ITP Techblog

Brought to you by IT Professionals NZ
« Back to ICT Trends

A plan to help our tech start-ups

Peter Griffin, contributor. 30 April 2020, 12:45 pm

It's the lifeblood of tech start-ups, investors' cash that's crucial to seeing companies through until they are generating enough revenue to fund themselves.

But with investors stockpiling their own cash to ride out the Covid-19 uncertainty, it is a tough time to raise new money or pursue the lucrative 'exit' many tech founders dream of.

The United States is the home of the tech start-up and the chill winds of Covid-19 have hit the sector hard. As I outline in my BusinessDesk column this week, even tech companies that are generating significant revenue and have easily attracted venture capital funding in the past, are now finding doors closing on them.

Augmented reality headset developer has raised US$2.6 billion from backers including Google and Alibaba over recent years, but this week announced a major restructure that will result in the loss of 1,000 jobs, around half of its workforce. 

US start-ups suffering

The company will now accelerate its move away from the consumer market, where it initially saw its headsets being used for entertainment purposes, to the enterprise market, where commercial and industrial applications of its technology will be the focus. Magic Leap's owners had been hoping to secure a sale of the business valuing it at as much as US$10 billion. But the appetite for expensive acquisitions has dried up. Magic Leap is in a fight for its survival.

So too is another tech start-up that has attracted worldwide interest AirBnB. The accommodation rental platform has seen its business grind to a halt as demand for short term stays in it members houses and apartments has dried up. AirBnB had to resort to taking out a US$2 billion loan at a 10 per cent interest rate just to access cash to get through the crisis. Its lenders also secured the right to buy into the company at a steeply discounted rate.

Across the US start-up sector, 25,000 jobs have been shed in the last six weeks, according to which has been tracking the lay-offs. This crisis could change the face of the industry in the US forever.

So what about our start-ups? We face the same headwinds here, but our start-up scene is very different. We don't have a lot of pre-revenue companies with vast amounts of VC money invested in them. Our companies typically aim to get to revenue generation quickly, run very lean and on smaller amounts of capital.

As I've been calling around tech founders and CEOs over the last couple of weeks, I've received fairly upbeat responses. Some have had to defer projects and ask staff to take pay cuts. But the mass lay-offs and even closure of start-ups we've seen in the US haven't happened here yet.

More capital coming

We may also see capital being easier to access for those start-ups who can get through the next six months. The government's $300 million Elevate will soon come online, representing the largest single injection of new capital available for early-stage companies in the industry's history.

Start-ups focused on hard-hit industries like tourism, aviation and retail may not survive the slowdown in those industries. But those that can pivot or find opportunities to help businesses in the post-Covid world, will thrive. Many I've spoken to are busier than ever as they supply enabling technology to allow their customers to adapt to the new environment.

But the Angel Association, which represents investors in early-stage customers, sees the government having to step in, to some extent, to keep our dynamic start-up scene healthy. Pointing to research suggesting that every dollar spent to stimulate the New Zealand tech sector generates about $3 of GDP growth, the Angel Association has floated 15 suggestions for how the government and the industry can mobilise to help start-ups get through the next six months to two years.

The ambition of angels

They include things like offering funding to secure intellectual property so it is not lost or sold-off by distressed or failed start-ups. It calls for a $100 million equity injection, above and beyond the Elevate Fund, secured by the Government and aimed at companies that have already received venture investment.

It calls on the Government to increase the size of the R&D tax credit and to incentivise Kiwisaver funds to invest more in start-up enterprises. Ultimately, the Angel Association argues, we should aim to spend $1 billion a year on start-ups, ten times the current amount.

It would mean funding 400 new companies every year and generating one million "high value, resilient jobs".

These are ambitious proposals for extraordinary times and it's unlikely the government will have the will or means to adopt most of them. But with the disproportionately large role of tech start-ups in generating new innovations that in turn create high-value jobs and wealth for the country, they are certainly worth giving serious consideration.

You can download the Angel Association's submission to the Government here



You must be logged in in order to post comments. Log In

Web Development by The Logic Studio