pandemic created keen interest in Kiwi thought leadership and brought many Kiwis home. New Zealand led the world in the fight against COVID-19 with a hard and fast lockdown that, for the most part, kept the virus out of the community.

‘It caused massive, renewed interest in New Zealand,’ said Rob Vickery who left COVID-19 behind in the USA as he arrived in New Zealand in late 2020.

‘We’ve experienced the brain gain of entrepreneurs coming back, building new businesses and pitching them for money from people like me. That’s exactly what we need, otherwise, they would be doing that in San Francisco, London or Sydney.’

Talent is not just returning to New Zealand due to the pandemic but staying on after graduating too.

‘In the last year, with the COVID-19 pandemic, there’ve been a lot more graduates sticking around in New Zealand,’ Hallett said. ‘We were augmenting the Company-X team with skilled migrants, whereas now we are hiring more local talent.’

The government announced plans in May 2021, to restrict immigration to those highly skilled in areas where there are genuine skills shortages.

‘This market is on fire,’ Vickery said. ‘I have never seen so many entrepreneurs in one spot.’

The return of Kiwi IT sector talent from overseas to these shores as a result of the pandemic, and retention of Kiwi graduates who have decided to stay home rather than see the world, has resulted in audacity in the tech sector. Provisionally, a net gain of 15,500 New Zealand citizens was partly offset by a net loss of 8900 non-New Zealand citizens in the year ended March 2021, according to Stats NZ.

‘Historically, New Zealand has had an annual net migration loss of New Zealand citizens and an annual net migration gain of non-New Zealand citizens, but COVID-19-related travel and border restrictions have reversed this pattern,’ population indicators manager Tehseen Islam said.

‘On an annual basis, migration estimates indicate a provisional net gain of New Zealand citizens since December 2019’.

New Zealand citizens are returning to, and staying in, New Zealand in record numbers, as the COVID-19 pandemic spreads. Annual migrant arrivals of New Zealand citizens are provisionally estimated at 42,800 for the year ended March 2020, with almost half of these arriving between December 2019 and March 2020. This is the highest annual number on record. Not only are more people returning, they are also using this change of circumstances to reflect on how they think.

‘I have seen founders coming to me with much bolder ideas, more risk-taking,’ Vickery said.

‘It’s cool, and I feel like the number eight wire mentality is metamorphosing within this new group of returning Kiwis.’

‘The number eight wire is going to just change into something which is more about being frugal with what you’ve got but being more audacious and more creative with the solutions you create.’

The tech sector is the third largest export for New Zealand, according to NZTech, accounting for $8.7 billion dollars of exports. It drives eight per cent of New Zealand’s Gross Domestic Product (GDP), a major contributor to this economy and to this country. Company-X is one example of how the tech sector is changing, as Rob Vickery explains.

‘It’s down to the growth of companies like Company-X, and the formation of more start-ups. It’s interesting how important New Zealand has become to the tech sector, but also how important technology has become to New Zealand.’

And Company-X is not alone. ‘I was chatting with Microsoft about their driver for opening three data centres in New Zealand. It’s down to the fact that there’s something interesting going on in the market here. It’s an untapped treasure box. It’s largely undiscovered. Even though it’s still important to our economy, it’s still unknown.’

The Waikato a locus of creativity

New Zealand’s universities are an important creator of digital talent. Vickery said he appreciated the technical capability held by the University of Waikato’s Computer Science Department and the skills it is passing on to students.

‘The University of Waikato produces graduates who are pursuing ideas in the worlds of artificial intelligence and machine learning and this is a major focus of our fund,’ Vickery said.

‘They are going to come up with some really cool ideas.’

The University of Waikato is renowned for producing world-leading techno­logists, including Google Maps creator, Dr Craig Nevill-Manning, and co-founder of Google DeepMind, Dr Shane Legg.

‘New Zealand needs to think about how we cultivate more technical talent within our universities that aren’t corralled into building a start-up within a university, but instead get those skills and offer them to employers. The only reason why Los Angeles grew so fast as a tech community is because we had the University of California, Los Angeles (UCLA), the University of Southern California (USC), and California State University, Northridge.’

Vickery said it is better to have tried and failed than not tried at all and Kiwis returning home after a decade or more, bring that psychology with them.

‘I’m using a pretty rough and ready start-up product to run our internship program,’ Vickery said.

The Hillfarrance internship programme schools interns in the day-to-day activities of a venture capital firm, getting them involved with deal due diligence and understanding how a portfolio is managed.

‘I’m using it because the founder just returned after six years in Canada, and he was courageous enough to put a product out into the wild to ascertain how potential users might interact with it. Within his first trial his initial users broke the product. What some might think is not a good thing, I think is awesome. I said to him, ‘Don’t be pissed off by that. Celebrate the fact that you had the courage to get something out there that didn’t really work, and you still had people willing to use it because they believed in your mission.’ That’s investible kind of stuff.’

Vickery said it was vital founders were freed from the shackles of excessive governance and given unbridled permission to pursue bold, moon-shot ideas that succeed, fail, or fail fast in a capital efficient way. Figures supplied to Vickery by Waikato law firm Tompkins Wake, showed onshore domestic investment into Kiwi start-ups had flatlined to around $80,000 over the last 14 years, while offshore investment was about $4.3 million.

‘We’ve got to make that void and fill it more with domestic money,’ Vickery said.

Vickery said he believed a slow moving, gradually funded, start-up economy was destined to fail.

‘There sadly might be a Permian-level extinction event in our start-up economy from the companies formed seven to five years ago. Angel investors have realized that they can’t keep giving 50 grand a year to keep start-ups limping along. Sometimes founders and their ideas need to fail fast and to get back up even quicker and learn from the mistake. In fact, this cycle might need to repeat itself a few times before the founders find the holy grail otherwise called “product market fit”. ’

‘We’ll emerge stronger from it … There’s a rising audacity within founders who are willing to take some risks and maybe raise more money and be more visionary in their approach,’ Vickery said.

‘That rising tide is raising all of us, and that’s super exciting for everybody. Ultimately it increases the output that we need from our universities, for data scientists and engineers, back end engineers and front engineers, and CEOs, and chief marketing officers, all those types of people.’

Kiwi digital start-ups have never had it better

The New Zealand tech economy needs to move into version 2.0.

‘Version 2.0 is a market where the fundraising process is done within weeks, as opposed to six months, and it’s a process where the founders retain more ownership of their company than they did before.’

Company-X is helping Vickery usher this vision in, with co-founders and director David Hallett and Jeremy Hughes contributing to the $40 million Hillfarrance Venture Capital fund. Both Hallett and Hughes ran their own software development companies before meeting through the Digital Industry Forum in 2009 and founding Company-X in December 2012. Hallett was consulting director of Pulsar Computer Solutions, founded in March 1998, while Hughes was managing director of Ignition Software, founded in March 2001.

Company-X was established as a tenant of Waikato business incubator Soda Inc in the old Innes and Co Ltd soda pop factory at The Meteor in Victoria Street, Hamilton. Company-X moved to Wintec House with Soda Inc in 2015 and became a cornerstone tenant. Company-X has worked on software development projects with start-ups, alongside government agencies and big tech, ever since. Company-X’s high-profile start-up clients include the Hamilton-based water-bike company Manta5, whose Hydrofoiler XE-1 crossed Cook Strait in 2021, and multinational trampoline designer and manufacturer Jumpflex. New Zealand Police, Waka Kotahi New Zealand Transport Agency and Cisco Systems Inc, are also Company-X clients. Company-X appeared on the Deloitte Asia Pacific Technology Fast 500 for three consecutive years, consistently ranking as one of the fastest growing technology companies in the region.

With the backing of Company-X, Hillfarrance is looking to make about 20 investments in predominantly digital start-ups.

‘Company-X has helped US-based Fortune 500 companies with innovation for nearly a decade, and this fund is an opportunity for us to help New Zealand entrepreneurs in the same way,’ Hughes said.

‘By supporting Rob Vickery’s Hillfarrance fund we are promoting and encouraging entrepreneurs and the growth of the tech sector in the Waikato and New Zealand.’

A new breed of start-up

A new breed of New Zealand start-up has been born, and Vickery wants to help it grow entrenched with Kiwi culture.

‘We’re going to develop an entirely new form of start-up, built on the Treaty of Waitangi and some key, flow-on aspects of that: he tangata, he tangata, he tangata, the people, the people, the people. We’re going to have start-ups formed by Māori founders, or maybe Pākehā, and we’re going to build start-ups that may challenge the very bones of venture capital. It is what drew me here. We don’t need to be a back office for Silicon Valley or a clone of Israel. We can be our own funders, and that’s what I want to work out.’

Vickery used his own te reo Māori to English translation of the Treaty of Waitangi as a basis for developing criteria for founders of start-ups he wants to invest in.

‘We need start-ups that create shared experiences and a sense of belonging for their team,’ Vickery said.

‘That’s all about company culture, inspiring talent to come and work for you, retaining talent. How you create that shared experience as a start-up is a cool and unique challenge.’

The next big challenge, Vickery said, was ‘self-determination’ — another Treaty principle.

‘How do they enhance leadership and participation in their community? How do you create more leaders? How do you inspire leaders of the future? Then we’ve got “guardianship”. Will they ensure a sustainable future and intergenerational reciprocity? Do they improve the quality of life and satisfaction with our environment? Are our start-ups building businesses that are environmentally friendly and sustainable? Are they raising the community around them? For example, do they go and teach at schools? If they’re doing code, why not go for free for the afternoon to the local primary school, teach the kids how to write a line of Python?’

A sense of identity in start-ups is also important to Vickery.

‘Do they create a distinctive sense of identity? Uniqueness and belonging? That goes again to culture, to brand, and to the start-up and what it stands for. That kind of uniqueness is a pretty investible kind of thing. So basically, I apply all these filters before I make any investments.’

Vickery said one in 150 start-ups meet his investment criteria. But for those who do, the Hillfarrance support network is there. In general, Vickery said, support for the start-up sector needed to get bigger and deeper and quicker.

‘We’ve got to get quicker at getting shit done. We’ve got to make it quicker and easier for start-ups to grow and to fail. The real estate challenge here for start-ups is very real. Most of the founders I know can’t afford to buy their own home, and that’s rough. They’re starting to feel left out and unsatisfied, and their partners are unsatisfied.’

Expanding toolbox helps start-ups

An ever-expanding toolbox of digital solutions from big tech companies is another game changer for digital start-ups.

‘There’s a lower bar to entry and a higher chance of success,’ said Company-X co-founder and director Jeremy Hughes.

Building a minimum viable product (MVP) with just enough features to be usable by the client has become a more popular and efficient way to validate an idea over the last decade. Company-X designed and built an MVP version of the Waikato Expressway Testing Application (WETA) for City Edge Alliance in under a week, before spending just under three months refining the end product.

‘You can completely refactor what you started with,’ Hughes said. ‘You don’t have to do these big think waterfall projects. You can start with something and if you do it right, that sets the basis going forward. That completely changed the game.’

Before the advent of cloud services, like Amazon Web Services, start-ups needed to buy a lot of hardware and the costs were huge.

‘You had to go and buy or lease all this infrastructure so that you could put your app on it,’ Hughes’ fellow co-founder and director Hallett added. ‘Now you spin up a virtual machine instance, or you build your application serverless … you don’t even need servers. You can build in a serverless environment which is elastic.’

The elasticity of a serverless environment makes projects scalable, with start-ups able to dynamically increase and decrease resources based on requirements. The introduction of follow-the-sun servers, delivering minimal lag time, was also a game changer.

‘With Amazon Web Services you just click a button and say where your application is housed to move around the globe, so that it’s close to where the users are awake,’ Hughes enthused. ‘Crazy stuff like that was not available 10 years ago.’

‘Amazon is the thought leader in this space, and also the tech leader,’ Hallett added. ‘To think they started building this to provide the infrastructure for their own online bookstore. They built this because they saw it as necessary for their own ecommerce solutions.’

‘Those things have enabled a substantially different approach all the way up. Start-ups can begin without much venture capital because they don’t need big servers and data centres or have the big costs that come with those things,’ Hughes said.

The adoption of Apple and Google App Stores from 2008 around the world, and the Microsoft App Store in 2012, means software no longer needs to be shrink-wrapped and shipped to a reseller, as apps are easily delivered electronically to their markets.

‘You used to need a huge marketing campaign, but now you can publish apps in the app store that aren’t advertised but are accessible to users. You can just tap a button on a website and the app is on your device,’ Hallett said.

‘These are technical things that are way below the radar of investment companies and founders, but they have profoundly changed the game,’ Hughes said. ‘All of that reduces your investment, that increases the number of people that can play, a lot greater catchment of innovators to actually get as far as getting something out there, instead of getting stumped on how to pull that together.’

Better access to funding and new tools meant the creatives of the world could afford to explore their ideas earlier.

‘University graduates can get together and just start building an idea and see if it’s going to work because they have got distribution channels and they have got scale from all of these services,’ Hallett said. ‘In the past you rarely saw graduates able to do this. It’s always they have had a job in Silicon Valley or somewhere else, and they have made some money for the company and gone back and done it whereas now, actually, they can come straight out of college, give it a crack, and use the knowledge they’ve obtained in their doctorate.’

Company-X has grown from the two co-founders to a team of nearly 60 software specialists. Hallett and Hughes announced the formation of Company-X LLC in California, and the formation of a US based Company-X team, in 2021.

‘The decision to expand our business in the USA and employ a team there grew out of the success Company-X has experienced offering to multinationals like Cisco Systems Inc,’ Hallett said.

‘We’ve been working with US companies for years and we know it works,’ said Hughes.

Company-X is offering nearshoring software development services to North American companies.

Top tips for starts-ups on business growth

The most common challenges facing start-ups remained in the years leading up to the COVID-19 pandemic. A lack of venture capital, and the international IT skills shortage, limited growth. But the ripple effect of the pandemic has changed things dramatically, bringing Hillfarrance Venture Capital managing partner to New Zealand, along with returning Kiwi talent. With better tools in hand than ever before, New Zealand’s start-ups have never had a better chance of success.

David Hallett and Jeremy Hughes share their top tips for start-ups who want to grow their business:

  1. Start with a unique business model. You need a point of difference. There is absolutely no point in doing the same thing as everyone else in your sector.
  2. Bring in experts. You might hold the monopoly in your field but be sure to validate your business ideas with those who know business well.
  3. Brainstorm until you can brainstorm no more. Define the principles under which you will do business. These really are as important as your point of difference.
  4. Establish goals for the business using the SMART methodology: Specific Measurable, Attainable, Relevant and Time-based.
  5. Do not go it alone. Ensure someone else in the business has your back. A problem shared is a problem halved. Two brains are always better than one.

Chris Gardner is communications manager at Company-X. He has extensive story-telling experience in corporate, media and tourism industries. He enjoyed a long journalism career in weekly, twice-weekly and daily newspaper journalism in the UK and New Zealand before joining Company-X in 2016. He has also written for Titan Magazines’ Star Trek Magazine and Star Wars Insider in London for three decades.

He contributed to the BBC Domesday Project in 1984 at Archbishop King Middle School, Isle of Wight, researching and writing entries for the UK’s largest electorate and entering them into a BBC Microcomputer.

Gardner began his storytelling career aged nine as a schoolboy guide at the ruined Isle of Wight mansion of Appuldurcombe House. He was later promoted to keykeeper and custodian by English Heritage. He is working on Mansion of Memories, the definitive history of Appuldurcombe House.

He joined the Waitomo News in the King Country as a reporter in 2001 after emigrating to New Zealand. He worked as deputy chief reporter at Hawke’s Bay Today in Napier and Hastings for nearly three years, and technology editor and chief of staff at the Waikato Times after moving to Hamilton in 2006.

Gardner was one of four contributors to DeAgostini’s Disney Innovation Award winning Build the Millennium Falcon partworks magazine, writing the weekly Secrets of Spaceflight segment. He has also contributed to the Star Wars Fact File published by DeAgostini.