Episode 4 of the Curious Kiwi Capitalist Podcast
27th August 2019
My guest for this show is Richard Higham. Richard is one of the top business academic practitioners in New Zealand history. He has not only experienced but researched and studied entrepreneurship. He has run his own firm, consulted to corporates about entrepreneurship, and saw the start of venture capital in NZ before "venture capital" was even really a word.
Now in his eighties, he is still going strong, as you'll see he is the master of the rhetorical question and pretty much ran this interview himself!
In this show, we'll discuss entrepreneurship and the early days of venture capital in New Zealand including:
- The king, the castle and le entrepreneur
- Austrians and supply-side entrepreneurs
- Drucker arrives on the scene leading to a bloosoming in books and research on entrepreneurship from 1983 to 1986.
- Early venture capital in NZ
- 2-6-2: 2 winners only
- The Saudi king and Saudi Corp in NZ
- Graeme Hart, his MBA and financial wizardry
- Process vs poduct innovation
- Large corporates find entrepenurship from within, they're in the woodwork, somewhere though the "corporate immune system" then tries to destroy it
- Death Valley and the going up the S-Curve
- The assumption that 80% of small business were going broke is wrong, its probably only 30%.
- Prospective entrepreneurs making up less than 10% of the NZ population of which only a few succeed
- Otago University rugby Blooz Nooz.
Richard Higham still lectures at Otago University. The lectures are run at the same speed you hear in the episode, always a sprint, but always time for a student. I believe he was a pathfinder for many New Zealand entrepreneurs, not the least being Graeme Hart.
He studied at Oxford, as a young man worked at Imperial Chemical Industries, went to London Business School as a Sloan scholar, and worked at various times in the Auckland and Otago MBA programs, and consulted far and wide.
Richard Higham was my master's thesis supervisor at Otago University as well as my favourite lecturer. Indeed, of the 8 courses I took, he ran three of them, all of them practical and useful today in representing or investing in high growth companies.
Richard has played rugby, and also has been heavily involved in coaching and leading the Otago University Rugby Club. If you played rugby at Otago then you will want to subscribe to his newsletter about Otago Univeristy rugby, the popular Blooz Nooz.
Blooz Nooz Otago University Rugby Club newsletter, subscribe by emailing Richard: richard.h[email protected]
Transcript: Entrepreneurship and early Venture Capital in NZ with Richard Higham
Bruce: Thanks Richard for coming along to this episode about entrepreneurship. Perhaps a little bit about the history of venture capital. I remember my time fondly here at Otago University in the courses that that you taught. Let's kick it off by asking you about entrepreneurship. What is entrepreneurship?
Richard: What is entrepreneurship?
Well, it started off years and years and years and years ago in France. Where the entrepreneur built castles for the king and the King said I want a castle and someone came along and said I know how to get a castle for you and it'll cost you so much. So this was really a demand-side initiative the king wanted something and an entrepreneur in France le entrepreneur provided it.
And this went on bring the fashion in France for generation after generation after generation until things changed because what happened was that people started not responding to demand but by taking initiatives they started something themselves. And some people who started things were accused of being against the law.
You can't do this. You can't simply change things like this and one chappie wrote an article about it way back in the 1720s in which he maintained that the entrepreneur on the demand side was equally the same as the entrepreneur on the supply side. Someone supplying something new was just as justified in the economy as someone responding to someone who wanted something new and this was the birth of the supply-side entrepreneur the person who takes the initiative does something new pursues it to the ultimate that they can trying to find customers a totally different routine from responding to the king who wants the castle.
Now this went home for year after year after year with studies being undertaken in Austria. The Austrian professors wanted to know why it was that people in Austria were initiating things and other people were not and they wrote pamphlets and books about the supply-side entrepreneur and refined the theory of them.
And one chap who sat at the feet of the professor's with a man called Joseph Schumpeter and he was an ideal student. He got As in everything and he absorbed all the things that these Austrian Vienna based professors talked about entrepreneurship and years later when he done his PhD in 1910 he wrote a book about it and it came out in 1933. And he said what we want is for people taking initiatives in the economy.
Look at the way that we're facing a terrible depression. The depression would be solved if people just did some new things and had some more people to do more new things. And if they did that we would have a depression no longer. But the theory by the economist of the time was that the economy would solve itself. If there was a depression people would price their labor so low that others would take it up and make something out of it, but it wasn't happening. It was not happening and Schumpeter saw it not happening and he was exasperated by it. And he said we want more initiatives on the supply side and people simply laughed at him.
And they went on laughing and they went on laughing for year after year after year. His theories were simply abandoned as being ridiculous. In 1970 I was at the London Business School as a student. And no less than the Austrian-Hungarian communist-run regime asked the business school for a deputation to go along and advise them on how to make the economy better and I was part of that deputation going over. We went over to the heartland of Schumpeterian economists. We went there and you know, we had never heard of Schumpeter and I tell you the truth nor had they. This was the place where he wrote. This is the pastry countless theories. Faith never well, I realize now that they've never heard of him.
They had no idea about supply-side entrepreneurship, which was what they needed and we went there and we pounched about telling them all about Capital big Capital communist Capital. But when the communists ran things they ran things for the sake of the peoples being employed. You couldn't be unemployed in that place.
If you were unemployed you simply had to go along get a job at the local Ironworks and when you went there and they said, what is your skill? I'm a peasant. Oh, well, you better grow some flowers then and the gardens at these Iron Works in a place that we visited called Misconch[?] were enormous in fact that Ironworks employed 1500 gardeners and 500 iron workers.
This is true and we met the board there and they had one man who was supposed to know about entrepreneurship who'd been a grocer before the war. It employed two people in his grocery shop and at the end of the war they'd imprisoned him for three years for employing himself and two others in small business entrepreneuring and it was illegal in communist countries. So they put him in prison now, they brought him back and said advise us about how to run this place better and all he knew about was being a grocer.
We came back to London thinking we've done a good job. Where in fact, we had absolutely totally 100% a thousand percent missed the bus. We had no idea what we were talking about.
Years later. In fact 13 years later, things changed. A man called Drucker. You know where he came from Austria
I was thinking America but not it was Austria.
Richard: No, no, he came from Austria has chucked out by the communist and he went to America and he started writing about guess what entrepreneurship and you wrote a book called Innovation and Entrepreneurship and it came out in 1983 and he wrote about not what it did for the economy so much although he had theories about that, of course, but how to do it.
Others read his book and they thought another sounds interesting and by 1986 three years later a whole cycle of books that come out about initiatives on the supply side entrepreneurship as a way to get the economy moving the replacement of jobs and Michael Birch came out Birch came out with his measurement of how many jobs were created by various sectors in the economy.
And when he looked at it he thought that's funny the small business getting all these jobs and he discovered it wasn't the small business. It was a small business entrepreneurs growing. So he published his stuff about the new theory of job creation. The entrepreneur on the supply side is the person who launches something.
Maybe it's difficult. Take some time. Starts getting employment hiring people and grows fast. And Entrepreneurship became the study of fast growth risk-taking, innovation New Ventures all these things that we now know all about because people have discovered entrepreneurship for what it is. So in 1983 to 1986 out came books, book by Brandt, book by Christensen, book by Drucker, book by Birch, book by many other people talking about what entrepreneurship actually meant in the economy.
Now, I went back to London Business School in 1986 to teach entrepreneurship and I tell you what, I still had absolutely no idea what it was. I stood up in front of the MBA class at London Business School to talk about entrepreneurship and I started off talking about small businesses. But the director of what they actually called the Small Business Center because they still believe that entrepreneurship is small business evening in '86.
He had got some people who call themselves venture investors to come and talk to the class. Who were these people? I'll tell you. They were people who been employed in large organizations and they had been on the finance side. Seen people coming up with new ideas in large corporations and not getting any help and being turned down and one or two of them said there's money to be made in this if we get it right and they had left the large corporation and they'd gone to the marketplace privately and said give us a few million and we'll back new ventures and see if we can make some money. And they came to the business school in London to tell us what they were doing now, they weren't yet successful. But they had a routine and they learned the routine from the Americans.
What about poor old New Zealand? What about poor little New Zealand not skittled up by the most forces time the skittled out because we didn't have those sorts of venture investors. We didn't have them. Well, someone thought that we should have them and that was a man basically in the Development Finance Corporation Called Graham Croackam[?].
And he was dead set on developing the Development Finance Corporation, which was a government-run bank for backing business to back new business. And he persuaded his bosses in Auckland to send him to a place called Harvard. Now Harvard is in America and at Harvard you do the MBA and he went there to do the MBA. When he got there somebody came to the business school there and talked about Venture investing just the same as when I was at London Business School the same year. He was at Harvard listening to the same stuff. And then he came back to New Zealand.
Now by the time that happened I had another job to come back to because I'm afraid being entrepreneurial, I'd had to leave the large corporation known as o-ta-go university to go and teach at London Business School.
They thought it was a silly idea. I'd had to leave I had to resign so when I left the London business school after year teaching there was a contract for year. I had no job. But I was entrepreneurial and a man at Auckland University heard about what I've been doing at London. His name is Professor Brian Henshaw, and he sent me an e-mail.
He was Sloan fellow they called it at Harvard Business School. I was a Sloan fellow, this is a studies program at London Business School. And so he knew me and I knew him vaguelly and he sent me a note saying come to Auckland. We need you to come and talk about Venture investing. And so I came back to Auckland and also came back Graham Croackcam[?] from Harvard and he was persuaded by Henshaw to come along and do a lecture at the Auckland University on what he's learned about Venture investing in Harvard and what I had learned about Venture investing in London.
What have we learned? What we learned was this. Venture investing for new independent initiatives is tricky. What it requires is persons with money disposable cash to go in and buy shares. Can they buy shares and pick winners? No, you cannot pick winners among entrepreneurs. What you have to do is to invest in a portfolio of 5 10 15 companies. What happens then when you've invested in 5 say 10 say 10 companies doing your very best and in fact looking at 300 plans. Refining them down to 30 proposals and investing in 10 it is so risky that out of those 10 the best you can expect is 2 surge and make a fortune for you; 2 go belly-up in the first three years; and the other six putter along and should end up a small companies. The Great rule is 2-6-2, 2-6-2, 2 make a fortune, 2 go belly-up and six putter along and make nothing for you.
And the two that make a fortune, compensate for all the others and if you get it right then you'll expect to make 30% on your Capital where the best at that time shareholders were make perhaps fifteen percent on their capital and everyone else made 5-10-8 percent on their loans. That was about the way it went.
So 2-6-2. Now then will you made the deal with those entrepreneurs who were seeking to expand fast what could you what should you look for? Well. These were Financial people and they were not looking so much as the likelihood of it succeeding in the marketplace because no one could tell them that what they were looking for was a very very good plan, well drawn up and well criticized which offered to make not 30 percent on your money, but seventy percent on your money. If you found 10 of those then those would end up by making overall 30% with 2-6-2. So you had to buy shares in firms that promise to make a very substantial return on that investment--bank money and shareholder money.
Now how many of them actually made it? Well as I say 2-6-2 but out of those 70 %ers you hope to invest in the 10 very best ones and make money. What else did you look for you? Look for the character of the entrepreneur. They had to have good technology. They had to have a overarching determination to make the thing succeed and to make money for themselves. They were driven by the returns are going to make and they had to be Innovative. They had to think of something new not just the same old stuff. You then put your money in you watch them you help them as much as you possibly could and in the end you had to sell out.
Now how many of the shares in the company would you expect to be able to buy? You can't buy them all.
I mean the Venture investor can buy some of them not all of them because the person who started the firm wants to do own the firm. So that routine was buy about 30 to 35 percent with the promise, this was was just an initial investment and that 30-35 percent would be very very helpful to the person to get going but they would run into difficulties. They would run into cash flow problems and you would be able to invest more perhaps another 20% you're getting down to 50 perhaps 25% you're getting 55 and technically you could be in charge of the company.
And so the routine for the Venture investor by the best advice from the America basically Harvard, but also, of course the California experience was that by the time you've got to owning 50 55 60 percent of the company you had to so-call syndicate. What syndicating was find another venture investor to come in as a second party and he'd buy or she'd buy the second 25% adding up to 55% You'd have 30 he'd have or should have twenty five, fifty five percent. Then the third round Finance you might find another one to come in and by syndication these Venture investors could the word is not pxx in each other's pockets but that's what they did. They helped each other to get the best ones shared out. And this was a sort of a syndication move by Venture investors in California who are very successful at it and he became the fashion to be done elsewhere.
When it came to selling the shares this is when you made your money, it might be after three years, hopefully, but it was usually after five six or seven and when you stole the shares you expect to make six or seven times what you'd put in but over the years this would make you 30% on your investment.
Now who was going to do it? Who's going to do it? I'll have to tell you who is going to do it, Professor Henshaw[?] Professor Henshaw initiated when Crowkam[?] came back he initiated a small Venture Capital fund. And it was called Pacific venture capital and it was invented by him and by a student who came, in fact from this University of Otago with an MBA forgotten his name, but he used to work for Air New Zealand, I could recognize his face in the street immediately.
And they to set up Pacific Venture Capital. It wasn't very big. It was three million dollars it was pathetically small but it started things and they would bring people to the university with ideas. They were not just think to invest in them, but they get them to explain to the classes what they were trying to do as entrepreneurs. And this was a very very small start-up in New Zealand
Bruce: Richard. This was 1980...
Richard: 1986. 86 86 or 87 when I came back from London Business School. And at the same time there was a very very wealthy man who happened to be visiting the country on a sort of trade mission and he was the king from Saudi Arabia.
And what did he do? He thought this is a place here in New Zealand is rather fun. I might drop a bit of money in here and he left three million dollars three million dollars, that's not much. But then when he went back to Saudi Arabia and he heard about venture capital and doing new things in oil and so forth he wrote back to his friends here and said make this Saudi Corp call it Saudi Corp and start investing and raising money and I'll put some more in and he put in more millions and more millions and Saudi Corp found a very very capable accountant trained man called Owen McShane, and he'd been talking venture investing for some years before this he thought about it and learned about it and he became the manager of Saudi Corp. Saudi Corp launched big in New Zealand and they followed the right routines. They made money for the prince in Saud they made money for their shareholders were those for wide-ranging by the time they finished.
And he gave way after two or three years to another man, Bob Wilton now Bob Wilson was an accountant. He was a very skilled financier. He came into Saudi Corp and expanded dramatically and ended up as a professor of Finance at the University of Auckland and taught Venture investing. So it all became part of the routine. It became part of the routine.
Well who was out there actually bring new ideas to the marketplace? Now, I'm not thinking of persons who are Financial engineers, and I'm fighting for a name here for the richest man in New Zealand who came to do the MBA here. Oh Hart, now Graeme Hart, I met Graeme Hart and he was a very very clever Financial Wizard and I thought to myself this guy is a potential Venture investor.
But his routine was quite different what he did was. He didn't go into new situations. He went into existing situations, which hadn't yet learned about entrepreneuring and were dying on their feet and he bid for their shares and got the shares and then he went as an entrepreneur. The result, would fire all the managers who are bloody useless get rid of all the people who are deadbeat put in my own team so that the total amount of money spent on running the company went like that.
That was what he could earn for his pocket know for his return on shares and of course you then sell the company very well run and make a lot of money and expanded expanded expanded and in fact, it was a venture routine. An entrepreneurial venture routine vision and he went on he came to the MBA down here and I came down from Aukland University to teach entrepreneurship here with him in the class.
He was an extraordinary example of the skill in that kind of financial engineering entrepreneurship, but that's not real entrepreneurship the way that the innovators go. They are the sort of man who sitting in the back blocks that somewhere in a large company who's developing something totally new. The sort of inventiveness of large organizations engineers is absolutely legendary and I'll have to tell you that before all this happened with me I worked in a company called Imperial Chemical Industries. First job after my University Oxford University with Imperial chemical Industries. They made a fool of themselves by going to China and putting up a stand at an exhibition there in which they translated Imperial Chemical Industries as Imperialist Chemical Industries, a disaster for them.
But that firm in the 1920s and 1930s had been the innovators in the chemical industry. They'd been the entrepreneurial venture which started off in the 1925 s with Bruno Mound[?] and so forth and they expanded and expanded expanded and when I joined them they were still at the last gasp of the entrepreneurship. And they were telling each other we don't need to do this anymore, we don't need to be inventive anymore. We've done it all. We can survive on what we know and they survived on what they knew. And I was in a bit which had been in fact a new Venture some years before and it was still you venturing on. I'll tell you how clever these Engineers were, what we did was we made plastic film. We made it by a process called the bubble process. Up in the sky somewhere 40 meters up in the air you extruded a tube of plastic. Polypropylene, which what we did polythene would be the other one. that was big. Polypropylene was new and we had to work out how to do it, but they worked out how to do it they extruded this plastic tube and they put hot air inside and outside and more inside than out. So it went and they hit it with heat and it bubbled out into a great shimmering 30 meters across bubble of film. It came out of the sky falling molton as came down it the hardened and they realed it off.
Now then this was polypropylene film which in my early career in ICI, I went out on the road selling as a way of packaging biscuits. What a thought my look I loved doing it, but it was there was just what a stage in ones career but...in America there was a company which was making polypropylene film. Not like that, but by a flatbed process and they could make it far faster far better far thinner far everything than we could. And we were being caught up by these people launching the stuff into the UK where I was working and beating us in the marketplace on price and the ICI bosses turn to the engineers up on the plant and said we need to make this thing cheaper.
And the engineers said. Okay, so what do they do? They blew a double bubble two cubes coming down one inside the other, slit as they fell round off one way and the other way and double the size of the plant in three months. How about that? That was incredible. I mean the technology is all new.
Now this was process innovation. Process Innovation is making the process work better. Product innovation is doing something entirely new with it. And at the same time in 1986 there was Abernathy and Clark who were looking at the two sorts of innovation and claiming process Innovation is fine for the big guys, but don't think it'll last forever because someone will come along with something entirely new and bowl you over. Product Innovation and process Innovation have to go together and they were like Schumpeter they were laughed at but they were right.
They were right and if you look now at Imperial chemical Industries, I have to tell you the name is still there. It's owned by a Dutch company and the original company which I worked for the biggest chemical company in the world when I was there is dead. D-E-A-D. Gone. Finished. Over. No longer. Same with Kodak. Same with a lot of large companies. Why? Because having invented something and having got it going they thought this was the name of the game and it was. But it wasn't forever and the people who like the engineers are able to do some new things with that plastic they were think what why don't we do the why don't we print it in situ? Why don't we line it with something else, why don't we do two together like silver inside to make it even...and they were told no we make polypropylene film. That's what we're here for--as it was a god-given right to exist and what you did so they left came back to haunt the company.
How long did it take the large firms to realize that they had to be both. process and product Innovative. Well, many of them still don't know they still don't realize it but the ones who do realize it, what now, here's a problem once you've realized it, what can you do? Because what you're asking yourself is to employ some people on Innovation and Entrepreneurship who previously been employed on making things better not different. So but they're they're hiding in the Woodwork there somewhere. They're all they're trying to find something entirely new. So you have to find them you have to ask them what they can do. You have to back them to a certain extent not too much. Not too much just a bit get them going little cells little cells little Innovative cells in a large organization and that has become the name of the game for the large corporate.
Corporate Innovation is finding the innovators and backing the right ones. And the other ones who maybe their ideas are a little bit too extreme, well they can go outside and do it outside there. And so you've got the Venture investor who leaves and requires venture capital from outside. And you've got the Venture investor inside who is there to develop something entirely new inside the firm. And well, you're going to you're going to eat yourself aren't you because once this thing works is going to replace what you do already now.
I have the pleasure of going out and inviting some of New Zealand's largest companies on how to do this and the struggle and the strain to get that corporate culture to change from within I mean, even the people who own the shop floor, they love the company. They love what they're doing.
The University of otago is like that it loves what it's doing try to infuse some change into it and you're fighting you're fighting uphill. How do you do it? What what you do is you discover people who can be incubated and that's the word were trying to find before the incubator is where you put the oddballs not everyone or all the time, but you put them in there and you get them to start thinking of doing something different. Fifty sixty seventy percent of your time doing what you're doing already and the rest of it doing something which entirely new and you foster them and you help them but they're only a small cell and you explain to everyone else why they're there and why it's important that they're there and they'll struggle to to accommodate it because they think that what we do already is fine. But then they'll get going and they'll come back and they'll haunt the company with something new then gradually. It'll it'll find it find its feet and get going. Now it isn't just a large corporates and the world...
Bruce: Just to jump in there too Richard. Westpac, for example, I know has a venture capital company they've set up, I think in Australia, outside of Westpac thats owned wholly by Westpac. That is, as I understand it, I don't know it well, is there to be a standalone Venture Capital company that actually invests in fintech companies including one here in Dunedin that I know of. So it seems like they are they are trying to get both the inside and the outside approach.
Richard: If you try to get things going inside it is so very difficult that you have on occasions to say well we simply can't do that. What we have to do is invent ourselves outside put the people in there and then possibly bring them back later and when they come back later, they'll come in with all their new ideas, but the idea of separation. It has to be separate even if its right bang within it has to be in a building somewhere just over there where they're doing all this magic new things.
It doesn't have to be bang inside the corporate and if it is they'll be watching it carefully. The corporate immune system is what it is called. It is called the corporate immune, Brandt called it the corporate immune system. What happens is they will gobble up and try to get rid of them because they're different.
Now lot of firms have incubators now, but universities are really there because inside the university you've got this clever scientists who are thinking of new things. Previously, they would have to go outside the university to try to find some backing and they will regard as a bit odd, I mean the professor going outside and finding money to get a business going as, remember the professor of chemistry did that and his building a just down the road there, and I remember his name if I really try to, went and invented something new in chemistry, and he ran that while the same time being the professor of chemistry and the university I think of the time thought my goodness what is happening here?
Well, what should have happened would be that he should be encouraged inside in an incubator and here the University of Otago, and other universities just the same, we have an incubator glass building of magnificent proportion with wonderful facilities and who gathers inside there, a director and he encourages people who have new ideas from the University and some from outside it to come into the place have a room share their views with others and see how to get going. See what the problems are going to be and see what the possibilities are.
And this is where they come against two big factors 1. Death Valley 2. Up the S-Curve.
Now I'll talk about Death Valley first of all, because it's a really favorite expression of mine Death Valley. What happened was,besides Graham Croakham going over to Harvard and learning about new venturing just before that, others from the Development Finance Corporation that government-run bank in New Zealand went over to America to learn about investment, investment in not just new ideas, but old ideas as well. And they came up with the American expression, particularly in California, of Death Valley.
What is Death Valley? Death Valley is when you start off with $100,000 and expect to make sales and profits to cover your borrowing of $100,000. What happens is that the $100,000 becomes 80 thousand dollars then sixty thousand dollars then and it goes down you use it. And it hits the 0 line and when I hit the 0 line, you should stop or get some more money, but you go on to the bank and say we just ran out of that original one.
Can we have a lot more they going to say what have you done with it? Well, we spent it on getting going. Well have you got going? No. Why not? I don't know just haven't. Well you can't have any more money. So you're going to go into overdraft. Down into Death Valley and Death Valley is a long curved down which in the end turns and comes back up again.
There are two Death Valleys is actually. One is Death Valley of profitability. You start making money and so the Death Valley starts to turn but because you're financing debtors and stock and all that sort of stuff the Death Valley cash goes on down and then it turns. Does it turn? Does it turn? I've seen people with worried front brows pondering over is it going to turn?
The truth is Death Valley according to your plan will be so assummed as $100,000 Death Valley in reality will be twice as far out twice as far down: two hundred thousand dollars in a year rather than $100,000 in the first six months of the bottom of the pit.
What can you do about it? What can you do about it? You can't do anything about it is going to be there. You're going to have a Death Valley. What you have to do is to persuade the shareholders not the bank the shareholders for a second round and a third round of finance and that remembers where the Venture investor comes in and starts a Syndicate and they will see syndicate if they think is going to turn and come back up again.
Let's go back to the Development Finance Corporation going to America and coming back with Death Valley and I think in the nineteen eighty one, two, three, all we heard about from the Development Finance Corporation was watch out for Death Valley. Watch out for Death Valley. We're all trying to avoid Death Valley. First of all by not spending money and secondly by trying to find some more money, but the Development Finance Corporation itself borrowed money in Japan at five percent and then lent it on at 12% and then the interest rates turned against them and the interest rates charged by the Japanese lenders went up to 15%. And guess who died in Death Valley having pronounced death in Death Valley is the worst thing for a company a Development Financial Corporation itself died in Death Valley.
It died down there. It was down the bottom there. It couldn't get itself out of Death Valley
Bruce: Borrowed short and lent long.
Richard: That's right by our dear dear that's right and of course bankers know about this, but it was there for the government to invest in in Ventures existing Ventures and then new Ventures and they did a wonderful job, but unfortunately, they miscalculated and their Death Valley overwhelmed them.
So we invite others not to go into Death Valley or if you get in to get out as fast you can they themselves died there.
What is the other thing you're going to have a Death Valley? You're also going to have an S curve.
What is this S curve? Well, people estimate how many people are going to buy from them and obviously because they're in love with their product they reckon it's going to be a lot.
And unless they've been to University and learned about Death Valley or if the Development Finance Corporation was still there at from the or from the bank and learned about not Death Valley about S-curves.
When they've learned about it they will realize why it is. What is it? When you go out and try to sell something you'll go to 10 people and get one who's interested and they'll buy something, you expect five you hope for eight, and you get one, so you're starting to build up the ready for the for the expansion of the firm and unfortunately, not many people are buying so the stock goes up the cash goes down and the people don't buy.
The geometric progression of purchasing is 1-3-8-15-50 and that's how it goes, one person buys, persuades 2 friends and they buy 3, then he goes to 5 of people thinking about it.
Then he goes up and up at 50 and just when you think is never going to go up its soars. So you need more stock, now in Death Valley and the S-cruve is the worst possible slow acceleration of sales then a huge surge that you'd ever expect from the point of view of your need for cash, but it's real. Look it may be that it's not real if it doesn't take off at all.
And you really wan that S-cruve because you need to have the sales but they're going to confound you with more stock more debt has more everything you require the company more finance therefore to finance growth.
Bruce: And in the case of technology, perhaps more customer services staff, more engineers, probably less of the stock but certainly more of the headcount perhaps even marketing costs.
Richard: Let's look at an example, years ago a company in New Zealand sold fertilizer. Ravensdown Cooperative. Ravensdown sold fertilizer up and down the country. They were very successful and then they persuaded themselves the new general manager that they ought to look at other forms of service to the farmer. What forms of service to the farmer? Well nowadays when they put the fertilizer on the ground they can tell you where they put it they can tell you how much has gone on they can tell you what it's done.
They can tell you it isn't going into the hopefully not into the rivers because they haven't put it down. They have automatic feeders out of airplanes to put the right amount on the right place at the right time and all this is totally new. Noone knew about it before. Now can you imagine the amount of effort it takes first of all, to think that we ought to do it and then actually to do it means a whole new division and then you're going to go out and persuade the farmers its useful have to have this extra service and may cost a bit more money.
So it's slow to take off. But once it takes to of is like an airplane soared into the sky and they have I don't know their figures, but they have a substantial investment now in these in these things new. And it costs and it's slow to get going but once it gets going then you're on the gravy train and it needs controlling.
How fast from the company grow? Some companies grow at a hell of a fast rate.
They need second round financing a third run Finance. They need possibly corporate finance. And of course, the culprits are all looking around for possibilities. To avoid being overtaken by them and they would go along there would say look we are big you are small you are growing. We think we may be able to help you and they were putting their thoughts together in how to invest in the company by way of buying more shares.
But of course buy more shares means milking the company's directors of their shares because if you're going to put a whole lot more money in and you're going to get up to 80 or 90% of the firm leaving 10%, what they will say is listen, the old corporate venturing thing, listen 10% of an elephant is better than 90% of a mouse, and it is it is but that leaves 10% in your hands and your small fry now and where the company goes. And the corporate really owns you or the Venture investor who done the deal owns you with ninety percent of the shares and then of course, they'll sell out and you get a whole new owner and the corporate world buy you and you've got three percent of the shares or you cleaned out all together.
That's the way that the innovator will make money though but of course they lose the company and they very often they have to take all their money put in the bank and then retire to place it like Cromwell or Queenstown and relaxed up there and enjoy themselves and have an easy life. Not always though.
Can I just go back to these incubators?
Why would the integrator be a good idea what the Venture investor lacks is companionship. They've got a whole of advisors on board. Some of them know what they're talking about and many don't. But what they don't have is other people in the same boat as they are facing the same problems as they face the same marketing problems the same pricing problems. And being in an incubator mean to say you can share the ideas out and talk about it over lunch time and and see what other people have thought should be done.
And then of course the incubator received expertise from outside. If it's in a University from within the university if it's outside entirely friends, if it's a bank one, then from others in the bank and so forth and you'll learn more about some of these tricky bits.
What do I think the real nasty tricky bit is as you expand. What is this? It is going into another place. Why? Because you have developed something, which is super for here. Then you think we'll make some sales by going to and many companies in New Zealand would think Australia first step. What they don't realize is that Australia is a totally it really is a totally different place.
It's bigger scale. It's more competition, is different people. They think of the kiwis as johnny-come-lately you go over and tell them what you've got and they say, oh, yes, we've got that, they haven't got it, but they tell you that they have, you have to take the stuff there and that means take it by a boat or by Aeroplane.
You have to sell it there, which means you can have someone on the ground. Agents, do you have an agent you appoint an agent? What do you do? How do you price it? Now years and years ago pricing and overseas market was very simple. You only had to make a contribution. margin. What you had to do was to cover your cost and made a bit extra and you may have been extra, so it's only 10% extra but that went straight to the profit. You covered your costs. There were overheads, you cover the overhead little bit of overhead as well. But the rest of it straight to the profit so it was a very profitable thing to do pop overseas and sell at the margin plus a bit.
And if you're successful, of course it grew and it grew it became a bit problematical. And the dictum was when you go to an overseas market and sell at the margin, this is the old-fashioned way of thinking about it, what you have to do is get to about a quarter of your sales, maybe the third of your sales, you know, so a third of your cells are going over to overseas market now and then you've got to have a totally different strategy because now it's so big in your portfolio you have to change.
You have to start to think of higher pricing getting out. A much better return on your on your sales and that's not easy. So starting off low price ending up having to be high-priced if you're successful is a terribly difficult thing to do. Now people do it but very often what they find is they need a friend over there maybe even a corporate who's going to bring the stuff in and handle the selling and handle the difficulties and that's probably one of the better ways to go but it's not easy.
It's not easy. I've seen companies that are going into overseas markets with very very high hopes and great success. Yucca themselves because they get the fundamental equations wrong. They did the balance of what they're doing here and what they're doing over there completely wrong.
Now there is another way that people expand in another territory and that is by franchising and franchising is a very very very solid routine for come to the producers something that can be produced here here here here even in manufacturing.
Franchising is a good man a good way to go. But you have to be very canny with your franchises. What you don't want is someone who knows more about it than you do in your first Branch. Can you imagine appointing someone who knows all about what you do is even a competitor of yours set themselves up as not telling you what to do.
And it can be horrible tension. What you want is someone who's a trained business person but not perhaps necessarily in that particular routine, right? So they have to learn as they go.
How big can you go with a franchise? The sky's the limit absolutely the limit but get to 30 franchises and you've got to have a franchisor arrangement agreement with them all you have to bring them all together and discuss how you're going to go.
Some people are very successful at it. All the companies find it very difficult, but I always think franchising, I like franchising because what it does it it releases all the small business initiative, although sometimes the entrepreneur initiative it releases all that under control. And that's a very it's a very good balance between what you're doing here and what you can be doing somewhere else and franchises go overseas with great success as well.
Bruce: And you have your distributor or reseller actually funding your company.
Richard: That's right, and they will go to the bank and they'll say I'm operating a franchise with this company from New Zealand and I need to have so much capital to get going. What do you think and they'll look at the plan is think it's successful New Zealand. Let's have a look at it in Australia. It looks like it could be successfully run by an Australian. And when we go through, yes, you can you can raise more finance that way. It's very good. Very good.
Excellent. Why do I teach the MBA?
Bruce: Before we go there though...
Richard: You don't want to know about that.
Bruce: We'll come back to that thought for sure, but we were going down and track of different ways to fund your fast growth and we certainly covered exporting and perhaps finding an agent that way, we talked about franchising.
We talked a bit about Venture Capital venture capitalist coming in, did we finish that conversation though? Because the there you are you've got this Death Valley, you're staring down into it. Cash flow and perhaps net profit. You don't know where the end is you talk to someone who's willing to invest through that Venture Capital that that Death Valley poor cash flow process, what comes out the side?
Richard: After the launch of the Venture Capital industry in New Zealand with those two small ones both growing, things change really quite dramatically.
Because what happened was it was an entrepreneurial initiative itself in the Venture industry which got Venture Capital going. It wasn't necessarily the big banks saying we ought to put some money into Venture investing. It was necessary to finance houses doing. I'm thinking of people who would override our offer loans on purchases of equipment that kind of thing.
They weren't necessarily the right people in their own view to start venturing into to start investing in small new Fast growth Ventures. So how could it be done? Well, sometimes an overseas company would come along with a branch in here in a couple of American branches were founded quite early on I don't know the details of that, but I do know that they exist.
But after that it became the property of entrepreneurial investors themselves to raise money among their friends, friendship capital you might say, and it was a formal arrangement within the firm but it wasn't part of a large organization. And and that's the way it got going down in Wellington. I remember Wellingotn people investing all through one of the one of the entrepreneurs there who got things going.
And then friendship capital, people funded, crowdfunding came in and you could launch things on a stock market, launch things on a on the market by going to Facebook... and sayingtwho wants to invest in This brilliant new Venture and along with come some people who probably weren't very well advised in Venture investing. In fact, they weren't advised at all, but they had a bit of spare money and they put it in by way of a friendship investment and that got going.
I don't know that anyone knows exactly the proportions now of financing in New Zealand. The formal Venture Capital industry is not that large if you were to put 300 million on it something like that it would be about that as a limit, but there's lots and lots of other ways that people starting off with family finance getting friends to put some money in associate to put some money in and then launching with their friends to raise more money and and that's become a routine its success or otherwise of it I don't think anyone has figures for that.
Bruce: Sure and the Angel Investing side as well perhaps we've got the seed and New Zealand Venture Investment Fund.
Richard: Yes, of course lead the government's is very very keen to get continue to get more Ventures going. Let's just look for a second at the dynamics here.
How many people in a normal place like New Zealand normal place like New Zealand? Okay, abnormally normal and New Zealand how many people would be imbued with the initiative and the intention of doing something new? I wouldn't put it any higher than 8 to 10% of the population.
How many of those will actually do something new? Well the biggest you'd expect will be a total of three percent. So three out of ten will actually have a go.
How many of those will succeed 2-6-2 out of 30, six, they will succeed.
What is the result in the economy? Well that job turnaround rate as a result of the entrepreneurs getting going is reckoned to be about 10% of the population every year that is the amount of it.
Why is it like this? It's like this because the large firms process innovating are losing jobs in proportion to their output. They're saving on their investment in people by putting in new technology. And that's an entrepreneurial thing.
How fast are they losing? Well reckon to be about 10% lose every year and this is a massive amount. I mean, is it the whole thing turns around and about 10 to 15 years, you know, it doesn't actually turn around that that because they're also hiring more people and but the decline rate in jobs is, Birch, about 10%. Where the new jobs come from? They come from inside and outside entrepreneurship, but the numbers are small the numbers are small because the numbers of people who succeed a small but it takes a lot of effort to get going to replace the jobs.
Are the numbers of jobs in New Zealand increasing? Yes, does that mean to say that when entrepreneurial nation? Yes. Does it mean to say were also saving on the large firms? Also yes. We're just I think we're perfectly in balance, but we do need those entrepreneurs to be doing things and the result is going to be a 10% change every year. Jobs. Job, circulating like this and the person who work all that out was a man an interesting round man called Birch in the nineteen eighties who went round and asked the questions in America after questions of how many people to employ now how many two years ago how many five years ago me 10 years ago and he developed this thesis of the declining job numbers in large firms, which is what they have to do to survive replaced by new initiatives either inside or outside.
Very tantalizing small resource to see
Bruce: You're talking about the University, what are you doing here now? What's the MBA...
Richard: What happened was the University of Otago decided it was going to be like other universities overseas and have a master's degree in Business Administration.
When did the master degree in Business operations start? About 1900 and in Harvard in America. When I did the Sloan Fellowship course, which was a post MBA course, London Business School. They had been in the business of offering MBA since about nineteen hundred and sixty-seven that's when they started off offering the MBA when I was there, London Business School in 1970. There were besides us 20 Sloan fellows. There were about a hundred MBA students. When I went back to lecture 1986 there were 600 MBA students and I bet there are more now, it became the fashionable degree to do in business.
What happened in Otago? 1979. The professor management a man called Philip Russell, who was actually Read International Paper he'd been a very big wig in that in the human resource side came here as a professor of management. He persuaded the university that we ought to have this MBA and in 1979, it started with six students and guess who did a lecture on the opening day of the first MBA taught in diversity of otago a fellow called Richard Higham.
And what did he talk about? I talked about an experience that we've had with a company in Otago McSkimming Industries. What a wonderful company that was, was, was, no longer exists.
Why was it wonderful? It had perfected a very difficult routine making lavatory pans not easy because you've got two parts and they got two fit together and you do them in one effort and the pouring of that liquid stuff in to form the lavatory pan was an art form beyond belief. It was McSkimming Industries had learnt it and they got it, right and they did it right. Unfortunately overseas people are doing the same sort of thing with equal success, but huge huge organizations and flooding the marketplace here with cheapo lavatory pans and this in the drove poor McSkimming Industries broke. But when we did the case study lecture they were still going strong and I talked about what it was to organize production for something which is extremely difficult and complex to make and then market it throughout New Zealand. 1979. Well after that I lectured on the MBA for each year. I was covering entrepreneurship innovation is as far as I knew it, but it was all small business at the start.
How the small business survived with the, you can remember people used to say, did you realize that what it fifty percent of small businesses fail in the first five years? 80% 80% of small businesses failed in the first five years. Did you realize that eighty percent of small businesses startups fail after five years and this one why why did they fail or they ran out of money or they ran out of market or they did that. Was that the other.
What should we do about it? We should train them. Huge effort in training small businesses how to be good small business people was initiated by the government and that's why they found a thing I belong to the business development center and that was to help small businesses because they were seedbed of all the good things in the in the economy. What was actually happening was the decline rate of 80% was not just people going broke, 30%. It was people combining with others. Being taken over. It was people who started off with two partners who couldn't stand each other and so they'd stop and one person would take over and start again. So it was a stop but it was a restart immediately with the same one of the two people starting.
And of the 80% failure 30 actually went broke. Of that only about 15 were in the of courts, and the rest of them was still there, but under a different name or different format or they belong to someone else and so forth.
It was completely falsoe statistic. It was completely wrong and it led to enormous efforts to help the small firm and there I was teaching how to do it because I was a small firm expert I'd run my own small firm after I see ICI. 1983-86 changed all that when we realize the entrepreneur was the name of the game.
And so we started teaching on the MBA here entrepreneurship and I remember Auckland University and coming down to teach the entrepreneurship classes at the MBA in this University as well as in Auckland and we had a case study of a fast growth firm from Invercargill which had gone in for making components little bits of wood that would end up in chairs and they made components for the industry and they, couple of brothers, anyway, they started their company, I think that father started the company and they went whoosh like that and were handling that fast growth. They may still be there.
Bruce: Up the S-curve
I think we this is the one that I did?
It was over two classes, right?
Richard: That's right, and but not now. No longer taught. We teach the importance of being entrepreneurial. And how to get the entrepreneur going and how to finance the entrepreneur and how to control the rest of them so they understand that entrepreneurship is important, but the actual technology I don't think it's taught in the University anymore of actually handling fast actually handling fast growth actually getting the money together. I don't think that's taught.
Bruce: And that was the Master of Entrepreneurship I think,
which is what I did.
Richard: Well the Master of Entrepreneurship started off as a marvelous marvelous investment in people's time. It was terrific and I was lecturing on the MBA on the master entrepreneurship as you remember for many years using the case study to show the sort of things that actually happened in a firm like that. Then the directorship of the entrepreneurship changed and it became something completely different and they didn't want me anymore and I was shoved out, but I was still doing the MBA classes teaching people how important entrepreneurship was the in the large firm and how to handle it but not teaching how to actually be this fast growth entrepreneur very sadly because that was a good good case study.
That was it was good case towards real to, real gosh scary
Bruce: And now you're writing the Blooz
No the Bloose Nooz ws is completely different. What happened was the University of Oxford
Bruce: Otago University...
Richard: What happened at Oxford was this I went to Oxford to study Greats.
Greats is called Greats because it's was the Great course. It was the Great course going back into the fifteen and sixteen hundreds of Classical Languages literature philosophy history and so forth and if you went to Oxford you did what was call on moderations [?], which is all the languages stuff and then you did Greats and I did Greats. At Cambridge you went there to study mathematics.
The mathematics classes there ended up with people doing the examination seated on a three-legged stool called a tripos and they still call their degree the tripos, you take the tripos at Cambridge, and you argued with the professors and the senior wrangler was the person who got the top first and my uncle was senior wrangler for Cambridge meant he got the top first and got a three-legged stool way back in 1920.
At Oxford you did Greats and I did the Greats course and I love doing that doing. But there was also a thing called Rugby Football. And four of us thought ourselves capable of playing in the second row for the Oxford University in the annual match against Cambridge and of these four I was one of them two played for Scotland in the end one played for England in the end and I played for Bedford Rugby Club.
And so I was technically the least capable but I was the one who never got injured. What a difference. They would go on the field. They would star star for 35 minutes and then suddenly their leg would give way and they be off the field. Sadly and they come back, and then I'd take over you see, and then they come back three weeks later. They do a wonderful job, but in scoring the final winning try again somewhere other they would break their nose and could no longer play the following week. So it just happened that the pattern of injuries to these other three compared with me got me in and I went to a place called Twickenham with the Oxford University Rugby Football side in nineteen fifty-nine sixty years ago, and we knocked the stuffing out of Cambridge and we won by three penalties to one and I was part of it.
So when I came to this University, I then afterwards played for a club,.Er, but when I came to this University this university has a fantastic record in producing good rugby players. We boast. We don't boast anymore because our friends in Ponsonby and we have got an agreement that we don't actually claim to have more All Blacks than anyone else has but we have, but don't tell them, but they think of as many as we have actually played for the club at that time. Since our players have to leave the university after three or four years and join a club we've got that number equal to Ponsonby, but the same again, playing a year later for a club so we count them all
Bruce: Clearly much better than Ponsonby,
Richard: So we count them all. Now three years ago, now when I came here I coached the Colts and then the Blues then I was such a bloody hopeless. I was a hopeless coach becuase all I did was to say enjoy yourselves. And so I was the club Captain then the club president and all the rest of it and I went on being that until I went off to London Business School in Auckland.
When I came back here in 2000 two things happened. First of all, I went to a concert and I met a lady who'd been at Auckland University managing the MBA who come down here to manage the MBA down here and he said what are you doing here?
And I said I've retired, no you haven't she said, 2001 this is, no you haven't come and meet the director. So I went to meet the director fella called John Burke director of the MBA and he put me lecturing the MBA. So I was back in to lecture in the MBA here. And he was the president of the University of Otago Rugby Football Club.
So he said come along to the club. So I went to the club and variously I enjoyed helping at the club and doing and behind the bar and also a staff until three years ago when I put out a one-page summary of what we've done this week with the A's and the B's and the Colts and the women and so forth one page with a few pictures.
Unfortunately, I sent it to people who replied if I simply filed it somewhere it would have been safe but I sent to people and the list was 50, then he went to a hundred. And it grew and then they started replying and sending in I remember what happened in 1954. Do you remember you remember well all sorts of players like Kirk the chap who captained the All Blacks in the World Cup this out the sort of thing David Kirk and and so on
And well I knew him you see cause when he came here to University I was the club captain and we are tell you something we had a trial at which someone didn't like him very much and they hit him and flattened him and he was lifted off, I didn't lift him off but I supervise had been lent up against a fence over here. Like this and he's sitting on a jersey and you completely gaga it was concussion of the worst sort and at the end of the trial everyone left to went away and I was leaving with my pad here and there he was still so went over to him and said are you okay, and he said I think so sir, and I was sure he just came from school. That was David Kirk captain of the All Blacks and winning the World Cup. That was David Kirk.
Bruce: Okay, so I'll have a link in the show notes talk about this later perhaps how you can get onto that list.
Richard. Thank you so much for your time.
That was very interesting. Thank you, sir.
Richard: Pleasure pleasure real pleasure. Great fun.