Kiwi software firms eschew 'growth at all costs' for a more sustainable approach

About a dozen Kiwi firms have built significant, sustainable businesses on the back of software company Xero's star power.
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About a dozen Kiwi firms have built significant, sustainable businesses on the back of software company Xero's star power.

Kiwi information technology companies are putting profitability ahead of achieving growth at all costs, resulting in more sustainable growth, Deloitte partner Darren Johnson says.

"People are aiming for their businesses to be more sustainable, as opposed to putting all their money into marketing and growing them as fast as they can but not necessarily having the underlying foundations," he said.

The technology sector has had a mixed year.

At the top-end of town, an index compiled by the Technology Investment Network suggested the country's top 100 technology firms and top 100 emerging ones grew their combined sales 12 per cent to $9.4 billion in the year to June 30.

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Their higher exports even managed to offset the latest annual drop in dairy industry exports.

Angel investment was also solid at $23 million during the first half of the year, suggesting there could be a strong pipeline of smaller business coming through.

But the share prices of several mid-sized technology companies that listed on the NZX in 2013 and 2014 in the wake Xero's market success have been in the doldrums.

Time and cash ran out for one – security software firm Wynyard – which collapsed into voluntary administration this month after raising $172m from investors during its float and a subsequent series of capital raisings.

When high-profile companies got in trouble that could definitely dent confidence, Johnson said.

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"We can't afford to have too many of these companies not succeeding."

Deloitte's observation that more businesses were achieving sustainable growth was anecdotal, he said.

It primarily came from its experience helping privately-owned cloud software firms – many of which had raised money from professional investors – to gear up to take their businesses overseas.

"A lot of them are lasting longer. There have been a lot that fire up but don't see it through. People can't just keep going back for capital."

However, there was "no rule of thumb" on how long the path to profitability should be, he said.

A "reasonable portion" of the businesses Johnson advises are firms that are selling add-ons to Xero's accounting software, either to cater for specific industries or to add generic features to do with the likes of stock management, point-of-sale and payroll.

"There is definitely flow-on from Xero."

Challenges for tech companies include the strong dollar. However, investors tended to value software firms in United States dollars given the standard way to cash-up their investment was through a trade sale to an American buyer, Johnson said.

Getting skilled staff was an issue everywhere and that could be exacerbated if there were any further moves to try to curtail immigration.

"One thing that always comes out of the Fast 50 is the difficulty getting skilled people," Johnson said.

"A lot of the local skill is already taken up by the big players so it is important to be able to get those skills in from overseas. Reducing immigration would have a knock-on effect."

One way Kiwi businesses had responded to those pressures was to contract out more work to lower-cost countries, Johnson said.

"[But] it is obviously not as easy as having someone locally you can oversee day to day."

If there is one thing fundamental to the heightened trend for discipline it is "just making sure that capital is spent wisely", he said.

 - Stuff

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