The Press, November 2008

‘The sky is falling, the sky is falling’ we are told every day, as acorns hit the heads of the Chicken Little pundits who seem to delight in the looming economic disaster they predict.

Are there any opportunities amongst the debris of what we are told are our crumbling economies? Or should we roll into the foetal position and prepare to take what comes?

Marketing people, especially those in advertising, will tell you that this is the ideal time to promote your way out of any trouble. This is a simplistic and self-serving view.

And many companies don’t believe it. Particularly in consumer markets, companies are reacting to weakening demand by “reducing their ad budgets or shifting to lower-cost alternatives like e-mail marketing and public relations,” according to an article in the New York Times last week, which pointed to growing redundancies in the US advertising sector.

It is not so much about spending more on marketing, but being smart about understanding and exploiting market opportunities. The fate of Kiwi exporters of technology-related products is an interesting case in point, where sound analysis and a focused approach can still deliver growth.

According to a recent presentation to the New Zealand Software Association by Neil Butler of highly successful Wellington IT company Optimation, there are considerable opportunities for New Zealand tech companies in markets like the USA.

Butler’s analysis was based on the US finance sector’s turmoil. Many Kiwi tech companies have in recent years been competing against venture-capital backed firms in the US. These well-funded companies have aggressively sought market share, with customer acquisition more important than immediate profitability. They were typical driven to build revenue quickly before undertaking an initial public offering (IPO) or a private equity sale to provide their funders with a return.

Many of New Zealand’s stellar firms have been successful, but it has been a tough battle against these hyper-powered competitors. But the landscape has radically changed, with funding becoming much tougher to obtain and US tech companies being forced to focus on growing cashflow-positive businesses.

As a recent Forbes article put it “Cash will be scarce in 2009, no matter if you’re a pension fund, a VC or a start-up. Wall Street is broken.” Leading VC company Sequoia Capital Partners gave a ‘secret’ presentation last month that has spread over the internet entitled “RIP: Good times.”

The other dynamic is that the big technology companies like Oracle, Cisco, Apple and Microsoft are flush with cash after years of raking it in. These giants are scooping up bargains amongst technology companies that are so starved for cash they have little choice but to sell out. Fortune Magazine quoted Cisco recently saying they can buy a company that was demanding $US100 million a year ago for $11 million today.

These trends offer opportunity for Kiwi tech exporters.

VC funded start-ups are now struggling and having to tighten their belts. They can no longer throw huge money at advertising and other promotions without generating the income to justify it. Quality of customer service is becoming a key to success.

Other US firms battling our tech exporters are being gobbled by the technology behemoths, ensuring they will be slowed down and focused on the bigger commercial opportunities.

For New Zealand companies, accustomed to ‘bootstrapping’ themselves i.e. using cashflow rather than VC debt to penetrate US markets, there is a great opportunity to use their flexibility and smarts to succeed.

There are some locally-based examples of this trend that provide some reason for excitement amongst the doom. According to their company blog, software provider SLI Systems is growing strongly.

“Even in these difficult financial times we are growing strongly. Last quarter was the best quarter we’ve ever had in terms of new customers and the first month of this quarter was the best month we’ve had in over a year,” wrote CEO Shaun Ryan.

And their VC-backed competitors are struggling. A major rival of SLI’s called Mercado, who is reported to have raised more than $70 million in funding over recent years, hit trouble recently and was acquired by a major US internet company called Omniture.

SLI Systems is well positioned to grab what opportunities there are in that market. They are focused on a specific niche, have built a reputation for providing a good customer experience and spend sensibly. Aggressive start-ups used to spending freely, caring more about customer acquisition than customer care, will fall off the pace.

And the best news is that the weakening Kiwi dollar delivers more to the bottom-line.

Should everyone rush off to the US or other offshore markets expecting an easy ride? Of course not – demand is soft and there are still plenty of competitors around in most sectors. The challenge is to spend time and effort researching and analysing market opportunities, finding the gaps that nimble Kiwi companies are adept at filling.

Rather than wallowing in the doom and gloom, it is great to see some companies looking for the opportunities. Unlike Chicken Little in some versions of the fairytale, they won’t be eaten by the big bad wolf.

Owen Scott is from marketing company Concentrate. www.concentrate.co.nz. He is not depressed by the economic outlook. (Disclaimer: Concentrate has completed projects for SLI Systems.)

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