Listing benefits greater than just cash
This article I wrote in response to comments on the Capital Market Development Task Force appeared on NBR online today.
NBR’s Shoeshine column last Friday on the new Capital Market Development Taskforce raised the issue of the costs of listing on the NZX. It set out that in some cases the NZX is an expensive place to raise capital.
But for many companies, the benefits of listing are significantly more just the capital raised.
The primary reason for listing is access to capital. If we are going to compete globally it’s important that we have the resources to do things properly. If we don’t then our entrepreneurs are just well meaning amateurs with just a handful making it through to some sort of exit. The effort being so great that once they get their cheque – they check out. That is not the way to build sustainable innovation and commercialisation experience to grow productivity.
For early stage companies in New Zealand requiring a significant amount of capital, the NZX is currently the only place to raise money and still have a long-term chance of New Zealand ownership. Unfortunately, New Zealand’s venture capital market does not have enough depth to do larger deals and once US VC funds are taken, your company is for sale.
But these amounts are still tiny compared to our overseas competitors.
Even with capital, New Zealand businesses are the low cost operator when compared internationally. In our own Xero example, the $15m (at 7.3%) we raised to fund a team of 50 allows us to compete effectively with Australian-listed MYOB, which spent $AU65m on their 1254 staff last year, and FTSE-listed Sage, which had annual people costs of £511m covering 13,500 staff. NASDAQ-listed NetSuite had spent a total of $US70m on product development costs to the end of 2007.
So New Zealand companies have to be very effective with the capital they raise to take on overseas competitors – which we are used to doing because we are used to dealing with constraints on resources.
Listing provides a number of other benefits as well.
Being a listed company is very valuable when exporting overseas. It provides credibility and transparency.
We are finding that new industries like Software as a Service almost require a company to be listed. The software industry is a near perfect market where the incumbents operate a “research and development by acquisition” strategy. Fronting up offshore as private company forces a potential customer to ask: “if I buy your product, you’ll probably end up getting sold”. This was a deadly catch 22 situation that we encountered at my previous company AfterMail, and one of the reasons why we were pushed to an early trade sale.
As a new market entrant the profile around being a listed entity provides the opportunity to accelerate brand building. Some of the costs of capital can therefore be offset against marketing spend.
Bryan Gaynor’s comments in the New Zealand Herald at the weekend show how our capital markets have not kept up with other investments. “The total value of the country’s residential housing stock has surged from $81 billion to $614 billion since the end of 1986, whereas the total value of all domestic companies listed on the NZX has risen from $42 billion to just $62 billion over the same period.”
For us to create a vibrant technology sector, with the opportunity to raise sufficient finding to have a real go, it’s important we fix our capital markets.
The ability for high growth technology companies to raise capital publicly will have a positive waterfall effect on the local venture capital market and angel investment networks, which will see innovation thrive and productivity grow.
So I welcome the taskforce. Fixing our capital markets is an important foundation for making New Zealand a better place to grow businesses.