Sam Morgan on taxes, tech and timing
By Peter Griffin,
Questions by Peter Griffin • Photographs by Mike Heydon
Few of us will ever get to bank a Trade Me-sized settlement. Founder Sam Morgan has put his fortune to use investing in Kiwi startups, funding a string of philanthropic ventures and helping environmental initiatives at home. In this exclusive interview, Morgan says it’s been a learning experience—but not, he says, a taxing one
Last year was a bit of a nightmare for many. A lot of businesses went to the wall. How did you fare?
I certainly haven’t made money in the last couple of years, but I haven’t lost any either. Most businesses I’m involved with are reasonably early stage. But a lot had corporate sales models, and they were struggling because people were not buying.
You stepped in to save your iVistra investment by taking control of the company.
It was a basket case. We kept a few people and bits and pieces of technology. It’s called Vizfleet now and we have a great team. We’ve reformulated the strategy around small-to-medium enterprise dispatch software for mobile workforces. Every small company has ten vans running around fixing bus stops, collecting rubbish bins or whatever. By and large you walk into their office and they’ve typically got the frazzled wife of the owner coordinating everything with Post-it notes. They don’t know where their commercial vehicles are. Getting a Sky dish installed is a classic. It’s “Can you be home all weekend, or nine-to-five every day this week, because we have no idea when we’ll turn up.” We’ve developed web-based software that relies on GPS in the vehicles to track their positions.
One of your investments, the light-operated mouse and keyboard (Lomak), seemed a great product. Why didn’t it take off?
Having a great product does not give you a license to have a great company. The sales just didn’t come. The market is very difficult. It’s a subsidised control channel, a fragmented market, into a minority of the populace, people with severe disabilities typically. And getting to those people is reasonably difficult, because you go through physicians, and so forth. I think the whole supply chain for that market is just broken, so we just said let’s cut our losses.
After three years of putting money into startups, you haven’t really had an exit yet.
No—that’d be fair. I’m a big investor in Xero, which is public, and I can sell my shares on the market, I guess.
What’s the big lesson from these investments?
Go for people who are a bit more grown-up. It’s too early if it’s just an idea. It’s too early if it’s just on PowerPoint. It’s too early if you haven’t got your management team in place, roughly. It’s too early if you haven’t got a couple of sales at least in order to understand your own unit economics, and channels, and how to get to market.
So it’s all about timing?
Get them late enough, but early enough! Companies need money for ages. I regularly say to people “Look, you’re too early for us.” They say “Well, within a year we’re not going to need any more money.” Its like “Yeah, well, whatever sunshine. Come and see me in a year when you’ll be burning twice as much money, but you’ll be further along the curve.”
Is it just me, or has the ‘Silicon Welly’ scene gone a bit quiet?
You’ve got a bunch of entrepreneurs starting their own ventures. The law of numbers says that half of those are gonna fail. In the nicest possible way, they are kind of two-minute wonders.
The noise, at least, was based on a small number of people who were entrepreneurs but weren’t cashed up. They didn’t have the ability to actually do stuff long-term.
“I was lucky enough to sell my company in a country with no capital gains, so I paid no tax. Now I don’t have a proper job, so the tax that I pay is minimal. I pay basically no tax. And that’s not right, but what am I supposed to do?”
Xero is like a beacon of light for aspiring web entrepreneurs. It must have been good to see Craig Winkler, the founder of Xero’s rival, MYOB, come on board and buy a large chunk of shares.
Absolutely—he’s been great value as well. Xero is a really well-executed company. They made the call to hire a lot of people ahead of the curve, and just do things right and do things well. There’s enough cash in the bank to see it through to be successful.
One of the buzzwords for the government is innovation. Have you seen any action from them?
I haven’t seen a hell of a lot from the government. I think cost controls in government generally are probably a good thing. But a move like not mandating compacting fluorescent light bulbs in New Zealand is a bit retarded. The people in charge of environmental policy are certainly not taking a leadership position.
There’s tentative talk about reintroducing an R&D tax credit. Would that stimulate more innovation?
Not in the companies I’m involved with. It just changes allocation of capital. That doesn’t do very much at all.
It looks as though owning investment property is going to be less attractive. Do you think Kiwis have the confidence to invest elsewhere, in New Zealand businesses or even the stock market?
Fundamentally, no. I have this argument with my dad. We agree that the allocation of capital into property is excessive and needs to be controlled.
I think central government actually has a role in protecting people from their own stupid selves—and stopping people investing wholesale in residential or commercial property over the odds is sensible, because it has the ability to be a complete bomb in New Zealand. What we disagree on is whether there will suddenly be a reallocation of capital into other asset classes. What I’ve seen of people who had their formative experience through the 1987 stock market crash is that they don’t own equities. So I think people have been scared off a lot of asset classes.
Your dad [Gareth Morgan] has some strong ideas about tax—a 25 percent flat tax rate being one part of his ‘big kahuna’ ideas to shake up the system.
It’s hardcore, his manifesto, but very interesting. The amount of tax that people pay in different areas is not fair. The people that pay the most tax are working people.
I was lucky enough to sell my company in a country with no capital gains, so I paid no tax on the sale of my company. Now I’ve got no income effectively, because I don’t have a proper job, so the tax that I pay is minimal. The tax I do pay, I throw money into my charitable foundation. So while I can’t touch that money, it is for charitable purposes. I pay basically no tax. And that’s not right, but what am I supposed to do?
Talking of property: in late 2008 you bought a sheep station near Wanaka. What are your plans for that?
It is a big high-country station. The plan is to keep the station intact and run it as a farming unit, in line with the pastoral farming heritage of the region. And on the flats, there are 26 lots that we’re in the process of getting housing platform locations confirmed for.
Have you been following this whole feed-lot argument down in the Mackenzie Country?
New Zealand is widely recognised as having pastoral system, not a lot feed system. Muddying that message by having lot-fed cows is not good for our brand with dairy exports being a third of our net exports, or whatever it is.
Our clean image took a beating last year overseas.
I think it’s moving a bit beyond that. The full energy equation has been taken a bit more into consideration. With a pastoral-based system you have an extremely energy-efficient system, because the sun grows the grass, the cows eat the grass, and then you chop their heads off and ship them. Whereas when you’re applying lots of fertiliser to grow soya beans in Brazil that you then ship to the UK to lot-feed cows, the energy equation just doesn’t work.
Certainly the smart buyers—the Waitroses of the world—are onto that. I think ‘buy local’ is a big thing; food miles, I think, is on shaky ground intellectually.
Last year, your father paid half a million dollars to scientists to research and present the arguments on climate change. Was it a good investment?
It certainly enlightened him! John Key said to me that he’d heard that the book was well regarded, and had it on his reading list for Christmas. If you have influence at that level it’s good because ultimately those issues need to be dealt with at a policy level. People are not going to change their selfish behaviours in a hurry.
There has certainly been a rise in scepticism around climate change.
There are aspects of it that are problematic, like carbon credit exchanges and those sorts of things. They’re all a bit like funny money still. But we cannot continue to destroy our ecosystems.
What I don’t like about the climate change argument is that it takes all of the discussion around oceans, and soils, and air and water off the table because it’s all about CO2.
Former Fairfax boss David Kirk had a rather unceremonious departure last year. Did Fairfax appreciate what he did in buying Trade Me?
There are certainly no regrets about that transaction. Trade Me is still a fast-growing company that is generating heaps of free cash they can use to pay down their debts, so I’m sure they appreciate it. But the debt had obviously somewhat accumulated in that period as well.
Will the iPad save media?
I think the fundamental problem is that there is so much more media, and barriers to entry are very low. You don’t have to own a printing press or employ many journalists, if any. I don’t think it’s fundamentally changing that. It might provide an additional revenue stream, but who is going to buy a thousand-dollar device to read their newspaper? I don’t think it will turn up on the newspaper P&Ls in a hurry.
“We need to solve the international bandwidth problem. I’m almost inclined to just do it myself. It’s maybe $600 million and I think you can make that happen”
The New Zealand internet is getting better, but we still have data caps.
We need to solve the international bandwidth problem. We need a cable which is not based on price maximisation. I’m almost inclined to just do it myself. It’s maybe $600 million and I think you can make that happen. You do a cost-plus model and sell some bandwidth to the likes of TVNZ, Sky TV and Vodafone. Put a little cable across to Australia to get the Australian demand as well, and you have a business.
We could have unconstrained international bandwidth basically free within two years if we laid a cable. It is not acceptable to go and stay in a hotel and be charged $30 for bandwidth overnight. Fibre to the home is great, but it only takes you to Auckland. So unless Google is going to live in Auckland, then it’s kind of a waste of time.
You’ve been on the road looking at DOC projects. Are you becoming a bit of a greenie?
I was never really into the conservation thing, but every now and then you see a model that works. I’ve been looking at what the Department of Conservation is doing in at the Mangatautari Reserve in the Waikato. So I have an idea now—at least I know the difference between a kakapo and a kiwi. I didn’t before.
You go up to Mangatautari and you’re in a forest with a perimeter fence that has been up for a few years. The forest is completely different: shoots coming out of the ground, little rimu and kauri. You just don’t see these shoots in the forest in New Zealand. And once those trees die, our forest is gone, because nothing is growing beneath the canopy level. It’s all eaten. It’s a ticking time bomb.
1080 use is still such a polarising issue.
It is divisive, but the data show that if you want to save your forest, it works.
So would you chip in money to government-run conservation schemes?
Yes, I’d be happy to support that sort of thing. But you need to ask all the questions. Is the model right? Often what happens is that government money is there, and they have a bit of private money. If the private money is not there, the government money expands, or they’re doing different objectives, or they’re at cross-purposes. Private sector-style models often work better at the innovation and the early stage stuff.
What’s this about buying into a cattle farm in Brazil?
There’s a family up in the Waikato, the Wallace family, who farm around 10,000 head of dairy cattle. About ten years ago Simon Wallace went to Brazil and he’s built a New Zealand-based dairy model in Brazil. They have New Zealand cows and New Zealand farming practices, with Brazilians manning the milk stations.
The productivity there is three times what it is in New Zealand. The economics of dairying in New Zealand are embarrassing by comparison.
So I think there are some quite interesting models out there—the Icebreaker model of having designers and ownership here, and increasingly being in Portland. We need to be internationalising. It’s an exciting path for us to take.
You must be travelling a lot these days.
Yeah, not gratuitously. We had three months in Europe as a family trip last year, and next week I’m at the TED conference in Long Beach. Then in March I’m in Africa for three weeks, Rwanda, Uganda and Kenya.
Let me guess: micro-financing business?
No, philanthropic kind of activities, mostly around yield improvements for small plot farmers and a really interesting educational franchise model that a guy there is building up. The problem with education systems in those countries, is that they actually don’t work. You can build schools and staff them, but 25 percent of the teachers don’t turn up. On spot checks half of them aren’t teaching, and you just don’t have the right incentives, because you don’t have the tax base to fund teachers and put systems in place to make sure they work.
What’s the answer?
Private education, actually—franchise systems with scalable, typically scripted, curricula. Because you don’t have a depth of teachers there either, so you basically just get smart qualified graduates.
And African farmers?
You hear about the bottom billion, the world’s most extreme poor. Seventy percent of them are rural farmers, so if you can double their yields—which is easy to do by teaching seed spacing, getting access to markets, better hybridised seeds and those sorts of simple things—you can help them go from having zero discretionary income to having a bit. And the first things they buy are education and medicine.
Hillary Clinton’s science advisor, Dr Nina Fedoroff, was here recently and said to feed the bottom billion we need to get over our hang-ups about genetic modification.
Genetic modification has been happening ever since we started to cross-breed seeds. It’s just a question of whether you do it with cross-breeding, or radiation, whether you use a scalpel rather than a shotgun. I don’t have a problem with it.
But I do have an issue with farmers not being able to keep their seeds from season to season. Hopefully what would happen in that space is that the patents on genetically modified seeds wouldn’t be respected. In the same way generics eventually became the biggest part of the pharmaceutical industry, I think that as long as developing countries are equally disrespectful of crop patents that makes sense.
In Africa, are you funding farmers directly?
We support what is called the One Acre Fund. You have small plot farmers, typical family size of about six people, four children and two adults, typically farming staples, rain-fed crops. They give you seed, training, and access to markets.
They take farmers from having a crop of, say, one tonne per hectare to three tonnes. They take the surplus tonne to create their own financial sustainability within their organisation. The farmer gets double the yield, and the organisation is sustaining and can grow. We’ve been funding them for about 18 months, and they’ve grown from 2,000 farming families to 17,000. They are targeting 100,000 families within three years.
Your philanthropy seems to have kicked up a gear. How many schemes like this do you support?
We’ve got oh, maybe 15 to 20 on the go at the moment. Another one we are talking to is franchising health clinics in India. Their model is tele-medicine. They put a TV on the wall of rural clinics and link them with microwave broadband. They connect typically to a call centre which is full of doctors, mostly female doctors, because the patients are mostly female and want female physicians, who are apparently difficult to find in India. They do the consultations via tele-link.
Trade Me produced some great entrepreneurs, like Nigel Stanford, Rowan Simpson and the Star Now guys. Is it still a breeding ground for entrepreneurs?
I think so. But if you join Trade Me today you’re in a 150-person organisation, in the middle of the dev team or wherever. You don’t have that same perspective, so it probably won’t continue to throw them out systematically.
Do you miss the buzz of running a company like Trade Me?
I probably miss the people more than anything. But a lot about those sorts of roles that are all heat and no light.
Next week I’m in the US at TED with all these smart cookies, and the week after that I’m in Africa, and last week I was at Mangatautari up in Auckland, up in Hamilton holding a Kiwi and looking at their pest-proof fencing technology, and that sort of stuff. Before that I was in Fiordland with DOC looking at what they’re doing with pest eradication and saving forests. I love the variety.