3 Lessons from the Kiwi Tech Revolution

Kiwi technology startups have reached a tipping point. In everything from rockets to Saas software, the tech tinkerers that used to hide away in their garden sheds are striding out proudly, building big companies, and taking their place on the world stage.

I recently returned from a research trip to New Zealand. I was fortunate to be able to meet with CEOs, founders, CTOs, angel investing groups, and major private investors. Those meetings demonstrated the revolution that is happening in kiwi technology businesses.

From Sheds to Startups

New Zealand has a proud history of resourcefulness and ingenuity. The country sits in a remote corner of the South Pacific. If something wasn’t working, generations of kiwis took it upon themselves to fix it. If you did not grow up in New Zealand it is entirely possible that you are completely unaware of this. But for those of us who did, New Zealand’s list of innovations, from splitting the atom, to the jet boat, to the electric fence, has been hammered in to our brains since before we were old enough to bungy.

New Zealand might have been a nation of backyard tinkerers. But most inventions never became businesses. There was a culture of innovation and invention, but little commercialisation.  

A few years ago that began to change. TradeMe’s sale in 2006 was a seminal moment (for Australians, imagine one business that combines Gumtree, REA Group, Carsales, and Seek all in to one). A business started in 1999 was sold for $NZ750 million to Fairfax just seven years later. Kiwi entrepreneurs began to realise that they could build a big technology business too.

3 Key Lessons From Xero’s Big Win

If Trademe unlocked the door to New Zealand’s tech success, Xero knocked it off its hinges. The cloud accounting software company’s founder, Rod Drury, was a technology veteran. Before starting Xero he had already created and sold two software companies (Glazier Systems: $7.5 million, Aftermail: US$45 million). This time was going to be different. This time he wasn’t going to sell, he was going to take on the giants at their own game.

Today, thirteen years after founding, Xero has over one million small business customers, and a market cap of over $6 billion.

Xero had three major impacts on the NZ tech scene. First, it demonstrated that to build a massive global company required a new skill-set: sales and marketing. Second, it raised the bar. Kiwi entrepreneurs now aimed to build global scale businesses themselves. Third, the wealth created for early investors, and the skills developed along the way, meant that there was a new group of sophisticated technology investors. 

Lesson #1: The Power of Story

“Our only option really was to tell a big story, and explode early from day one” — Rod Drury

Xero developed some pretty great cloud accounting software. But Xero’s biggest innovation wasn’t their tech, it was their sales and marketing strategy. Xero turned accountants in to raving fans.

Accountants could see how much easier Xero made their lives, and so they pushed their small business customers to sign up. Xero brought them in on the deal, with accountants effectively earning a cut of the monthly Xero subscription. It was a masterstroke. Xero invested heavily in the relationship, developing new features to make sure that accountants remained the company’s biggest cheerleaders.

Pushpay, a payments and engagement software company for the faith sector is another kiwi success story that understood the power of sales. Pushpay’s technology was highly innovative, but it was their sales team that really drove their success over the past few years. In just eight years the company has gone from an idea, to processing over US$4 billion of donations annually, and with 55 of the 100 largest U.S. churches as customers. That was only possible because the company developed a sophisticated sales and marketing process.

New Zealand’s culture of humility means that selling is an underdeveloped skill set for many businesses. But companies miss this lesson at their peril.

One small publicly listed software company that I met with had been close to running out of cash after multiple failed sales strategies. The original founder had wasted millions on ineffective international sales teams that did little more than book meetings. A new CEO has stepped in and is currently rebuilding the business, and the marketing process, on a surer footing. I am watching with interest.

Lesson #2: Think Global, Scale Global

It used to be that kiwi tech startups would only think about international sales once they had exhausted their local opportunities. Today the best New Zealand tech companies are global from inception.

But thinking global is only half the story. Companies can’t be everywhere, so they must pick a few key markets, and ensure they scale up aggressively there before then expanding further. That means delivering on customer needs, and building depth in every geography you enter.

Xero serves customers in dozens of countries, but focuses on just three major markets: Australasia, the UK, and the U.S. Pushpay similarly realised early on that there isn’t enough large churches in New Zealand and Australia to reach their ambitions. The company set up their headquarters in Seattle, and built an efficient U.S. sales machine that employs hundreds.

When companies lack a scalable sales and marketing process, thinking too big can actually be a trap.

I met with the very smart founders of kiwi tech startup StretchSense. The company develops sensors that can be stitched into clothing to measure body movement – with fascinating applications for everything from precise Virtual Reality gloves, to biomechanical measurement. Early in its life StretchSense had won a major contract with a Japanese retail giant to develop a suit which gave customers exact body measurements to check if products bought online would fit them.

The agreement would have valued the company at over $100 million. But the demand was vastly greater than the small startup was able to deliver. The deal eventually fell through, and StretchSense had to lay off 140 staff. The company pivoted quickly and has been able to rebuild with a new business model, but the near-death experience highlights the lesson: think global, scale global.

Lesson #3: Sign up Sophisticated Tech Investors

Early in its journey Xero was able to secure investment from billionaire, and Silicon Valley legend, Peter Thiel. That stamp of approval put Xero on the map and attracted both top talent and further capital. Rocket Lab followed a similar strategy, heading straight to Silicon Valley to fund the business, and attracting one of the world’s leading venture capital firms, Khosla Ventures.

For a long time New Zealand struggled with a lack of experienced technology investors. But today’s tech success is creating a virtuous cycle. The wealth created by early investors in Trademe, Xero, Pushpay, and other startups, and the skills developed on the ride, mean that there is now a growing pool of skilled and wealthy technology investors.

As these investors gain experience from multiple technology investments, the companies they invest in are able to benefit from this accumulated knowledge. Taking one example, the Huljich family have had a string of successful technology investments from pre-IPO all the way through to multi-million dollar exits. They have invested in several Saas software successes, from Diligent, to Pushpay, and recently Valocity. Other early investors in Pushpay such as the Bhatnagar family have likewise gone on to fund further tech startups. These sophisticated technology investors thereby ensure that lessons are passed on from one generation of startups to the next.

Conclusion

The Kiwi tech ecosystem has reached an inflection point. Pioneers like Xero have pointed the way, and a new generation of startups are striking forth on to the world stage. Kiwi tech companies are taking on the world by understanding the power of story, the need to scale globally, and the value of attracting sophisticated technology investors. The revolution is fun to watch, and with most of the world still to pay attention, a lucrative place to find new investment opportunities.

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Rocket Lab: The Kiwis winning the new Space Race

The world changed on Sunday afternoon.

“There are two private companies in the history of this planet that have been to orbit and it’s Space X and it’s Rocket Lab and that’s it.” — Peter Beck, Rocket Lab Founder and CEO

From a remote peninsula on the East Coast of New Zealand, Rocket Lab launched its second commercial rocket into space, carrying spacecraft for NASA. By this time next year Rocket Lab is planning to launch a new rocket to space every week.

Transport to space, space, is about to become as regular and reliable as a flight to Bali. Earth’s next trillion dollar industry has just started, and a company launching out of New Zealand is leading the charge. Not only that, Rocket Lab is doing this with a rocket, the Electron, that is a fraction of the size of Space X’s monstrous Falcon Heavy:


(Source: The Economist)

You’re probably wondering how little Rocket Lab can possibly compete with the gargantuan Space X?

I was curious too. I dug into the economics of the launch vehicles, micro-satellites and the industry itself. I was also fortunate enough to be able to interview Rocket Lab’s Founder and CEO Peter Beck. The answer involves cutting edge technology, deeply customer-centric design, and more than a dash of Kiwi ingenuity.

Space Economics

Rocket Lab’s level of technical innovation has been incredible. But it is their economics that are about to change the world.

Return on an investment always matters, and space is no exception. In 1969 humankind set foot on the Moon for the first time. Three years later, we set foot on the moon for the last time. How is that possible? Forty-six years have passed since and… nothing. Why? Economics.

We could technologically go to the Moon in the Sixties. However that exploration came at a cost: at its peak the U.S. government was spending over 4% of its entire Federal budget on the space program. And with little return to show for it, aside from bragging rights.

Today’s Space 2.0 revolution is about space travel being possible not just technologically but economically.

Rocket Lab is at the forefront. The company has adopted a recursive cycle of continuous improvement that is putting daylight between it and its competitors. Let’s call it Rocket Lab’s Cost-Frequency Flywheel:

#1: Cost minimisation

“I started with one piece of paper and on that piece of paper it had two requirements. Must be affordable. Must launch weekly. And everything has been driven by those two requirements.” — Peter Beck

Every part of the Electron has been designed for regular and reliable space transport. The result is a rocket system that looks strikingly different to other rockets. First of all, it’s small. The Electron stands just 16 metres tall, compared to the 70 metre tall Falcon Heavy. Rocket Lab has very intentionally decided to serve the small space craft market and has zero intention to ever build a bigger rocket.

When Peter Beck created Rocket Lab, he could see the future, and the future was small:

“The big geobirds [large geo-stationary satellites] are declining. And you’ve got Space X and Ariane, ULA all competing for those big geobirds. But if you look at what’s happening in the Lower Earth Orbit market, in the small spacecraft market, it’s 200% growth year on year on year. And it’s something like 2,500 spacecraft that need to launch in the next few years. So the real needlemover in the industry is frequency. That is what is going to fundamentally change the way we use space and ultimately, life on Earth.

Technology is on a continual path of miniaturisation. If you need a reminder, look at the smartphone on your desk (or that is buzzing away in your hand right now because you’re as tech-addicted as the rest of us) and compare it to the lounge-full of equipment that this cool dude used to need to do the same job:

Peter Beck saw the same trend happening in spacecraft and built his company around it:

“For me it was always very obvious that spacecraft were going to shrink. When you analyse what is in a spacecraft there is a bunch of electronics, batteries, solar panels, and a sensor. And all of those things are on rapid trajectories either down in size or up in performance…Their limiting factor and enabler for that future was the ability to get those spacecraft up in orbit regularly, affordably and frequently.”

Many of the new generation of spacecraft are much smaller than Rocket Lab’s lift capacity of 150kg. These micro-satellites are known as Cubesats. One ‘Cubesat unit’ (1U) is a tiny satellite that can fit within a 10cm cube. A larger cubesat could be 10U or 20U large.

Rocket Lab is taking bookings for cubesats of all sizes, with one rocket ride containing up to 82U. Don’t let their small size fool you, these micro-satellites punch above their weight. For example, NASA is currently planning for a cubesat with an ion-thruster that will self-propel all the way to Mars.

Focusing on small spacecraft mean the rockets themselves can be smaller. Smaller rockets means less complexity, higher reliability, easier mass-manufacture, and ultimately lower cost.

(Inside Rocket Lab’s Auckland factory. Source: The Everyday Astronaut)

Rocket Lab also sought to align its cost base with humanity’s relentless march of technological progress. As Peter Beck explained:

“We stood back and said well what are the technologies that are either going to reduce in cost or improve in performance. Composites is one of them. 3D printing is another one. And batteries is another one. So there is no coincidence why a lot of the solutions we have chosen align with the trajectories of those either materials or technologies.”


(Source: The Economist)

The Electron contains the world’s first battery-powered rocket engine. Traditionally the main fuel of a rocket (liquid oxygen and kerosene) is mixed together by a gas-powered rocket engine. But those gas powered engines are complex and expensive. Although the industry thought it impossible at the time, Rocket Lab was able to make a battery-powered engine work.

Rocket Lab thereby aligned itself with the rapid decline in battery prices, and equally rapid increase in battery efficiency. Every decline in battery costs, and reduction in battery weight means lower launch costs for Rocket Lab.

ELaNa19-engines-Photo-credit-Brady-Kenniston

(Full thrust. Photo credit: Brady Kenniston)

The company’s Rutherford rocket engine is also the first oxygen/hydrocarbon engine to use 3D printing for all primary components. 3D printing meant Rocket Lab’s engineers were able to create complex but lightweight structures that would have been impossible to achieve using traditional techniques.


(Rocket Lab’s Rutherford Engine)

3D printing reduced the build time from months to days, and significantly lowered costs. As Peter Beck explained:

“The way we have designed the vehicle, it’s designed for manufacture. So while we use very expensive and exotic materials such as carbon fibre, and inconel superalloys and things like that, we don’t use very much of them. And the processes that we use, like the 3D printing of the rocket engines, means that while the material itself is very expensive, because we 3D print them, there is no wastage in the material. It’s additive manufacturing rather than subtractive manufacturing.”

Aside from its size, the other striking feature of the Electron rocket is that it is black. That’s not a nod to the All Blacks (although I might like to pretend). It is because Rocket Lab has pioneered the use of carbon fibre as the primary structural material. For those keeping score at home that is three world firsts in one little rocket.

ELaNa19-liftoff-Photo-credit-Trevor-Mahlmann

(Liftoff. Photo credit: Trevor Mahlmann)

Using carbon fibre was immensely technically challenging. Rocket Lab was helped by New Zealand’s world leading carbon fibre industry. The same one that builds America’s Cup yachts. Using carbon fibre means that the Electron rocket is far lighter, stronger, and crucially much easier to mass-produce.

All of these innovations add up to significant cost savings. A single Cubesat slot can be purchased for as little as US$80,000, while an entire mission starts from US$5.7 million. Those prices mean that access to space is now affordable for even the smallest startups.

As a private company Rocket Lab keeps its financials, well, private. However, I estimate that its marginal costs are likely to be a fraction of the sticker price. The company expects to be at cash flow break even shortly, even with just a few launches under its belt. I expect Rocket Lab to gush cash once it hits scale because most of its costs (engineers, launch facilities) are fixed, and its marginal costs continue to decline. Which brings us to the second secret of Rocket Lab’s success: launch frequency.

#2: Launch Frequency

Rocket Lab’s greatest competitive advantage is the frequency and flexibility of its launch schedule. It is incredibly valuable to customers, but also something that its much larger competitors will struggle to achieve.

“The launch regularly bit is the bit that everybody misses. So the reason why we have operations in New Zealand is because of the launch site. Every time you launch a rocket you delay national air travel. When Elon’s Falcon Heavy flew earlier in the year, there were 562 commercial air flights that were delayed or cancelled.

The East Coast of New Zealand is a beautiful place. But the reason Rocket Lab is based there is not the unspoiled coastal vistas, or the proximity to Hobbiton. It’s the huge flexibility of launch windows. Rocket Lab can launch regularly and with the widest range of orbital inclinations of any launch site in the world. All thanks to the limited aircraft and marine traffic. In fact, while the entire United States only managed to launch 26 rockets in 2017, Rocket Lab has approval from the New Zealand government to launch a new rocket every 72 hours.

Still-Testing-8

(Launch Complex 1: Mahia Peninsula)

That frequency and flexibility of launch allows customers to precisely plan when and where their spacecraft will enter Earth’s orbit. The orbit determines how fast the satellite travels, which part of the Earth the satellite passes over each day, and what time of day the pass-over occurs. It’s not much point building a mesh network of communication satellites if they’re all circling the Earth on random trajectories.

F4-NASA-Fairingfall-1

(Fairing separation. Source: Rocket Lab)

This launch control is the primary consideration for Rocket Lab’s customers as Peter explained:

“It’s control of destination and timeline. That’s the number one thing. ‘I’m going to this orbit on this day’ because that’s one thing that [traditional] rideshare can never offer. Because you just don’t know where you are going to go, when you are going to go”

#3: Flywheel effect

Rocket Lab’s low cost and high launch frequency are powerful in isolation. But it is the way that each positively reinforces the other that provides Rocket Lab’s moat. Lower costs mean that more customers can afford to launch more rockets, which provides the cash to fund higher launch frequency.

Increased launch frequency allows Rocket Lab to continuously iterate new innovations, and to achieve greater scale of rocket production. Both of those lead to lower costs. Those lower costs lead to greater demand. Which increases launch frequency. Which lowers costs. And the flywheel spins ever faster.

Peter Beck describes Rocket Lab as not being in a rush to launch one rocket, but rushing to launch one-hundred rockets.

The easy thing to do would be to just say ok, let’s just build a launch site in the U.S. and live with one [launch] a month, and we’ll work out how to get frequency later. We didn’t do that.

Rocket Lab took the pain of heavy investment up front, whenever it would result in better performance later on. It meant taking the time to develop multiple world-first technologies; building their own private launch facility and monitoring stations; and going through the regulatory burden of getting U.S. government approval for the export of sensitive rocket technology to a foreign country. As Peter Beck describes it:

“Owning that infrastructure is a key element because we have complete control over our launch windows, we have complete control over, basically everything… I tell everybody that Rocket Lab is a third the rocket, a third regulatory, and third infrastructure. And the infrastructure and regulatory bit aren’t as romantic and sexy like a rocket, but they are actually more the enablers than the rocket itself.”

If that long-term strategy sounds familiar, it is the same relentless approach that has been the cornerstone of Amazon’s success globally. The strategy is summed up by Amazon’s founder Jeff Bezos in the motto: ‘step by step, ferociously’.

Despite its smaller size, Rocket Lab can offer its customers the same price as a rideshare on a much larger rocket. And thanks to the flywheel effect, that cost is continuously falling. Plus, Rocket Lab provides a level of precision that rideshare will never be able to match. Combining low cost and vastly better service is a customer value proposition that is tough to beat – just ask Amazon’s competitors.

The first email

Rocket Lab’s success to date has been awe-inspiring. But speaking with Peter Beck, it’s clear that the company is just getting started:

“It’s a super exciting time in space right now when you think about it. The best way I try to explain it to people is go back to when the Internet was brand new and somebody had just sent their first email. If you went and sat beside that person at that time who sent the first email and explained to them all of the things the Internet was going to create it would largely seem like fantasy. With space, we have just sent that first email.

Rocket Lab is doing far more than holding its own in this new space race. In fact, when it comes to the hyper-growth small-satellite segment, Rocket Lab has so many competitive advantages that we may actually have the question backwards. We shouldn’t be asking if Rocket Lab will be able to compete with SpaceX.

We should be asking whether SpaceX can compete with Rocket Lab.

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