Creating a sustainable high-tech ecosystem
Based in Wellington, Free Range's mission is to build the capability and connectivity of startups. It was started in May this year by Linc Gasking and Joshua Feast.
For his report - Five ways New Zealand can accelerate a sustainable high-tech ecosystem - Linc Gasking researched seven startup ecosystems overseas and spoke to a number of local and international entrepreneurs. In the following extract, he discusses how to leverage market based evidence for high-tech immigration and grants.
New Zealand's immigration point system has similar challenges to the US for serial entrepreneurs who;
1. are college dropouts despite multimillion dollar exits (a focus on qualifications as a proxy for ability, which in hightech are often unrelated)
2. are unsure what their startup will be, or change their business part way into their immigration process (the visa is tied to the business, rather than the entrepreneur)
3. have extremely valuable experience and networks, the value of which is not measured nor taken into account (placing value on mentorship instead of financial alternatives).
Failure is part of the high-tech startup process, and immigration policy does not currently account for this.
New Zealand's current entrepreneur visas require the submission of a business plan as part of the visa process, counter to research that businesses are usually formed after immigration takes place.
A local immigration focused academic reported that current policy (such as business plan evaluation) has resulted in attracting a large quantity of locally focused small businesses, rather than global high growth startups with high value to the New Zealand economy.
If hightech entrepreneurs do not want to be tied to a specific business plan, New Zealand's barriers to entry for residency are comparatively high via the investor visas ($1.5 million up to $10 million). From a high-tech perspective, the amount of initial high-tech startup capital required has drastically reduced over the last decade. Serial entrepreneurs who qualify for this level of investment in New Zealand are outliers, such as James Cameron and Kim Dotcom. By April 2013, only 148 applicants had been approved for the lower Investor 2 category of $1.5 million.
Neither category targets entrepreneurship, but this is a popular category for those who do not fit the discussed point system. The top category does not require any business experience to gain entry, and the lower category accepts investment in government bonds.
David Cooper, immigration consultant and director of Malcolm Pacific, says, "From an economic point of view, we want these people to come here to contribute."
New Zealand's entrepreneurial category could focus on local contribution, such as mentorship or providing startup capital to local firms.
Several high net worth individuals were interviewed for this report who had recently interacted with New Zealand immigration and attested to the fact that immigration policy has not worked as planned for them. In one example, the immigration process for two individuals from the United States cost between $60,000 and $80,000, excluding preparation time which was the most frustrating element. In two other cases, one application was initially declined, and another's was delayed four months due to their country of origin which was described as a "nightmare" and "time consuming". These immigration applications are from individuals who could have a high impact on New Zealand's future economy, yet they report that the current system creates unnecessary roadblocks for them to enter, invest and start businesses or participate.
As an example, the following feedback was received from an international serial entrepreneur.
"Currently [New Zealand] immigration evaluates technology startups similarly to traditional businesses, while they are quite different categories. This is seen in pressures to start generating revenue, to employ x number of people (full-time), etc.
"[For] the entrepreneur visa, the majority of the value of the entrepreneur is determined by his/her success in building a company (in a traditional way), not the overall value that entrepreneur can add to the whole eco-system (e.g. mentoring, investing, attracting other talent, thought leadership, etc.). I can understand the motivation to bring only those who are serious about contributing to NZ economy, but more flexibility in the way such contributions are evaluated can be helpful.
"Another idea [for immigration] is to possibly have someone at INZ dedicated to advise/support entrepreneurs who want to move to NZ, figure out options etc. Lawyer fees are ridiculously high, and [I'm] not sure every entrepreneur can afford to do that if he/she wants to come here. Ideally [the advisor would be] someone who has spent time in the startup/entrepreneurial space. This person could [advise] INZ on entrepreneur friendly immigration laws as well."
Canada in 2013 launched a new programme which offers permanent residency for high-tech entrepreneurs upon a local angel investment of C$75,000 in their startup, relying on the market to pick individual winners. The programme does not require the venture to succeed.
As Canada has used the capital markets as a proxy for high-tech startup visas, a similar mechanism could be employed for grants. In New Zealand, the documentation for the recently announced pre-incubation grants states the selection process requires a business plan, which implies it will be used within some type of selection mechanism. Grants for innovation are similar to entrepreneurial immigration policy because both currently involve the government picking individual winners in hightech startups, which has proven incredibly difficult for even the world's best incubators.
Only 5% of Israel's exits were hatched in incubators despite Israel's renowned incubator programme which launched over thirteen hundred startups and invested around US$500 million.
The total value of Y Combinator companies, of which 306 have valuations, is currently US$13.7 billion. http://ycombinator.com/
The Y Combinator programme has a 3% acceptance rate which results in about 18,800 applications received. Almost three-quarters of value come from just two startups, Dropbox and Airbnb.
In recognition of the difficulty in picking individual winners, and the relative importance entrepreneurs have to hightech business success, Y Combinator has led the way by evolving away from ideabased evaluations.
Paul Graham discusses the counterintuitive nature of picking startup winners:
"The two most important things to understand about startup investing, as a business, are (1) that effectively all the returns are concentrated in a few big winners, and (2) that the best ideas look initially like bad ideas...To succeed in a domain that violates your intuitions, you need to be able to turn them off the way a pilot does when flying through clouds. You need to do what you know intellectually to be right, even though it feels wrong. It's a constant battle for us...if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good. Which is not that far from a description of insanity, till you reach the point where you see results.
"The first time Peter Thiel spoke at YC he drew a Venn diagram that illustrates the situation perfectly. He drew two intersecting circles, one labelled "seems like a bad idea" and the other "is a good idea." The intersection is the sweet spot for startups...The best we can hope for is that when we interview a group and find ourselves thinking "they seem like good founders, but what are investors going to think of this crazy idea?" we'll continue to be able to say "who cares what investors think?" That's what we thought about Airbnb, and if we want to fund more Airbnbs we have to stay good at thinking it."
You can download the full report by sharing it one social media here.
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