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Steven Joyce in Twitter war with Selwyn Pellett over Endace sale

UPDATE: Joyce tells NBR ONLINE he has no problem with Endace - now set to fall into foreign ownership - pocketing $11 million in government R&D grants.

Fri, 07 Dec 2012

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. 

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Steven Joyce in Twitter war with Selwyn Pellett over Endace sale
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