Member log in

NextWindow - another Kiwi tech gutted after offshore sale

For staff of companies like Navman and The Hyperfactory it's a familiar story. A hot NZ technology company is sold to offshore buyers, with its founder pledging jobs will stay in New Zealand - only for that promise to melt away as the new owners take control.

The latest casualty is NextWindow, a company whose revenue hit $60 million+ as it supplied touchscreen technology to PC makers like HP, Asus and Lenovo.

The recipient of a $6 million, no-strings government grant is gutting its local office, a source close to the situation tells NBR ONLINE.

Layoffs will see 11 staff left in NextWindow's Auckland office, which at the time of its 2010 takeover by Canadian company Smart Technologies housed around seven times that number.

Powerbyproxi leases space in the same building. CEO Greg Cross tells NBR his company has already taken over space vacated by NextWindow.

NBR left a message with NextWindow managing director Brian Ryan (ironically, a Navman veteran). The following reply was sent through a PR company:

NextWindow Limited has been a leading supplier of optical touch technology and touch-screen components to electronics manufacturers.

Global demand for these products is rapidly declining, and the company is taking a pro-active approach to address these market realities. NextWindow is therefore examining a proposed restructure of the business to manage costs in line with revenues in order to sustain global operations and continue to meet customer requirements.

Employees have been advised regarding a proposed restructuring of the business. NextWindow is working through a well-defined consultation process with staff.

When the Auckland company was sold to Canada's Smart Technologies in 2010, founder and CEO Al Monro (pictured) told NBR NetWindow had 120 staff worldwide, including 75 in New Zealand.

With annual revenue hitting $40 million, Mr Monro had recently leased extra space in NextWindow's building to accommodate anticipated extra staff.

“Our new owners were aware of that and supportive of that; I think there’s a strong commitment to grow the business here,” said Mr Munro.

Mr Monro was passionate and genuine in his belief that Smart Technologies should grow the local operation. But of course he was no longer in charge of the company's destiny. Smart Technologies is listed on the Nasdaq, and its board answers to shareholders.

In May 2012, NBR revealed Mr Monro was quitting Next Window (he left in December, 2012). Smart Technologies CEO Nancy Knowlton flew in to reassure NextWindow’s staff as Mr Monro’s departure was officially announced and McKinsay was retained to "undertake a deep strategic review."
 
The situation is nuanced. 
 
Even as NextWindow ranked third on the Deloitte Fast 50 in 2009, Mr Munro's mood a Deloitte announcement function was downbeat. He told NBR he was frustrated. He had tried to raise capital locally, but with no takers he had had no choice but to take on Kuwaiti investors.
 
And the Smart Technologies takeover had a dark genesis, with the sale resolving a patent spat between NextWindow and the far larger Smart Technologies, which had revenue of $US2 billion at the time of the takeover (read NextWindow admired buyer ‘until they sued us).
 
As anyone who's gone near a personal computing device in the past couple of years knows, touchscreen technology is booming.
 
But NextWindow, with its technology that is best-suited to larger displays has managed to miss the boat. 
 
According to the latest TIN100 report, its 2013 revenue catered to $27.4 million. But although it's partly a matter of cutting back due to market setbacks, NBR's source close to NextWindow says some R&D functions are being consolidated into Smart Technologies' main operation in Canada.
 
The insider noted that production staff in Asia were untouched by the restructure - perhaps an indication the market is not slowing down. The source adds, "Windows 8 was a flop and capacitive touch is getting bigger and cheaper so the market has cooled, but not that much."
 
Re-opening wounds
The NextWindow sale will reanimate debate in several areas.
 
One, why so many Kiwi tech startups reach a certain size (usually around $20 million to $30 million revenue), then get offshore - usually to Americans (see story links top right).
 
Two, why so many technology companies are being lost to NZ control full-stop. The TIN100 report ranks our 100 largest technology companies by revenue. Since 2010, 20 have been sold offshore.
 
Three, whether the government should make a company pay back an R&D grant after a sale. Orion Health boss Ian McCrae (whose company has received somewhere north of $8 million in direct grants) tells NBR this should be the case. Entrepreneur Sam Morgan says it would be better if the Crown had "some skin in the game," buying equity rather than ladeling out grants - and that's a big question given the government earmarked $321 million for its Technology Development Grants scheme. Should a future program have more strings attached?
 
Economic Development Minister Steven Joyce has defended the government's current scheme, however - notably in a December 2012 Twitter war with Endace founding CEO and shareholder Selwyn Pellett, as the network security company was sold to US outfit Emulex for $156 million.
 
NBR debriefed Messrs Joyce and Pelllett after their flame war.
 
Although he personally profited from Endace's sale to Emulex, Mr Pellett told NBR, "I remain unhappy about taxpayers' previous R&D investment in Endace now being put in the hands of shareholders (including myself) via the sales process without compensation to taxpayers.  It's an issue that needs addressing in a country strapped for R&D funding,” 
 
Mr Joyce told NBR the grants are about drawing research and development activity to New Zealand. The $6 million was given to NextWindow at a time when the government was aware its sale to Smart Technologies was going through. Like other grant recipients, it had to match government funding. He would happily give an R&D grant to a foreign company that had never had any NZ ties if it was willing to bring R&D activity to NZ. He said there was a separate vehicle - NZVIF - for directly investing in startups.
 
And it should also be noted that not every off-shore sale goes badly. Navman (now owned by Taiwan's Mitac) is the poster child for things going south, with the GPS company's Auckland staff being culled from more than 500 to a recent 37 (there's also a few dozen working for fleet management spin-off Navman Wireless, majority-owed by US interests).
 
But others have prospered. Notably 3D visualisation software company Right Hemisphere, whose Auckland staff have been expanded since it became part of German multinational software company SAP. And while fleeting tracking technology company Telogis' ownership, intellectual property and profits are now all a Californian concern, the fast-growing company says it is doubling staff in Christchurch over the next year to 300. Trade Me founder Sam Morgan sold out to Australia's Fairfax, but has reinvested a lot of his money back into Kiwi startups, including Vend and SLI (although ironically another company he poured some of his Trade Me cash into, Sonar6, was in turn sold offshore, repeating the cycle).
 
And Trade Me itself has returned home, to a fashion, by listing on the NZX.
 
And being listed on the local stock exchange is surely an incentive for hot tech companies like Xero, SLI Systems and Wynyard Group to keep most of their operations in NZ. All of their CEOs hold deep and genuine beliefs that that's the right thing to do. But then again, if Xero lists on the Nasdaq - which it's opening eyeing - or a moneybags buyer comes knocking, things are more up in-the-air. Mr Drury, like any CEO, will have to weigh shareholders' interests.
 
The Endace situation will be an interesting one to watch. 
 
Emulex CEO Jim McCluney met with Mr Joyce as the sale was announced, and gave verbal reassurances about keeping R&D activity in NZ. And he told NBR his company will keep 190 or so Endace employees in New Zealand (most Endace R&D staff are in Hamilton - a function of the fact its network monitoring technology grew out of research at Waikato University).
 
But he stopped short of contractually committing to keep R&D work onshore, or making any type of formal commitment.
 
Let's see if the American CEO stays good to his promise. 

Or if the current government, or a future one, thinks of a why of keeping our hot tech startups in Kiwi ownership.

ckeall@nbr.co.nz

More by this author

Comments and questions
37

"The recipient of a $6 million, no-strings government grant is gutting its local office, a source close to the situation tells NBR ONLINE."

Wise up New Zealand. Those million dollar govt. grants should now come with strings attached. Very tight ones.

And as the current fixation with angel investing continues, the same will happen again and again and again.

Any thing the Government gets $$$$ involved in,
is always a COCK UP
It not their own money they are playing with
Just the sucker NZ TAX PAYERS ###

Layoffs would have occurred whether it was NZ owned or offshore owned. What is a company supposed to do if its market is crashing - sit around and wait until it is bankrupt? The answer doesn't change who owns it.

Spot on.

Of more interest is Al Monro's disenchantment that none of the geniuses dishing out millions of taxpayer funds via NZVIF would back him so the Kuwaitis made the money instead.

But as long as companies can't raise capital in NZ, i.e., NZers won't buy shares, the owners must either stagnate, or look overseas.

Absolutely correct !!! This country, the NZTE and the few investors of any significance have to wake up before Silicon Valley builds a 4 lane highway direct into NZ.

Clearly there should be some obligation to claw back a grant in the event of a sale; govt should take note and fix.
paleo

Sam Morgan is right. The government should get an equity stake for the grants given. Then if the company is successful the government gets a return and can use this to help with funding of other promising start-ups. To give out money no strings attached is not a good business model.
If they have equity in the game they can also have some say in whether the company gets flogged off overseas for a quick buck or not also.

Yes but, how much tax did this company earn NZ whilst it was here? Also dont forget the little issue of NZ not having capital gains tax...

Yes but, how much tax did this company earn NZ whilst it was here? Also dont forget the little issue of NZ not having capital gains tax...

Sad to see these turncoat NZers take grants then sell out. They should have to pay back the grants from the sales proceeds as a start.

Unfortunately many of the comments made with respect to "what happened to Navman" are wildly inaccurate. These days I try to say out of the media and just get on with "building my own companies" but after seeing so many comments that are simply not true I thought it time someone provided a different point of view on R&D grants, why so many companies are being sold off shore and if this is actually such a bad thing?

First of all Navman. Over the fifteen odd years we ran the company we would have had more than $2m in R&D grants. The grant to develop the PND business was $1m but by the time we sold the company we were employing more than 500 staff including 150 engineers and we had racked up total exports well in excess of $750m. So if you look at the PAYE, GST and export receipts we generated NZ Inc ( you tax payers) got an incredible return. We sent staff to University at our cost, we ran English classes for our fantastic multi cultural staff and we provided opportunities for our staff to do their OE while working for the company.
We completed the sale to Brunswick in 2005. They then broke up the company up and sold the car navigation to MITAC of Taiwan (revenue $3b) , the marine division to Navico and the Fleet tracking business to a group of staff with a USA fund to back an MBO. So six years have passed since then. Mitac went on to acquire Magellan USA and the navigation team here in NZ is still developing navigation software with a team of more than 40 engineers still in Northcote. Navico, owned by Altor Private Equity, acquired Navman, Lowrance, Simrad, Brookes and Gatehouse and Northstar Inc to create the largest leisure marine company in the world. Albany is now the global R&D centre with more than 100 engineers employed. Navman Wireless was sold again recently for US$250m and still employs engineers and a sales and marketing team here in NZ.
NZ Inc is still getting a great return on the $2m of R&D grants made to Navman. The people who "rabbit on" about these grants needing to be repaid should understand that the world is full of countries who offer way better grants than NZ offer. Take a look at Singapore. In 2006 Navman was we awarded a $7m grant for the Singapore Government. They also have a tax rate of 20%. There were plenty of reasons for Brunswick to move the HQ of the company but at the end of the day they didnt.

So why do so many companies get sold offshore. The main reason is that we do not have a well developed private equity / venture capital structure in NZ. In offshore markets you can start with incubation money, move to early stage VCs and then on to expansion stage VCs and later to private equity or pension funds of an IPO. We have some small amount of incubation money, we have couple of funds doing early stage VC ($250k to $1m) but almost NO expansion stage VCs at all. We do have a couple of late stage funds who want to invest in mature companies where the founders may be selling. Milford has money but they will ONLY invest if you are prepared to IPO in NZ, in my view a fate worse than death, due to the lack of liquidity and lack of funds who understand "tech" in this market. If you run a VC fund in NZ you MUST look at how you are going to exit and provide a return to your investors so the conversation at the time of investment tends to focus on the possible exit in 3 to 5 years. Just to give you an example of how bad this situation is I have been trying to attract VC money for one of my own companies Fusion Electronics. Revenue this year will be $30m+ and the company is profitable. We havent even managed to attract an offer of investment let alone have a discussion on value. We do have several offshore based entities wanting to buy the company so all we can do is use our own money which limits the rate of growth. This experience is not unusual. I have other friends in the same boat and the solution is always the same... you go offshore for the money where you get a lot more investors, better valuations but ultimately you will likely end up with an offshore exit.

So is selling companies offshore such a bad thing? The answer is NO. The more we start and the more we sell the more we build up experience on how the whole game works. We will also end up with more crazy people like me who put the money back on the table again. If we do this enough we will attract offshore VCs to NZ to partner with local operators. The VC market here today is pretty well non existient so we need to attract more funds here who have good paths to market. Should we give grant money to companies who fully intend to exit offshore with no strings attached? In my opinion the answer is YES! We need to do everything we can to encourage Kiwis to have a crack at a start up. We desperately need XERO to succeed as the funding model they have used is the best example we have on how to really scale a company into a global market. Even if this company gets gobbled up by Google it will still be a roaring success because its putting NZ on the map and giving other Kiwi companies something to aspire too and a good model to copy.

What can the Government do? Right now VIF only provides assistance to funds for incubation or early stage investment, up to say $1m per deal. What we need to do is extend this so e can attract more money into the expansion stage funding, typically $3 - $5m deals. This is where NZ Inc will get the biggest bang for the buck and companies looking for $5m are normally over the "teething stage" and more likely to move to rapid growth. We need lots of $100m companies, not thousands of $5m companies.

Peter

While I agree that the Government got back its money in terms of general taxes and spending by your employees, what is wrong in putting the (small amount) money you got from the government back into the pot when you sold out. Even voluntarily.

It might not be big money for you, but the government sets aside only a limited grant money pool. Wouldn't you want to see some other entrepreneurs get it to see if they can make something with it too?

Mr Maire - what an extraordinary and enlightening commentary - Thank you !
Deserves a topic heading in its own right.

Peter!
I have followed the growth of your company with some interest over the years. Sadly the lack of capital in NZ has seen NAVMAN exit off shore.
This situation with entrepreneurial companies, set up by people such as yourself, will continue until such time as at least 75 % of the NZ voting population realise that this country is over-socialised, and grow up out of their 'Tall Poppy envy' mind-set.
Judging from the majority of the comments that I read in the NBR blogs, I will be waiting a long time to witness such a change.

If a company gets a $6M grant which increases its net asset value by $6M, then that company sells to an offshore buyer, the seller has effectively pocketed the $6M + the return on capital of $6M since the grant was received. That's the cold math behind it. And then there is the social cost of NZ employees getting canned after the merger/acquisition so the acquirer makes its money by cutting out duplicated labour while receiving the new revenue stream of the acquire.

There are a lot of venture capitalists in Australia willing to throw money at NZ firms with potential e.g. Macquarie Bank, Lazard, Quadrant. That there is no VC money available in this neck of the woods, as reason for selling, seems strange.

In my experience you are wrong, there are plenty of Private Equity firms from Australia that will invest in New Zealand, but at the venture capital end of the market - which Peter is discussing - other than a few biotech deals done by one investor there is very limited if any VC activity from Australia. Macquarie, Lazard and Quadrant as far as I can tell are Private Equity firms - very different stage of the market.

great explanation, cheers

Peter - what about the profits and employment opportunities lost to new offshore owners who simply steal our IP?

And are you suggesting that investors are only interested in capital gain versus ongoing ROI?

Thanks for taking the time to share your knowledge and experience. There are probably quite a few NZ's that might be interested in participating in your venture, but as most of us don't have big dollars we will not get an opportunity.
The only opportunity many NZ's get is after the ventures list often at highly inflated prices from day one and then lots of the little investors can end up getting burnt and turned off, and go back to the safety of unproductive investing, namely housing.
If more could get in at the earlier levels and experience success and wealth creation from something productive to NZ then this would create in turn create more enthusiasm and more money in NZ for this type of investment.

If we didn't have a govt 'picking winners' with tax money we could have low tax like the 20% Singapore has - and therefore these companies wouldn't go offshore. Supporting these handouts is just dumb.

Peter's observations about the lack of capital at the venture end is absoutely right. This has been a failure by the NZVIF.

It is however interesting that in another article on the eco-system recently posted Andy Hamilton of the Ice House says there are no major issues with capital in NZ.

I wonder who is out of touch with the real world - not Peter in my view.

Thanks Peter, great to read informed comment from someone who has been there done that. Thanks for taking the time to try and educate and informed those who haven't.

R&D grants don't end up in the pockets of the owners, offshore or local. They get paid to the people who are DOING the work ie researching and developing the opportunity that has been identified. Sometimes it works and the opportunity is developed and something better results and then sometimes the Kiwi owners end up better off.

And while that is going on the Kiwi employees get paid, a portion of that goes to the Govt as taxes (ie the rest of us). The company keeps paying rent here, pays for electricity and cleaners and phones and milk and coffee and toilet paper, and all that activity generates jobs for Kiwis. Sure some of the profits may go overseas, why is that a bad thing? I've lived and worked overseas and want my children to have the opportunity to do the same. "Overseas" is good, somewhere to visit so we can really appreciate how good we have it here.

Those against overseas ownership would all turn down a higher offer from an overseas buyer if they wanted to sell their house, Yeah Right.

Xenophobia is ugly.

The day-to-day money for R&D goes to the people who carry it, but the value it adds to the company goes to shareholders.

I'm all for foreign investment in a company for capital, skill and access to international markets.
 
But let's not be chumps about how taxpayer funds are invested to build tech companies - a category where firms are often sold in part or whole offshore.
 
The govt's $321m R&D grant scheme is just not well thought out. It's good the govt wants to bring more research and development in NZ, by international or NZ players, but at the end of the day its about using Crown funds to foster local companies. If a company wants to sell itself offshore, fine. They should be free to pursue the investment course they feel is right for their company, or simply reap a reward for their risk. But there should be a provision to pay the taxpayer money back. Or the Crown should invest in the form of equity so it's paid back as the new owner buys its shares.
 
Xenophobia is a factor NZ.
 
But it only seems to raise its ugly head when "real" elements like homes or land are involved. The Crafar Farms sale sparked an intensely emotional debate (read: On the Crafar Farms and what really makes us strong), But there was barely a ripple when Haier took control of F&P and its intellectual property, or Yashili made a $212m milk processing play.

How very typical of what is now happening all over the country. New Zealand and New Zealanders are being sold out.

And of course this isn't just happening in the high-tech area. Farmland covering an area greater than the size of Christchurch has also now been sold to overseas buyers.

The sell-out of New Zealand was well-foreseen - and it is our own fault if we do not hold this government accountable - and for the fact the the OIO has no mandate whatsoever to consider the detrimentmental effects to New Zealanders by any handover of our farmland to overseas interests.

Shockingly, and deliberately, the OIO is mandated only to consider the possible advantages - which, regularly never accrue... Promises which are never followed up on.

New Zealanders are being treated like idiots - controlled by a political oligarchy headed by determined leaders.

The most successful democracy in the world, Switzerland, would never put up this sort of serfdom.

I support the very timely 100 Days movement - as the only practical way controlling politicians in future. Check it out.

This is a politically motivated statement that just doesn't recognise that NZ lacks a savings and investment habit beyond housing. You can't just blame the current government. It is has been going on for decades under all governments. People want to sell their houses to whomever they like. why shouldn't farmers and business owners have the same right to sell to whomever they like?

Why do you think we have the Overseas Investment Office? There is also the small matter of business ethics to consider, particularly when a takeover leads to redundancies.

Rather than give out grants, why doesn't the government implement an R&D tax write off??

This way all businesses in NZ benefit, not just a select few who get grants.

Australia is doing this. I know software guys over there getting 50% of their R&D back again.

its a pity it couldn't have brought to the nzx so local investors had a chance to put money in maybe the jobs could have stayed here

It's a pity the NZX doesn't have enough investors who would understand the value of it and be prepared to invest in it.

Remember all those years of financial advisers who refused to even look at Xero?

Well written article (which does actually make the point that Peter Maire hammers home to commenters)

These guys that lose their jobs probably won't be lining up for the dole, so what's the problem? Change is good.

The NextWindow insider didn't contact NBR because they were being thrown onto the dole queue. There's an NZ and worldwide shortage of staff for skilled tech positions, so none will go jobless (though some might be lost to NZ).

It was because they were mad that a technology company in a hot area - touchscreen technology - which once had 120 staff and $60 million+ turnover - has been lost to NZ. The positions, the intellectual property, the profits - gone, gone, gone.

Hi Chris,

Regarding the Next Window technology; the actual technology and market demand has shifted out from and away from their approach to further advanced capacitive touch screen technology.
The predominant market for them was electronic whiteboards. What they tried and succeeded in, for a while, was the "Smart Displays" for the likes of the 'touch' interface Windows desktops which did not take off - HP was a big win. The user experience was somewhat underwhelming and not as good as the capacitive/resistive touch (traditional) approach. That too was ultimately lower cost than Next Window's. See their explanation if you like http://www.nextwindow.com/optical/comparison.html for their optical approach.
Actually Navman, while I was there, used Next Window in one of its large format Marine products; 10inch Marine PC. I'm pretty sure none of the products today use Next Window.
Why Smart was interested and acquired them is for the electronic whiteboard market where the large 'screen' suits their approach.
Al Munro and others saw the shift in the market coming (my opinion) and the desire from Smart to have them (and settle the Patent issues) and sold at a good time. There is no doubt that if they stayed as they were, independent of Smart, that they would be as shrunken down as they are today due to the market shift in technology.
Sorry to my ex-Navman colleagues who are working there …but I could be wrong!

I think a lot of this discussion forgets one crucial matter: the funds received from the sale are most likely going to be re-invested in more start-ups, aiding more entrepreneurs, and growing both platforms and reasons for New Zealanders to create world class IP here in New Zealand.
Scaling operations to compete across the globe is something that requires very large corporations with exceptionally deep pockets and well established distribution capabilities. These do not generally reside in New Zealand due to our population size, and geographical location.
The government has already announced changes to the way grants will be managed, so that part of the criticism has been partially dealt with. If those opposed to the grants system looked overseas at what other countries are doing to support entrepreneurs and real job growth, they would see that numerous western countries and Singapore continue to fund these efforts both by way of grants and other useful measures. Even within these communities, successful small companies get bought out, so we are not unique in these outcomes, despite our small population. Israeli start ups have the same success stories where multi-nationals acquire the businesses whilst they are relatively young, but capable of huge disruption.
Instead of carping sulking about these great Kiwi success stories, we should celebrate their success, and find other smart ways to encourage what Kiwi's obviously do very well.