Catching up to Australia: Tax, and How to really kickstart the economy

by Daniel Batten on February 18, 2010

I am amused.

Last year, I was amused to see a committee set up to investigate “How we catch up to Australia”. A bit like Dad saying to the younger son “You aren’t quite as good as your older brother across a range of measures; mum and I are setting up a committee to help you be as good.”

This week I was even more amused with all the discussion about tax restructuring, and John Key’s stance. As if taxation it matters. I mean do we really expect tax change will give our economy to kick-start. I would have more luck expecting my trail bike to spontenously kick-start itself and ride itself around a circuit beating allcomers by giving it a clean. Economic progress has and always will be stimulated by the coming together of creativity and business acumen. Not tax change. Not committees.

Tax change has, can, and will ever only marginally tweak business output, it cannot do anything to change the quality of our businesses. It cannot stimulate creative thinking. It cannot make New Zealand businesses innovate more, output more, sell more and scale more. To expect it to is like expecting an improvement in Auckland’s water quality by getting a committee to design some better underground water pipes.

Like many New Zealanders who have not personally profited through property speculation, I recognise that investing in property does nothing for the wider economy, whereas investing in local businesses through venture capital or angel investment is great for the individual and the whole country.

So it would be easy for me to join the band-wagon of the righteous who say we must punish those people who were smart enough to invest in ways in we did not think to at the time.

But this strategy will never work. Let property investors do what property investors have done. Our economy needs more carrot, and less stick. Why not encourage and stimulate the sorts of investment that gives twice – angel investment and venture capital.

This was exactly the recipe that San Diego used in 2000 when, faced with the cut of the Govt Defense contract, they had to reinvent themselves. They went from having 2 Venture Capitalists in 2000, to having 24 Venture Capital firms a mere 3 years later. This was not achieved by giving tax change or committees asking “How do we be as good as Mexico City”. It was achieved by government enticing “been there done that” entrepreneurs running extensive training programmes. These entrepreneurs in turn successfully propagated their business acumen into a new generation of entrepreneurs.

A new generation of entrepreneurs were taught how to pitch, get real, run a business, give up founderitis (over-controlling tendencies that throttle growth), sell, and build a team and invest in the right things at the right times.

This initiative single-handedly not only rescued, but improved the San Diego’s local economy. And it is a recipe that in a high-innovation centre such as New Zealand, with a similar inclination to collaborate, can replicate.

But only with the Sam Morgans and Jeremy Moons of this nation training the next generation. Leave it to officials and business graduates who have never run a corner dairy, and you will come up with predictable results.

6 years ago when Biomatters, a company I co-foundered the year before, got angel investment there had been no formal angel investment and there was hardly any Venture Capital in New Zealand. That has changed, but at a slow-pace. Incubators such as The Icehouse are doing a reasonable job – but there needs to be 10 Icehouses and 15 angel investment groups in each major New Zealand city catering for the different types of startups, cultures, emphases.

With the amount of commercialisable IP I have seen that exists in this country, this is achievable. All that is missing is political will. Government needs to focus on priority partnership with industry rather than setting up committees to review tax and bureaucrats to form “how to catch up” forums. And the advocates of business such as the Business Roundtable, who should be getting the general population warm to the idea that large successful businesses are critical to our standard of living, need to change their tack. From the outside, they seem to me lacking a purpose more meaningful than “political lobbying for business-friendly tax change and climate-change denial”. An emphasis which I suspect makes the average New Zealander less friendly to business, not more.

So what concretely should be done? You can’t grow a forest without planting many trees. We need more investment in planting those trees in the form of companies: seed-investment, sapling-investment and mature-investment for deserving kiwi companies.

Encouraging the siphoning of a small fraction of the money that currently goes into property investment nationwide, into the right well-trained companies, and you have a recipe for irrigating and stimulating a forest of successful companies.

Government and industry would do well to conspire to give urgency to answering “How do we do more deals to aggressively grow a forest of companies?”  rather than “How do we catch up to Australia?” The first question inspires creative solutions, the second question is that of a poor cousin with an inferiority complex playing ‘me too’.

The reason more investment in kiwi companies at all levels doesn’t happen right now is that almost all deals I’ve seen presented to investors are lost in translation. Founders fear investors as dream-stealers, and investors don’t understand or are scared by perceived (or often real) founder the naïveté. Company founders say “there is not enough money”, investors say “there is a shortage of quality companies”. These problems can be solved because both perceptions are false: investors and entrepreneurs are simply speaking different languages. Solve that problem with the right training, attention, and focus, and the floodgates of massive economic success will open as San Diego has already proven.

When I see the roots of our economy growing through investing in the startups and SMEs that are the sap of our nation’s economy, I will no longer be merely amused – I will be positively jumping out of my tree with joy.

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