The big deal
By Mitchell Hall,
Photographs by Nick Ruechel. Styling: Mengly Hernandez. Location courtesy of Florian Altenburg / southfirst.org
Derek and Geoff Handley created The Hyperfactory, a high-tech Kiwi business that competes with the world’s best, and in July they sold it for megamillions. Mitchell Hall asks what they’ve learned about entrepreneurship and dreaming big—and why New Zealand needs more like them.
This summer in New York is like being in the tropics, if the tropics were made of concrete, glass and neon and had more limousines than you’ve ever seen. In the midst of this heatwave, brothers Derek and Geoff Handley hashed out a deal to sell their mobile marketing company The Hyperfactory. Broadcast and publishing conglomerate Meredith Corporation offered them a reputed US$100 million-plus for their nine-year old company. Their split? A cool 30 percent.
Needless to say the brothers took the deal, and have now experienced the thrill of checking their bank accounts to find they’re many millions of dollars richer than they were the night before. Not only that, they’re getting paid to keep running their company. The heat does not ruin this moment. They smile easily.
We should all smile. The Hyperfactory’s success is entirely due to brains and gumption. Its product is perfectly suited to export: weightless, high-value and infinitely scalable. The Handleys have built a global business without a single warehouse, distributor or import licence. They’ve developed a great idea in New Zealand, taken it to the world’s biggest markets and proved its value. And along the way they’ve developed some staunch ideas about Kiwi entrepreneurship, technology and success.
They’re also a symbol of changing times—just look at the latest NBR Rich List to see the impact that tech entrepreneurs are having. But are the Handley brothers really a case study in how to generate wealth from New Zealand? Or just another example of the talented flying the coop?
Born in Hong Kong to parents of UK heritage, the Handleys moved to Auckland’s St Heliers in their teens. They weren’t strangers to New Zealand—an aunt had lived here for decades, so the family visited New Zealand every year, says Derek. “New Zealand was already like home.” They attended Selwyn College and went on to university, where Geoff studied business at Auckland and Derek went to Wellington (inspired by its “really cool tech culture”) to study architecture and finance.
“In New York it’s all happening around Union Square. If 25 young Kiwi entrepreneurs came to New York we would take over the scene”
Fast-forward to 2001 and the birth of The Hyperfactory. The brothers weren’t alone in seeing the obvious, that “the mobile industry was going to be something big”, says 32-year-old Derek, the clean-cut CEO who does most of the talking for the pair. “The internet at that point was very much about branding and marketing, e-commerce, and we thought that [mobile] would be the next wave. The biggest gap—and where we would be able to play—was in the marketing area to help brands figure out what to do with this new medium.”
They had dot-com backgrounds and quickly found good developers to help set up their nascent mobile marketing systems, mainly based around text messaging: CRM systems, database marketing, interactive gaming promotions. They also developed broadcast interactivity: texting to TV, texting to radio, and so on. It was early-stage, pioneering work, and at first they were almost alone in the field.
“At that time people were just getting their heads around email databases,” says Geoff, who is three years older, ponytailed and quieter, and looks like a musician without the tats. Derek chimes in: “Everything in New Zealand in the text marketing stakes we did first, but it wasn’t just in New Zealand it was first, often it was also world-first.” The brothers note there were a couple of other companies that started in the same field in New Zealand around the same time—and all were world-class.
The Handleys, however, thought their product could compete in other markets, so they came up with a plan to raise money to build an Asia-Pacific market. They excluded the US and Europe at the time because, looking back, they were basically scared. “At the time in New Zealand—and it’s probably still the same today—people overemphasised how hard it is to do things here and how much money it costs,” says Derek. “‘You need $10 million to open up an office,’ and all those kinds of things, which I think is just an excuse for, ‘I’ve never really been in and tried.’”
Asia was less scary because they’d lived there, and Hong Kong was the site of the world’s first 3G network, launched in 2003, potentially exposing their business to the mobile internet and the next wave. If nothing else, they figured they’d get plenty of positioning benefit from being there.
After securing funding, Derek left to open the Asian office. “It really was like starting all over again, because a lot of the learning from New Zealand didn’t translate to Hong Kong at all,” he says. In Auckland then they had ten staff, and the company was heading up the Deloitte Technology Fast 500 in Asia/Pacific: 13th in 2004, tenth in 2005, fourth in 2006.
Despite learning a lot about the 3G environment, it didn’t turn out to be very useful for the New Zealand market. Admits Derek: “Going to Asia definitely wasn’t the greatest success.” Why? Mobile internet in New Zealand just costs too much to have widespread penetration, so the lessons learned in Hong Kong were largely irrelevant back home. In New Zealand today if you have a smartphone your options are Vodafone or Telecom, who both offer a slightly-less-than-sensational 512MB of data for $30 a month. Major carriers in the US like Verizon and T-Mobile will charge you the same price, but for unlimited monthly data. This nationwide data throttling means New Zealand slipped from its perch in leading the world in the mobile technology market ten years ago.
The brothers reconvened at the start of the New Zealand summer of 2004. Derek’s flatmate at the time was former TVNZ reporter Charlotte Glennie, who mentioned that she knew Kevin Roberts, the New York-based worldwide CEO of Saatchi & Saatchi. The brothers scrambled to get in front of him over Christmas 2004.
“So we basically put a pitch together that said why this is important for advertising, and why The Hyperfactory is a good partner for Saatchi to enable them to be at the forefront of this industry,” recalls Derek. “And we formed a partnership with him that opened up all the doors around the Saatchi network. That was our one and only meeting with him, but we then were given other people to work with in the network and started to look at opening other offices. At the end of the day that’s what caused the move to New York in 2005—a standing-on-the-shoulders-of-giants thing.” The doors had officially opened. Derek uprooted once again to land in New York, first city of the world.
They hit the ground running. The Hyperfactory is a dedicated mobile agency that is a hybrid ad agency and technology agency in one, a blend between marketing ideas and the software to realise them. Their core business involves creating mobile websites, developing apps to run on the iPhone, Android and RIM platforms, text messaging campaigns, and 3G mobile content, along with strategy and media. They try to integrate with all channels as much as possible, such as having ads in magazines that have an SMS call to action.
While the brothers say they did a lot of groundbreaking, world-first work in Hong Kong, it wasn’t making a lot of money. But by combining their New Zealand work with their Hong Kong work when they arrived in New York, they found they had an unparalleled case study for the new market. In 2005, they reckon, there wasn’t really anyone doing mobile marketing in the US.
From borrowing a room in the Saatchis building, The Hyperfactory soon opened its own Soho offices in Spring Street, and then expanded to LA, Chicago and San Francisco. Again, it wasn’t an easy path—opening in Chicago and San Francisco “was another dumb idea”, says Derek ruefully. “If you’re growing and you have people all over the place, the culture is very hard to control. You create inefficiencies, you’re duplicating on everything. But there’s that mentality of, ‘Do I miss an opportunity by not having someone there?’” So although they rolled back Chicago and San Fransisco, the experience didn’t stop them from adding outposts in Sydney and Hyderabad for a total of eight offices around the world. In the US, the New York and LA offices encompass the ad agency side, while technical work is done in Auckland and India.
With increased scale their client roster also grew to include Nestlé, Kraft, Adidas, Microsoft, InBev (the giant Belgian beer conglomerate that bought Budweiser brewers Anheuser-Busch), Intel, Coke, L’Óreal, Taco Bell and more.
So they’ve developed a bleeding-edge mobile marketing product and managed to export it offshore where they grew quickly; how exactly did they find their willing suitor in Meredith Corporation?
“When the ‘real’ entrepreneurs in New Zealand are property developers and finance companies, we have the wrong definition. These are people who build shitty properties, raise money from the public and then fleece them, and get their money from banks who are their mates. Then it all collapses. Let’s change that mentality”
The initial plan had been to raise an ‘A’ round of a few million dollars in 2007, then in 2008 or 2009 raise major funding of around $10 million. The A round came quickly enough from their angel investors at The Bakery—Grant Baker and Geoff Ross from 42 Below—but at the end of 2008 the global financial system was on the edge of collapse. Undeterred, the Handleys decided their plans were still sound and they still needed the money, so the next year they hit the road to look for capital.
It was a long trip. They met everyone from Microsoft to AOL, and big agency holding companies like WPP and Publicis. Right at the end, Meredith came along. “And we were like, this is the right company to do the deal with,” recalls Derek.
Meredith actually wanted to acquire the business outright. But The Hyperfactory had leverage: at the time the only real competition had already been bought—Google had bought AdMob, and Apple then snapped up Quattro—so they struck a compromise. They sold Meredith a 19 percent stake in the business with the option to acquire the rest within two years.
With the funding safely in the bag, the Handleys worked to bring The Hyperfactory to its potential. With staff of around 100 in offices across the globe, the company was pulling in multimillion-dollar sums each year and growing at a prodigious rate. Meredith’s investment was proving to be a wise one and it seems certain they’d want the rest of the business. The Handleys figured The Hyperfactory would probably be acquired in either July 2010 or July 2011, but they weren’t sure. “Then a few months ago [Meredith] indicated they were going to acquire it this year,” says Derek, “So they were obviously happy with how it was going. They liked us and we liked them.”
So exactly how much did they get from Meredith?
The Handleys are bound from naming a price—even though they clearly would love to be shouting it from the rooftops of Manhattan. So, choosing their words carefully, the brothers acknowledge that the numbers the New Zealand press has been speculating on are not far off. “They’re not made-up numbers,” acknowledges Derek, “It’s reasonable to expect it to be in the range of those companies that they were talking about. I don’t remember how much Navman got sold for [$108 million –Ed.] but we said last year that the valuation of the business was in the region of that type of exit. When you think that we’ve already raised $10 million, obviously it’s got to be a lot more than that.”
A good time to settle down and grow the business. While Geoff has been running The Hyperfactory office in Auckland, in June he relocated to an apartment in the Financial District of New York, while Derek and his wife have a home in Tribeca. The brothers intend to stick around with Meredith for at least two years—they want to grow The Hyperfactory to “triple the size” in that time, and it sounds like they want to stay longer.
“You could stick around forever if you wanted to, I suppose,” says Geoff. “Meredith’s not going anywhere and there’s an exciting path if I wanted to stick around for four or five years and help change the face of publishing.” Both brothers are certainly jazzed about New York, calling it “the new Silicon Valley” with the rise of Twitter and Foursquare—the hottest mobile startups of recent times—both coming from the Union Square area in midtown.
The one thing the brothers don’t see in New York, and that bothers them, is New Zealand businesses. Apart from Geoff Vuleta of Fahrenheit 212 (which arguably wasn’t a startup given it was an in-house Saatchi venture) and fashion designer Rebecca Taylor, what other Kiwi entrepreneurs are operating in New York? Derek can’t think of any. “I don’t know if there are any other big offices of any New Zealand companies here, and that’s bizarre.”
Derek is tossing around ideas to rectify this. He believes what they’ve done with The Hyperfactory is replicable and scalable, and he wants to find a way to do that. “Maybe work with people like The Icehouse. Contrary to others, I think you can identify the traits that will make an entrepreneur and I think you can hone and train them to be a much better entrepreneur the first time around if they’re surrounded by the right type of ecosystem and the right type of knowledge.”
He insists that New Zealand entrepreneurs need to have a global vision from the outset. He believes too many forget that there’s a whole world out there, or they think about doing something ‘down the road’ if it ties in with the local market. But there’s just no scale in New Zealand—and never will be. “To think that you’d rather build a business to cater to four million people than one that caters for three hundred million” is just stupid, Derek pleads. It’ll take a bit more effort, “but the risk/reward ratio is not even worth considering.”
Derek dismisses the argument that it’s too hard to get a US work visa. “It’s those kind of things that really frustrate me. That’s almost the first question when I told my friends in New Zealand that I was moving here: ‘How did you get a visa?’ You find a way!”
The problem may be partly attributable to the middle-class comfort of New Zealand life. Derek cites an apocryphal story about a guy from Hong Kong who would paddle to America in a boat with his bare hands, to whom a visa was a very secondary concern.
And don’t get him started on what’s generally regarded as entrepreneurship in New Zealand. “When the ‘real’ entrepreneurs in New Zealand are property developers and finance companies, we have the wrong definition,” he says. That definition and what’s hailed as success in New Zealand for the past 30 years, “are people who build shitty properties, raise money from the public and then fleece them, and get their money from banks who are their mates. Then it all collapses.” And they keep on doing it because they’ve got their money in trust, but when the good times are good, “everyone thinks those guys are what success is and it’s the most bizarre concept to me.”
In America those types of people are regarded as used car dealers, says Derek, not entrepreneurs; there is no respect. But in New Zealand, “they’ll still be called upon by the Prime Minister, no matter which party, wanting the top ten in the business list to call. They will not be calling people outside of those. Let’s change that mentality.”
You’ve got to have a dream bigger than making money from flipping your asset, he implores, to create long-term value for the country “instead of trying to get people to buy and sell houses off each other. How does that help anyone? It’s bullshit.”
Derek’s very excited about spending more time in New Zealand. He wants to start a conversation to change Kiwis’ thinking if they expect to have the lifestyle they have now for the next 20 or 30 years. New Zealand isn’t generating the taxes, income and positive GDP growth it needs to maintain our current lifestyle, he says, let alone improve it. “It’s not about catching up to Australia, it’s about our general lifestyle and having a great place to live, a world-class country, and I think that’s lost on the general public. Maybe it’s a hard concept to grasp. But in the long run, if we don’t invest in this country and make it grow, what’s going to happen is your school’s going to be worse, your healthcare’s going to be terrible, your roads are going to fall apart and people are then going to ask why. The answer’s going to be because we hadn’t created a long-term vision for how we’re going to keep up with this.”
While both are sympathetic to the National Party, they’re disappointed with what John Key’s government has so far been able to achieve. They point to the limitations of a three-year electoral cycle—when campaigning for the next election takes up literally half your time, there just isn’t enough time to get much done—and MMP, which they say discourages bold, visionary decisions because split votes create parties that are disproportionately powerful.
Says Geoff, “I was very right wing—still am—but I was hopeful when this government came to power there would be massive change and it just hasn’t happened. No disrespect to Key or the party, it’s just the structure—there’s nothing they can do. Well, there’s nothing that you can do if you want another term, so you either change the system or you sacrifice yourself.
“But it’s not like there’s any real big leadership, like, ‘We’re going to the moon!’ Where are we going? We know more about the anti-smacking bill than we know about where we’re going. We know more about these minor things that have no impact on anything but we don’t know where we’re going.”
The Handleys aren’t totally down on the government. They take pains to express gratitude for the support they’ve been given by New Zealand Trade and Enterprise and the Foundation For Research, Science and Technology. Between them, the two organisations contributed nearly three quarters of a million dollars towards The Hyperfactory’s success, not to mention dollar-for-dollar funding on technology, and grants.
“I’d hope they would think that we were one of the success stories on the money-giving-away thing,” says Derek. “But we have a fight every year trying to build things and then go overseas and prove that it’s worth the investment. [The money] has obviously helped a lot, so it’s good to know it’s there.”
The Hyperfactory recommends tech-minded Kiwis come to New York. While the city didn’t really succeed in dot-com version one (creating only Double Click), now they say it has a real buzz about it. Glamour startups like Twitter and Foursquare are using new technologies like geo-location to create compelling new consumer apps.
“A lot of companies are starting up in the location space in New York and it’s all happening around Union Square,” enthuses Derek. “I think if 25 young Kiwi entrepreneurs came to New York we would take over the scene because people would know that we’re here. There’d be a buzz and it would be like, shit, there’s all these Kiwis with these hot companies, it would put us on the map faster than you can imagine. The accent, the fact that there are so many of them here, that they all appeared at once. It would be so cool—and not that hard to orchestrate.”