Want a thriving startup ecosystem in New Zealand? Start by building affordable housing

Last week I read an interesting article by Barnaby Marshall of Icehouse Ventures. The title of the article is What would it take to build a Trillion-Dollar NZX?, and it's a pretty good (if admittedly a bit investor-ish) read. In it, Barnaby poses the question of what it would take for New Zealand to develop another ten publicly-traded companies on the scale of RocketLab: his conclusion is that the major factor lacking in New Zealand to make that happen is a lack of ambition through founders, investors, boards and the ecosystem as a whole. I'm a consulting data and infrastructure engineer so I can't speak to the decision-making patterns of the business entities involved, but on the level of tech there is truth to this: New Zealanders tend to run to the technically unambitious and are usually happier to pay Accenture or someone to write them some truly execrable software than they are to invest in their own dev team and do the thing properly. There's also probably some truth to the idea that many of the startups Barnaby mentioned in his article (RocketLab, Crimson, TradeMe) were heavily influenced by people who spent at least part of their lives overseas and brought the experience and networks they built there back with them.

Unfortunately, we can't exactly create ambition out of thin air: humans are humans, and if the material conditions for ambition aren't there, people simply won't be ambitious. We thus need to understand why New Zealanders tend, across the board, to the unambitious and somewhat dreary over the ambitious and high-potential economic activities that they could be pursuing. Which is where I come in. Unlike a lot of people in the tech and investment spheres, I have at least a bit of background in the humanities, history and all of those murky forms of study that seem less rigorous and important than they actually are (if you read Clausewitz, you'll quite quickly find that the study of war is a humanist discipline), and my engineering background has given me some strong advantages in systems thinking skills. My personal background and experience with the sharp end of New Zealand's economy also means that I have a wealth of experience in parts of New Zealand society that a lot of people in these spaces don't have personal experience of. All of this means that I am perhaps quite well placed to identify some of the structural issues that prevent people from being ambitious and discuss how we might fix them. After all, trying to be ambitious simply by trying really hard to be more ambitious and make other people more ambitious doesn't really work: this really isn't something you can willpower your way into.

What we can do, however, is identify barriers to us trying ambitious things and remove them. We have quite a lot of them in New Zealand, and while some of them are going to be difficult to shift, they are shiftable with sufficient effort over a long enough period. Some of them are are also quite easy to fix. This, then, is the first article in a series where I write about practical steps that investors can take to make a proper startup ecosystem more likely to take in New Zealand than it currently is. In this article, I tackle the single biggest factor, to my mind, that's hampering the development of a strong tech and startup industry in this country: the absolutely execrable state of our housing market.

The impacts of expensive and awkward housing

Starting a start-up or doing anything that isn't the standard full-time nine-to-five job is inherently risky. There's a good chance it might not work out, a chance of financial ruin, a lot of stress. We accept these risks willingly, or at least without feeling too much spite about them. Housing, however, is a significantly bigger issue. New Zealand's housing is expensive even by global standards and much of what is affordable and available is in suburbs far from the city centres where economic activity tends to take place. And of course, New Zealand tends to have shitty public transport.

The reason I call out housing specifically is that an unstable housing situation makes everything else that much more stressful than it needs to be, and housing as an expense is much more inelastic than basically any other expense you might have. On a personal level, while trying to make this whole consultancy thing work, I've had very little money available, often to the point of being really uncomfortable (that this is still both preferable and more doable to my getting an industry job speaks volumes about how bigoted the industry is against trans women). I can mostly adapt: living in an apartment means that our power consumption is quite a bit lower than it would otherwise be. You can buy rice, beans and flour in bulk, and if you get good enough at cooking you can more or less live off that. You can get around by walking or using public transport. These are all broadly mitigable expenses. Rent, however, really isn't: every week I need to pull together three hundred dollars or I will swiftly find myself homeless. Homelessness is, to all intents and purposes, not mitigable: if I end up homeless I'm fucked.

This has a bunch of negative consequences for an ecosystem where we want startups to happen. First off, people aren't going to be willing to take the risk a lot of the time because the inaccessibility and high price of housing make the risk of starting something a lot steeper than it needs to be: you'll see a lot of people trying to build a startup or a new business on the side while continuing to work. This isn't a good way to develop a new business: these things tend to require one's full attention and quite a lot of work, and there's just no way that people can do that effectively while also working the whole time. This means that we get fewer new businesses than we'd like, and the ones that we do get are, for want of a better word, often pretty half-assed.

If (by choice or thanks to a lack of other options) someone tries to start something anyway, the very high cost of housing has serious distorting effects on our priorities. I don't, for example, really have the luxury of trying more experimental projects or taking things slowly: I have to publish frequently to keep eyes on my marketing and, in terms of consulting work, just take whatever I can get so as to be able to make rent for the week. In practice this means lots of fixing Shopify themes and suchlike (as an aside, if anyone has a Shopify shop that they need fixed or audited, hi!) and comparatively less of the more innovative things that an economy that wants to produce startups might like to see. It means that I'm not going to try and chase more ambitious work (well, I will because my personality's constituted that way, but even I do less of it than I'd like) because time needs to be dedicated to paying the rent. This means that we're all doing a lot less of the kinds of activity that lead to startup ideas: we see fewer companies because the people who might have ideas that could turn into a company are instead fixing another fucking Shopify site, and while that's good and honourable work, there's only so much you can innovate in that space.

When we are able to secure affordable-ish housing, it's often in suburbs that are very far away from business centres and that have poor public transport connections to them. A good example might be our previous home in Hamilton: it was half an hour from the nearest business centre of any size by public transport, with long gaps between buses. The only things in walking distance were a small supermarket, a few shops and a not-very-good library. This is a problem because a lot of how startups and any new professional business function is through in-person interactions: you meet new people, get to know each other and find opportunities in a way that it's very difficult to replicate online. There's a marked difference between having to carefully plan to go to a meetup (my previous situation) and simply being able to leave my apartment, walk for two minutes and be there on a whim (my situation now). This is also going to impact access to resources: if I need a book, an expert in something that I'm working or any number of other potential things, not having to travel half an hour for them makes them that much more accessible to me than they'd otherwise be. if someone has an idea in the current situation, then, unless they're lucky enough to live in Wellington or central Auckland they're going to be working mostly in isolation and with no support or feedback: not a situation likely to create success.

Finally, high housing prices mean that everyone trying to start something new is going to be faced, on top of all the stresses and anxieties that come with doing a new and somewhat risky thing in the first place, with the stress of paying through the nose for rent through the whole process. Stressed people, oddly enough, often have weird and counterproductive reactions to stuff and make bad choices, but the success of a startup depends, in large part, on people being able to make good decisions. Having people trying to start businesses in positions of extreme stress and precarity just seems like a really bad idea on the whole, and in practice what it means is that the only people in this country who are really well positioned to start start-ups are the people who're already wealthy or have the support of a family who are. This is true everywhere, to be fair, but the issue is significantly worse in New Zealand: the two people I know in my circle who were the most successful startup founder were also the people I knew with by far the richest family. This is a problem, because while these particular people are pretty smart and well-adjusted, they're also kinda outliers: many people who are positioned to execute on a start-up idea are quite detached from what the vast majority of people experience. This means that the startup ideas that they're likely to actually have end up being quite restricted. A lot of them aren't going to have the kind of reach we need for a properly ambitious startup, and a lot of them quite simply don't make sense to invest in if we're in fact aiming for the trillion dollar NZX described. As discussed earlier, though, we have a strong cultural attachment to "innovation" and also, in practical terms, too much capital chasing too few investment opportunities, so a lot of these ideas get funded when, in an ideal world we'd be funding more promising ideas that have a greater chance of actually sticking.

The end result of our housing situation, then, is that a lot of people who might otherwise try and start a new thing simply can't. Either the economics is prohibitive, the psychological barrier is to much to deal with or they're too isolated to make it work. Even when they can make something stick, the distorting effects of having to pay through the nose for housing and of having to take housing far away from business centres has a significant dampening effect both on which people can try to start something new and the types of things they try starting. Even when something ambitious is tried, it's usually tried either by people who have, if we're to be honest, quite a limited view of the world, or the sheer stress levels involved in trying to do the thing end up kicking your ass.

This is an obvious problem, and happily, the solution is also obvious. If we, as New Zealanders, want a thriving and active startup sector, we need to build affordable high-density housing that's easily serviced by public transport and close to existing business and innovation hubs.

Why affordable housing is good for innovation

The benefits are manifold. Affordable housing makes living comfortably on a low income a whole lot more viable: even if you're bringing in very little, if you can bring in enough to pay for rent, power (which is usually a lot cheaper in high-density housing situations) and internet, you tend to feel a whole lot more secure. You don't have to worry about losing the roof over your head and you're safe, dry and warm, which means that all of a sudden just trying something weird becomes a whole lot more viable. You can try something without having to worry too much about what happens if it fails, and as a result, the possibility of starting a start-up, along with a whole lot of other strange projects, becomes a whole lot more achievable. The people doing it also wind up a whole lot less stressed and consequently can both make better choices and afford to be more ambitious.

It's this, I think, that we need to stress the most. It's a relatively well-known fact from behavioural economics that most people are risk-averse: they'll work a lot harder to avoid a loss than to secure an equivalent gain. This is, of course, perfectly rational: in a situation where if you hit zero, you either die or find it very hard to claw your way back to your starting position, it makes a lot of sense to optimise for resilience and survival over maximising economic gain. It does, however, make it that much harder to be ambitious, and ambition is what a decent number of investors think that we lack. If we reduce the risk associated with failure, though, the balance changes and people actively become more ambitious: exactly what our startup investment community tells us they need.

You'll also get a much wider range of people trying out new ideas that could grow into high-value startups with a housing market that works for people. Right now, the barrier for a trans woman attempting to start up a startup is so high as to be effectively insurmountable (I should know: I've tried, though it never got very far). If you simply reduce the risk of being rendered homeless, though, you'll get people from all kinds of backgrounds and with all kinds of experiences trying new things. This is important: it means that investors are presented with a much wider range of ideas, and given that the current situation, as I've argued, tends to select for founders who are more than a little out of touch, I strongly suspect that the ideas being presented would have an overall higher hit rate when it comes to becoming profitable enterprises.

It's also worth noting that with more affordable housing, people become more able to actually trial their ideas before beginning to seek funding and other support. Especially for software startups, the very early stages of a business are pretty cheap: you might need to spend a little bit on website hosting, a bit on marketing and so forth, but we're talking quantities in the hundreds of dollars. Without affordable housing, that's often a stretch because the necessary exigencies of life just eat everything: with it, however, founders can often just pay out-of-pocket to try things out. This means that people will often just try something out and throw it online before seriously starting to seek investment, which in turn means that the ideas that investors see have already been battle-tested to an extent and shown their value:

The density, for that matter, isn't just a matter of making things cheaper: for a startup ecosystem, it's a good thing in itself. Trying to build a startup or a consultancy all on your lonesome is hard: it's lonely, as mentioned before there's no real service ecosystem that you can lean on, there are no clients and there's not even anybody whom you can talk to about the challenges involved in trying to do something independently rather than working for an organisation. Even if you have quite a lot of people trying weird stuff, urban sprawl means that people are dispersed and can't help or work with each other: they may as well simply be independent little islands of innovation all on their lonesome. Bring all of these people closer in to the business centre of the city, though (whether that's within walking distance or by way of frequent, rapid public transit), and all of this changes. You can suddenly support meetups which would previously have been impossible. Your founders and such can support each other with advice and emotional support. They can promote each other to people whom they know who might be good clients or customers. They can talk to clients or customers much more efficiently and consequently iterate much more often on their product. And people who might otherwise not have been able to start things on their own can find other people who can enable them to execute on their ideas. All of this makes it much more likely that the ventures actually succeed, and as a bonus these processes also generate more potential weird things to invest in.

The end result is that you're going to get a much wider range of ideas being tried, from a much wider range of people, and they're liable to be better and more rigorously tested ideas. People are also liable to be more ambitious with the ideas: feeling more secure and less threatened by failure, they're liable to try harder things and take more risks, given that they need to prioritise survival less in this situation. This creates precisely the situation that investors in the VC sphere want: a wider range of opportunities for investment, in a range of companies with different philosophies and in different niches, some of which will want to grow into really large, high-valuation companies.

While there's a lot New Zealand can do to encourage a thriving startup ecosystem, I'm pretty firm in my belief that this is the single biggest thing that we could do to make it more likely that large, high-valuation startups will develop here. To see enough ambition and create enough opportunities for investment, we need to reduce the risk of trying and failing. The biggest risk of failing at the moment is losing your home. Obviously, then, if we want to create the kinds of investment opportunities that the investor community in New Zealand really wants, we need people to be able to live safely, securely, affordably, comfortably and in the right place. We're pretty far from that now: let's see if we can change it.