2nd May, 2021

Week 18/52

Over the next few weeks I want to return to the series I started earlier in the year about building an ecosystem of innovative technology startups in New Zealand.

To recap, for the benefit of those who only got here recently...

To start we tried to define a “start-up” and found there are actually a wide range of ventures that fit that definition from early-stage to high-growth.

Next we looked at what makes a company a New Zealand company and found that is much harder to pin down than it appears on the surface, and probably doesn’t matter much anyway.

Then we talked about what it means to be a tech company and again found this doesn’t really filter at all - every company is a tech company, or should be.

Finally we tried to define “innovation”. We decided this is a distraction too - what we really want is repeatable execution.

So that leaves us with “the ecosystem”. And then, after that, the final question: Why? What do we actually want from all of this?

I want to eventually get to a definition, but over the next couple of weeks let’s lay some foundations first...

📈 Scale

About ten years ago I had the opportunity to spend a day with Jay Kimmelman who was, and is, one of the founders and CEO at Bridge International Academies. It was a fleeting moment. I’d be shocked if he remembers me. But he made a big impression. In just a few hours he totally changed my mindset about how to start and how to scale.

Like many founders I’ve spent time with over the years, he was excited to describe the process he was going through to validate the specific business opportunity he was working on and to demonstrate some of the progress he had made.

But, remarkably, his “venture” was a new private school system he was trying to setup in the heart of Kibera - one of the largest slums in the world on the outskirts of Nairobi, Kenya, an area of extreme poverty, and one of the harshest business environments you could possibly imagine to start and scale a business.

Most people, like me, would find it exhausting just thinking about the challenges of doing something like this. Seeing it happening was both extremely inspiring and hugely educational.

Jay is a no-nonsense sort of person, and my notes from the day are succinct and to the point:

He talked about the curriculum he wanted to teach (effectively the product he was offering):

  1. Reading with understanding

  2. Maths

  3. Critical thinking

He talked about the unknowns he needed to validate to show that his ventures could work and become a viable business:

  1. Economics - can the service be delivered at the required cost point?

  2. Demand - will people pay?

  3. Quality - are the education outcomes good?

Finally, and most importantly, he talked about his plan to scale:

  1. Unit model - first school

  2. Replicated - second school

  3. Multiple - five new schools at once

  4. Many - so many new schools at once that it will only work if the systems are great - i.e. where a single superhero manager approach fails

The reason this last list is so interesting is because it describes a generic approach to growth, which could be applied to many other things.

First you need to show that you can solve a problem once. Often in the beginning this requires a remarkable individual and the brute force needed to ignore all of the valid reasons why what you’re trying to do is impossible.

Then you need to show that you can do that again. Mostly to prove to yourself and others that the first time wasn’t an accident. The second time you start to see the patterns that are going to be useful in the subsequent stages of growth.

Then you need to show that you can do that repeatedly and at increasing scale. This usually forces you to build and finance a team of people to help you. These folks are typically going to be more specialists with specific skills, compared to the generalists who get things started from nothing.

Finally you need to prove that you can create a repeatable and self-sustaining system that doesn’t rely on a specific individual or set of circumstances. I loved his succinct criteria: prove you can do it at a scale where it is beyond the ability of one amazing person, or even a single team of amazing people, so it can only work if the systems are solid.

This is a well understood progression, actually, once you see the patten: first you learn to crawl, then walk, then run.

As tempting as it might be to skip the intermediate steps and jump straight to the end, because that is where the most fun and biggest value is, doing that is almost certain to fail.

As impatient as you might be you need to take the time to really absorb the lessons from each stage, because those are what enable you to be successful at the subsequent stages.

“The more slowly trees grow at first, the sounder they are at the core, and I think that the same is true of human beings. We do not wish to see children precocious, making great strides in their early years like sprouts, producing a soft and perishable timber, but better if they expand slowly at first, as if contending with difficulties, and so are solidified and perfected.”
– Henry David Thoreau

Nearly everybody who talks about wanting a larger, more vibrant and more successful ecosystem of technology companies misses the important lesson I learned that day in Kenya. They jump straight to trying to solve the problems of scale and repeatability, without first proving they really understand what it takes to do it once, then twice. So it should be no surprise that the things they create tend to be brittle, prone to failure and seldom achieve their potential.

🥊 Impact

“Real impact is the difference between what happened with you and what would have happened without you.”
— Kevin Starr

It's said: “People are to start-ups what location is to real estate”.

And yet, when we think about what we can do to support start-ups in New Zealand we seldom start with founders and their teams. We're much more likely to talk about derivatives.

Over recent years a lot of people have put a lot of effort into creating these things: innovation hubs and clusters; shared working spaces all around the country; accelerator programs of different flavours; networks of angel investors pooling their resources and investing in a portfolio of ventures; countless competitions or networking events designed to flush out promising new business ideas; numerous business awards celebrating entrepreneurship, growth or innovation; various initiatives to commercialise research done at universities; and, last but not least, millions of dollars of government funding including direct grants to companies, subsidised professional services and advice, tax credits and co-investment.

Next week I'm going to dig into a couple of these in more detail and try to understand the specific contribution they have made to growing an ecosystem.

But for this week, let's think of these “start-up derivatives” together as a group and try to come up with some way of assessing their impact ...


In calculus, a derivative measures how much one value changes in response to changes in some other value. For example, as an object moves we can measure its speed (the first derivative of its movement) and its acceleration (the second derivative of its movement).

We also use derivatives when measuring the performance of a business. I wrote about this a couple of weeks ago. For example, when reporting revenue we can consider the amount in dollars, the percentage revenue growth (the first derivative of revenue) or compare revenue growth rates now to earlier results (the second derivative of revenue).

The higher the derivative the more abstracted we are from the underlying result.

In finance, a derivative is a contract whose value is based on the performance of an underlying asset.

For example, an option is an agreement that gives you the option to purchase a share in a company at some date in the future for a pre-agreed price. The profit or loss on the option depends on whether the actual price of the stock on that future date is above or below the pre-agreed price1. Once in place, that option itself becomes something which can be valued and in some cases even traded independently of the shares in the underlying company – although their prospects are inextricably linked, at least in one direction, because without the underlying company, the option is worthless.

Abiotic eh?

So what do I mean when I refer to “start-up derivatives”?

I'm talking about all of the people and organisations that are part of the ecosystem, but which are not themselves start-ups. This concept of derivatives gives us a useful way to categorise all of these things. We can simply consider: how close are they to the underlying ventures they depend on?

Some examples...

Founders and their teams are the underlying ventures. They are, as they say, the people in the arena, dust and sweat and blood on their faces etc.

Incubators, shared working spaces, innovation hubs and accelerator programs are first derivative. Their success is a simple function of the subset of ventures they work with.

Active investors are first derivative. As we referenced two weeks ago, they are like a tender to a steam train2 — providing the fuel and getting pulled along at the same time. Passive investors, or anybody investing indirectly via a venture fund, syndicate or angel group, are second derivative, since they are an additional step removed from the underlying ventures.

Advisers working directly with founders are first derivative. Agencies that connect founders with advisers are second derivative.

Awards are first derivative. Sponsors of awards, or those who judge them, are second derivative.

Networking events, e.g. Startup Weekend, are second derivative (the purpose of these is not to create ventures directly, but to help connect people who might with each other and provide some experience in a controlled setting).

Dragons Den (just humour me here!) is second derivative, but only if we generously assume that some people watching might be inspired and encouraged to become a founder or investor. That's how it works, right? 🤨

Government funding adds an extra layer of abstraction.

Funding NZTE to provide in-market support for start-ups is second derivative.

Funding a fund-of-funds, like NZ Growth Capital Partners (previously NZVIF - see my thoughts on this from two weeks ago), is third derivative.

Funding Callaghan Innovation to run a program to develop accelerators ... I think we are up to four derivatives at that point!

And, in case you think I'm just throwing shade at others here, writing a Substack newsletter about the start-up ecosystem: third derivative at least.

(By the way, the name given to a third derivative in physics is Jerk)3

Too many preachers. Not enough prophets.

Financial derivatives have been around a long time, but really captured headlines around 2008 when a form of derivative called Collateralised Debt Obligations were blamed for the Global Financial Crisis. Warren Buffett famously called them “financial weapons of mass destruction”.

As John Bird and John Fortune explain in this sketch from the time, when risky things get packaged up like this, given interesting names and then abstracted enough, it's easy to completely lose sight of what actually makes them up, and indeed if there is any value in them at all:

Of course, the same is true of start-up derivatives.

In our desire to create a more vibrant and more successful ecosystem of start-ups in New Zealand it's easy to forget that what this really means is more successful start-ups. We can layer on as many derivatives as we like, but it will make little difference otherwise. The number of people starting and working on the underlying ventures is the limiting factor.

The constraint is fundamental, not abstract.

Velocity Made Good

How do we know what’s working? If we agree the purpose is to “grow the ecosystem” then which of these derivatives has actually created more early-stage companies and helped more of them become high-growth companies?

The simplistic answer would be: measure the size of the ecosystem — the number of companies started or new jobs created4. And, clearly, those results are encouraging. A number of very successful early-stage and high-growth ventures have been started. Some have raised investment. Some have hired a team and gotten large. Some have been acquired. Etc.

So, it must be working! Right?

Unfortunately, that doesn't tell us anything about the impact of specific interventions. At best it shows a correlation. We need to do better than that! We should be able to prove that the specific things we've done have made the difference. We should be able to link the inputs with the outputs, and attribute success5.

Otherwise we risk confusing activity for progress.

Those of you who watched the television coverage of the recent Americas Cup in Auckland will be familiar with the concept of Velocity Made Good (VMG).

The VMG measures the speed of the boat, but only counts the progress it makes towards the actual destination.

I think this is the sort of measure we need for start-up derivatives.

How much of the effort we put into these things is actually moving us closer to the desired outcome? How much of the activity is progress?

Intentions → Impact

When I've asked this question in the past, the standard answers I’ve gotten are: “it’s difficult to measure” and/ or “it’s too soon to tell” (even though in some cases we've been doing these things for many years now). I think that's a lazy excuse. Just because it's hard doesn't mean we shouldn't try. Plus I sometimes wonder if we are actually just too scared to look too closely at results in case it forces us to admit that we're not really making as much difference as we hope.

Here are four simple questions that I think anybody promoting a start-up derivative should be able to answer about their thing, so we can cut through a lot of debate about what works and what doesn't6:

  1. Who does this help?

  2. What constraint do they have?

  3. How do you hope to reduce or remove that constraint for them?

  4. How will you show it's working?

The last question is important to define up-front, and should be measurable. Otherwise it's too easy to just shoot an arrow and then draw the bullseye around whatever it hits.

Your method for measurement should also define early indicators and milestones — it's not enough to say that you will only be able tell if it worked decades later. As we saw two weeks ago when something is growing you can generally measure something right away to demonstrate momentum.

And, ideally, it should also define a control group which can be used as a comparison, so that you can attribute any positive impact you have.

The first three questions insist that you're much more specific about the who, what and how.

When a start-up I work with is thinking about their product or go-to-market strategy, I usually quote Steve Jobs and recommend that they start with the customer and work backwards to the technology.

In other words: It's not what the software does, it's what the user does.

Those who aspire to help start-ups need to do the same. That is, begin with the founders and teams who are working on these ventures and work backwards from there to the constraints that these early-stage companies actually have.

If you can't say in advance how you're going to be able to demonstrate that you’ve helped them, you're very unlikely to be able to later.

I think if we did this we'd eliminate a huge amount of the noise that contributes very little to the ecosystem. That would allow us to focus our limited time and money and energy where it makes the biggest difference.

Unfortunately just about all of the derivatives I listed above have been designed from the top-down. And too often to solve problems for those who start them and run them – e.g. we’re a bunch of rich folks and we want an easy way to invest in some start-ups we can tell our friends about; or we’re a corporate and we want the publicity that comes with helping small businesses; or we’re from the government and the minister would like a ribbon to cut.

We can't just keep on raising awareness and hoping that inspires somebody else somewhere to do great things. At some point we have to actually roll up sleeves and improve the things we want to improve.

This will require better feedback loops — in some cases this will be the first time these have existed, and that will be a shock. And we need an honest assessment of what we’re doing that is working and what isn't. We have to stop before we start something and ask: how will we know if this is working?

We also need to pay more attention to the control group - i.e. the companies that have been successful despite little to no engagement with these derivatives (which, awkwardly, is many of the biggest successes). Then we might better understand how they win, rather than just grouping them into the broader ecosystem and (like the guy stopping and starting the train in the video I linked to a few weeks ago) attributing their success.

Of course, not everybody can be a founder – indeed that would be an undesirable mess (that’s a topic for a future post). But, if you are currently involved in a first, second or even third or fourth derivative capacity, my advice is simple: think about how you reduce the abstraction; think a little less about what you’re doing and a bit more about what the people you’re supposed to be helping are doing; and be willing to investigate if you actually assist, because that is how you personally will make a bigger impact.

⚖ Value

I recently found this old tweet from 2011...

So let’s do what I suggested.

Xero then was NZ$2.74 per share. Today it's AU$141 (so ~NZ$152). That's a 55x increase.

Trade Me then was valued at ~$1.1 billion (this was shortly after the IPO). It was acquired by Apex Partners in 2019 for $2.56 billion. That's a 2.3x increase, not counting the generous dividends paid to investors during those 8 years.

Meanwhile, house prices continue to be the top “business” news story nearly every day.

To paraphrase Michael Lewis ... left alone for a while with a pile of money, we decided what we really want to do is buy New Zealand from each other over and over again.

Top Three is a weekly collection of things I notice in 2021. I’m writing it for myself, and will include a lot of half-formed work-in-progress, but please feel free to follow along and share it if it’s interesting to you.


It's common to hear people working on start-ups refer to “stock options”. But there is a lot of confusion about what these actually are. And, in New Zealand at least, common misunderstanding about their tax treatment.

If you're granted stock options as part of your employment, they will typically come with a vesting date (the first date when you can “exercise” the option - a.k.a. convert the option into a share of the underlying company) and a strike price (the amount you will pay if/when you choose to exercise the option). It may also come with an expiry date (the last date when you can exercise the option).

In New Zealand an option is normally treated as taxable income when exercised.

Note: I'm not an accountant and definitely not your accountant, so if you're offered options then you should make sure you take good advice from somebody who is, and understand how much tax you will pay and when.


The tender is the small carriage that is hooked immediately behind the engine and carries the coal that fuels the engine.


For completeness the fourth derivative is called ‘snap’ (or ‘jounce’), the fifth is called ‘crackle’ and the sixth … of course … ‘pop’.


An even better measure would be something like total export revenue earned or total tax paid.


For example, in a 2011 NZTE put out a press release “celebrating” that over the previous 10 years they had funded 250 companies via incubators, of which 177 were still operating, and who had collectively paid $45m in PAYE and GST over that time. They didn’t say how much funding has been provided to achieve that result.

Sadly this bit didn’t age so well:

In 2001 we started with four incubators … All have been incredibly successful, with PowerHouse Ventures named the 2011 NBIA Incubation Innovation of the Year and the Asian Incubator of the Year in 2009.

It would be fascinating to see an update to these numbers with the benefit of another ten years.


All of these questions are heavily inspired by the ideas generously shared by Laura Hattendorf & Kevin Starr at Mulago Foundation.

They have spent more time than most thinking deeply about impact investment and how to identify and invest in the highest impact giving opportunities.

If you're interested in this, I recommend you start with the “What we look for?” section of Mulago’s “How we fund?” website - which identifies three things:

  1. A priority problem;

  2. A scalable solution; and

  3. An organisation that can deliver.

Kevin's PopTech talk from 2011, which explains all of these ideas in the context of their philanthropic work is one I’ve referenced many times over the years and recommend it to anybody who is working on a start-up derivative now: