Member log in

Steven Joyce in Twitter war with Selwyn Pellett over Endace sale

Former Endace CEO and majority shareholder Selwyn Pellett has received a ticking off on Twitter over his public hand-wringing about the sale of the company.

After receiving two fat government R&D grants (one for $4.4 million, another for $6.7 million), Endace is being sold to US company Emulex.

Mr Pellett - who left Endace's board and sold most of his shares in 2010 - used the social network to say the government should stop giving tech start-ups no-strings-attached R&D money. Instead, the Crown should invest in convertible notes. 

He expanded on his misgivings to NBR ONLINE then, later, the NZ Herald.

This morning, that earned a ticking off from Economic Development Minister Steven Joyce, who tweeted:

The minister added "R & D co-funding is about doing R & D in NZ, not supporting individuals. But happy 4 u 2 repay so we can fund others."

A press secretary for Mr Joyce confirmed to NBR it was indeed his boss on Twitter.

He also confirmed it was Mr Joyce who met with Endace CEO Mike Riley and Emulex CEO Jim McCluney on Wednesday ahead of Emulex's takeover offer being made public on Thursday.

(On a conference call yesterday, Messrs Riley and McCluney said they had met with a cabinet minister and senior government officials, but then came over all secret squirrel, refusing to name anyone at the meeting. The hush-hush approach seems ironic given the Twitter flame war today. Mr Joyce told NBR he had not requested confidentiality.)

Yesterday, Mr Pellett told NBR the deal was good for Endace, and good for investors.

But he was wrestling with his soul over the public funding element.

"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 Pellett told NBR.

Many will roll their eyes that Mr Pellett is both complaining about and benefiting from the deal.

And Mr Joyce is certainly having sport with it.

But the broader question remains: as a string of tech companies go to offshore buyers (Zeacom, Sonar6, NextWindow, Right Hemisphere and EMS-Cortex are others) should there be some strings attached to R&D and other Crown funding? 

Does Mr Pellett's idea of convertible notes have merit (it echoes online comments by Sam Morgan that the Crown should buy shares in start-ups rather than offer them direct grants to it has "skin in the game").

Joyce: no apologies for $11m
After finally abandoning Twitter, Mr Joyce told NBR he stood firmly behind the government's R&D (research and development) direct grants, which match spending by the recipient.

The aim of the scheme was to bring R&D activity to New Zealand; to bring talent to the country and encourage networking - not to foster the growth of individual companies.

The government has separate initiatives, including NZVIF (where money does have to be paid back) to deal with the lack of capital for startups, Mr Joyce said.

Demanding R&D money be repaid if a company was sold offshore, via the convertible notes scheme suggested by Mr Pellett or a similar mechanism, would scare companies away.

Nor did foreign ownership disqualify a company from Crown R&D funding. There are many foreign owned companies operating in NZ who would qualify, the minister says. He added that if, for example, a multinational food conglomerate wanted to set up an R&D centre in Palmerston North, and work with Massey University, it would qualify for potential taxpayer funding.

Given the public policy aim of R&D funding was purely to generate more NZ-based research and development activity, restricting funds to locally-owned companies would represent a form of "corporate welfare for a relatively small group of Kiwi promoters," Mr Joyce said. 

One hook
Although none of the $190 million allocated in the 2010 R&D round had to be repaid, Mr Joyce noted there is a claw-back provision if a company shifts R&D offshore during the period covered by the co-funding (three years in the case of the $6.7 million grant won by Endace in December 2010).

Mr Joyce said he didn't seek any commitments about local jobs or R&D spending when he met with Messrs Riley and McCluney on Wednesday, but the pair volunteered their intention to expand Endace's local operation (most of the company's 190 staff are based in its Auckland head office or Hamilton R&D centre).

Postcript: the minister later said the government was reviewing its technology grant scheme. One possibility was that the Crown would match 20% of a company's qualifying spending rather than the 50% today. 

More by this author

Comments and questions
13

I presume Mr Pellet proactively applied for the taxpayer funds, rather than the government out of the blue transferring it to Endace's bank account? Talk about biting the hand that feeds you...

You'll note he stepped down as CEO in 2008. The funding was in 2010.

Selwyn Pellett stepped down down as CEO in 2008 and from the board in 2010.

Both dates have been noted in various NBR stories.

He sold most but not all of his shares in 2010, again as noted.

Was he still on the board when it sought funding?

Funding was received in July and he stepped down as a director in November.

I didn't detect any sign of whinging, moaning or complaining in Mr Pellett's comments.

The points he made were entirely reasonable so what is the problem? Typical Kiwi play the man not the ball and sad a Minister feels he has to join in, particularly one of the smarter ones like Mr Joyce.

Sam Morgan's comments about "skin in the game" are an example of playing to the gallery without engaging brain or understanding what the phrase actually means. It doesn't describe the government's position with its IT investments whether through R&D grants or the largely failed VIF scheme.

The government puts money in, has little ability to manage how it is spent and gets none of the upside. It has all the risks of "skin in the game" with none of the rewards which is the point Mr Pellett was trying to make.

Only in NZ could something like this (which should be a positive) become something so facile and potentially negative. does the entire nation have seasonal affective disorder???

Haha. Try working with him. Many other backs still have knives attached....

This is always a prospect when Governments apply unequal rights to business ( or for that matter citizens). It exposes once again the weakness of poor policy framework.

Twitter not really the place for a Minister to conduct his business.

And why not? What better place for twits to connect?
Why don't you geeks stop bludging off the taxpayer and go to the banks and individual investors for your "R&D". You know, just like other (normal) business has to!
Gov. "R&D" money is simply a slush fund for ministers to share amongst those that are willing to suck up to them.
Anybody disagree?
Steven?
Please post the amount handed out and the result of the cost benefit analysis?
WHAT!!! You mean there has been no cost benefit analysis done!!
WTF are you?

John, it's a little more complicated than you might think. 1/2, 3/4 or 9/8ths finished R&D has near zero value to banks so little or no funding available. Some angels like myself may invest in early stage R&D but there is a gap when the R&D gets to multimillion dollar values. Bigger market...maybe but in NZ it's called market failure.

So I believe there is a valid place for the govt to play but its entitled to a good commercial return if success results.

Helping to fill holes because the market is to timid is a responsible roll for govt but not as grants. So we are much closer on the how than might first be evident. Cheers, Selwyn

Thanks for that. I tend to agree, but I have a little experience with producer boards. In that case is was not in the interests of the "boards" to give either the govt or the producers a return/result on the investment. Instead, all the producers or govt got from the boards were long-winded statements that the sky would fall in if they weren't kept in the style they had become accustomed to.
Very similar to the speeches we hear from the peeps who beg for "R&D" funding.
The govt. could at least ask: "Show me want you want to achieve, and your sunset date, please."
But my preference is for the govt to just say, "p*ss off. If the likes of Canterbury Finance will not look at you we believe it is unfair to ask the taxpayer to stump up."
Cheers, John M