Perspectives

Where are the next billion dollar businesses?

Brian Gaynor asks, towards the end of his latest column:

Sam Morgan and Rod Drury have created $1 billon technology companies in New Zealand but why haven’t we produced more? 

Why haven’t we created more companies like Waze, the Israeli start-up now worth in excess of US$1 billion?

I see that the question is simply one of timing.  When will we will see the billion dollar valuations?

For me many of the candidates for the next generation of billion dollar companies following are already known, and in turn there is a deep pool of companies following them that we are only just finding out about. Let’s look at some examples from a very wide pool.

First off the rank is Ebos Group, who is buying (merging with really) an Australian pharmaceutical wholesaler and will increase their own NZ market capitalisation to $1.35 billion. Ebos supplies hospital and healthcare products and is not really a technology company, more of a sales and marketing company to Australasia, but still it’s an impressive feat and it’s our first billion.

Diligent Board Member Services is very popular with boards, who in turn are insiders when it comes to investors. That may mean their $670 million valuation is high, but they are on a healthy growth curve, and I see little reason why that would not continue. So while the market value may fluctuate up and down I expect it to exceed a billion at some stage in the next several years. Earlier if the hype continues.

SLI Systems, who recently IPOed, are also on a long term growth curve, albeit much steadier. The NZX is valuing them at $205 million for now, and their revenue run rate was reported in their prospectus as just $18 million, with small but positive EBITDA. Their growth path is not as steep as Xero’s, but the recent injection of cash will help them expand, and given time the increased penetration of their intelligent search tool for retailers should drive their market cap towards $1 billion.

Let’s go private.

Buckley Systems Limited (BSL) has been collecting awards over the last few years. They are owned by founder Bill Buckley, and while it’s hard to find the revenue numbers, this source puts them at $100m a year a year ago, and growing quickly. They dominate the market for precision electromagnets used for implanting ions into silicon chips, as well as the latest LCD screens used for computers, tablets and phones. They are also getting into medical systems. They are large, profitable and growing at an incredible rate. Arguably BSL is already worth close to $1 billion, but even if not it’s clear that some day they will be.

Datacom is another well known tightly held private company, and surprisingly large. They showed revenue of $788 million in the 2012 financial year and profit after tax of $25 million. If they continue with their 10 year annual growth rate of 14% for revenue then they will report over $1 billion in revenue in just two years. Their profit margins are relatively low versus revenue given that this is IT services, but just as clearly they are on the path towards a billion dollar valuation over the coming years. They have 4000 staff, commissioned a $90m data centre in NZ and purchased a Western Australian company earlier this year,  and are clearly able to sustain their growth by continuing their expansion into and beyond Australia. They did lose that Ministry of Education payments business to Novopay, but managed the trick of looking very good as a result.

Jade Software spun off Wynyard Group earlier this year, which in turn is looking for $65 million in an IPO. Wyynard are projecting $21 million in revenue in the 12 months to December 2013, and to grow at over 25% in the following year.  They will take a while to get to a billion in value, but are clearly on the track.

Vend, who raised $8 million for a fairly decent post money valuation is well known to Brian Gaynor and Milford, who invested (as I did in a personal capacity). Vend were approaching $3 million in annualised revenue in May, and continue to grow rapidly (400% in 2012) into a market that is even larger in potential than Xero’s. It’s not an uncontested market, but with a Paypal relationship and by targeting the more serious end of the market Vend are caving out a solid global niche. They will take a number of years before hitting a billion in value, but I am placing strong odds on them making it.

There are more cloud based services like Xero and Vend in the next wave of companies. Some appeared in the HiTech awards this year including: Timely, an appointment booking system in the cloud;  BIMStop which is expanding quickly in the USA and looks to have a good chance to dominate their 3D CAD objects market; and Green Button who provide computational cycles in the cloud. I can recall having conversations with all of them while they were in a very low or pre-revenue stage, and it is great to see them rise through the ranks. A quick browse through the past year category winners tells me, at least, that the quality our best Hi Tech companies is ever-increasing. From the 2012 Hi Tech awards the pick for me was Compac Sorting Equipment, and from 2010 it was Serko.

There are a host more coming. Three companies who I have been introduced to recently are Pet.co.nz. BookMe and OnceIT. Shane Bradley’s Pet.co.nz is, in my opinion, going to take over a substantial chunk of the pet food market in New Zealand. Don’t try to stop him, but do try to find another niche and copy what he is doing. BookMe is growing rapidly by helping NZ tourism operators find customers from NZ and offshore and OnceIT is helping NZ fashion designers reach new markets here in NZ. I don’t understand the OnceIT name, but then I am not in the target market.

It’s been around for a lot longer, but Sam Morgan’s vWorkApp is one example of a very interesting cluster of location-technology based businesses founded in New Zealand. The jury is still out, but I do see some big winners will emerge from that space.

Other Trade Me Alumni are also responsible for a few interesting companies. Nigel, Jamie and Cameron built StarNow into a substantial business, and Nigel quietly launched RubberMonkey a bit later on, between movies and soundtracks. Rowan Simpson was an early investor in and advisor for both Xero and Vend, invested in Fishpond and has just released an email app with very high potential – Triage. Phil, Richard and other Trade Me investors started Movac, a fund that has in turn invested into several companies, of which the pick for me are Green Button and PowerbyProxi.

The Xero ecosystem is another great source of inspiring companies. Aside from Vend, three of my favourites are Unleashed, a product of Massey’s eCentre, TradeGecko – a kiwi start-up based in Singapore, and let’s throw in GeoOP, another location-technology based business.

I could go on for a while, but let’s end with some larger companies that I ‘ve met through the Better By Design program. FrameCad have ambition to power the building of millions of houses, ZeeTags is one of my favorite companies with one of my least favorite websites (for now) and Waikato’s Dairy Goat Cooperative seems to dominate the global niche of goat milk nutritional powders. The last two prove that while we cannot escape our farming roots, combining technology and agriculture is a great niche for New Zealand. Waikato Milking Systems is another agri-tech example who have been through the BBD program and are growing quickly, including into China. I met them through Define Instruments as we are a supplier.

But let’s end with Gallagher Group, who are our very own conglomerate, and while relatively small at around $200m in revenue in 2013, seem to be positioned to become a far more substantial company. As always I checked out their stand at Fielddays this year, and came away impressed at their product range, design consistency and professionalism.

– Lance Wiggs

Philip A Fisher

The success of an investment does not depend on what is generally known about a company at the time the investment is made. Rather it depends on what gets to be known about it … Therefore it is not the profit margins of the past but those of the future that are important to the investor.

That’s a quote from  Philip Fisher, an investor with a long term perspective and a fondness for buying stocks in high technology companies. That was a very uncommon approach to take, given that he was active from 1928. He wrote Common Stocks and Uncommon Profits in 1958, a book which is still well worth reading today.

While his “15 points to look for in a Common Stock” are well known, he also had a strong emphasis on getting out of the norm of just looking at the financials, and reaching out through whatever means to find out more about a company.

Let’s just marvel at the relevance of the first of the 15 points today:

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? A company seeking a sustained period of spectacular growth must have products that address large and expanding markets.

Doesn’t that sound like Xero or Vend?

– Lance Wiggs

The long run value from end users

At LWCM we see that value comes from satisfying end user needs, but that’s only part of the story. This diagram from a presentation I gave at Innovation Tech Week yesterday explains a bit more:

Beyond 2020

In order for investors to get their lasting returns, we need to also identify and sell to the paying customers, and to build a company that creates, sells and supports the products and services. Investors also need to think about lasting returns, and not about quick gains. Investors searching for quick gains are really indulging in trading, and while that may be perfectly valid as a financial strategy for some, businesses themselves should focus on creating lasting value.

I found this cartoon from the middle of the dot com bust in 2000, and it really exemplifies the difference in approach between the long-term customer focused CEO and short term investors. A quick check of Amazon’s share price since then (a 16% annual return) shows just who was right in the long run.

Bezos in 2000

– Lance Wiggs

Welcome to LWCM

Welcome to LWCM. Chris Humphreys and I have been working on this company since late 2012, and we are happy to finally be public.

Chris and I met while we were both part of Pacific Fibre, a project that we both learned a lot from, and one where we both still believe in the basic business case. Indeed we worked on successive own versions of the financial model, and that helped us gained respect for the way we each operated. Someone will make a new trans-Pacific cable project work – but it’s not our turn.

We aim to help New Zealand grow the next generation of technology, web and design-led companies. For me that means playing a more expansive role than at present, moving beyond the investment, advisory and co-founding work that I am currently doing. For Chris it’s a much bigger transition from the world of large deals while part of PwC’s Corporate Finance team. For us both it’s exciting to be able to help the early stage sector.

Helping New Zealand companies start up and grow is something I first expressed a desire to do in 1996, in my formal application to Yale. Since then, including the MBA, I’ve learned a lot through a wide range of experiences, and also become part of the early stage community in New Zealand.

So what are we doing? Well, we are sorry to say that securities law dictates that we cannot say just yet, but on the site you’ll see that we can share a bit, so have a look around and get in touch if you feel we can help or answer any questions.

– Lance Wiggs