Sam Morgan on GM crops, conservation and broadband

By Peter Griffin 12/04/2010

Wellington-based Trade Me founder, entrepreneur and philanthropist Sam Morgan sat down with me a few weeks ago to do an interview, the results of which ran in Idealog. Here’s the full, unedited version which expands on the work he is involved in in Africa.

What about this inclement Wellington weather? Is it tempting you to move to sunnier climes?

sam morganYeah.  It is actually. We might do that at some point, but we’ll stay in New Zealand. My wife’s family is in Nelson, so maybe we’ll move there.

Are you travelling much these days?

Yeah, not gratuitously. We had three months in Europe just as a family trip last year, and next week I’m at the TED conference in Long Beach. Then on the 1st of 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 just 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 is actually what works, 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.

Franchising? Is this a not for profit venture?

That one is actually for profit, but we fund it out of my charitable foundation. If the guy who runs it goes from zero to doing a million kids, then it generates money, but we’re not really in it for the money.

And the struggling African farmers?

You hear about these people that are the bottom billion, the world’s most extreme poor. Well, 70 percent of them are rural farmers.  So if you can go in and double their yields, which is easy to do by teaching them seed spacing, and give them access to markets, and better hybridised seeds, and all those sorts of simple things, you can actually help them go from having zero discretionary income, to having a little bit.  And the first thing they buy is education and medicine.

Hillary Clinton’s science advisor Dr Nina Fedoroff was in the country 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 they 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.  So I don’t really 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 we eventually got to a point where generics became the biggest part of the pharmaceutical industry, I think that as long as the developing countries are equally disrespectful of crop patents that makes sense.

So this venture in Africa, you’re actually 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 tone. 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 two thousand farming families to 17,000 farming families. They are targeting a hundred thousand farming 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’ll diagnose people by tele-link?

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, which are apparently quite difficult to find in India. They do the consultations via tele-link.

One country dearly in need of help at the moment is Haiti. Recovery there might be ripe for micro-financing type schemes.

That’s part of it. We support an organisation that works there called Partners in Health. They do rural health clinics. We fund them every year on a cycle and after the earthquake we asked if we should bring the payment forward. They said they’d received twenty five million dollars in the last eight days. So money is not the issue, making good use of it is. A lot was learnt from the response to the Boxing Day tsunami. They were sending in lots of milk powder, which was mixed with bad water people had available to them, which gave people disease and killed babies.

Back in the developed world, last year was a bit of a nightmare for many people. A lot of businesses went to the wall. How did you fair?

I certainly haven’t made any money in the last little couple of years, but I haven’t lost any either. Most of the businesses I’m involved with are reasonably early stage. But a lot of them had corporate sales models, and they basically were struggling to sell anything, because people were not buying.

You stepped in to save your investment in iVistra by taking control of the company.

It was a basket case.  We kept a few people, and we kept bits and pieces of technology. It is called Vizfleet now and we’ve a great team in there. We’ve reformulated the strategy around small medium enterprise dispatch software for mobile workforces. There’s a really big need for it. Every small company you go into has ten vans running around doing whatever – fixing bus stops, or collecting rubbish bins.

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 like ’oh can you be home all weekend, or can you be home 9 to 5 every day this week, because we actually 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 other investments, the light-operated mouse and keyboard (Lomak), seemed like a great product, why do you think it didn’t take off?

The Lomak - Good idea, bad business
The Lomak - Good idea, bad business

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. So I think the whole supply chain for that market is just broken, so we just said well, you know, let’s cut our losses.

After three years of putting money in start-ups, 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 and that on the market, I guess.

What has been the big lesson from all these investments

Go for people that 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! I see guys like you all week long, and you will.  So come and see me in a year at which point 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 kind of a bunch of entrepreneurs who are starting off in their own ventures. The law of numbers shows you 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 themselves but weren’t cashed up.  So they kind of didn’t have the ability to actually do stuff long-term, so it wouldn’t surprise me if that had just kind of blown up a bit.

Xero is like a beacon of light for aspiring web entrepreneurs. It must have been good to see the founder of Xero’s rival MYOB come onboard and buy a large chunk of shares.

Absolutely so, you know 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. Luckily, there’s enough cash in the bank to see it through to be successful.

One of the big buzzwords for the Government is ’innovation’. Have you seen any action from them in this area?

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 moves like not mandating compacting fluorescent light bulbs in New Zealand, are 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, do you think that would help 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 soon going to be less attractive. Do you think Kiwis having the confidence to invest elsewhere, in New Zealand businesses or even in the stock market?

Fundamentally, no. I have this argument with my dad quite a bit. We agree that the allocation of capital into property is excessive and needs to be controlled.

I think actually central government has a role in protecting people from their own stupid selves.  And, you know stopping people investing wholesale in residential or commercial property over the odds, is sensible.  Because that has the ability to just be a complete bomb in New Zealand.

What we disagree on is whether there will suddenly be this 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 quite a lot of asset classes.

Your dad has some pretty strong ideas about tax as well — a 25 per cent flat tax rate being one part of his ‘big kahuna’ idea to shake-up the tax system.

It is quite 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 about property, in late 2008 you bought a high country sheep station near Wanaka, what’s 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, you know keep it in line with the pastoral farming heritage of the region. And on the flats, there are 26 lots which we are in the process of getting the housing platform locations confirmed for.

Feedlots in McKenzie Country. Good idea or not?

New Zealand is widely recognised as having a pastoral system, not a lot feed system.  I think 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 green image took a beating last year overseas.

Well I think it’s moving a bit beyond that.  I think, you know the full energy equation has been taken a little bit more into consideration.  And 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.  So it’s, I think people are, certainly the smart buyers, the Waitroses of the world, are onto that. I think buy local is a big thing, I think the food miles argument is on shaky ground intellectually.

Your dad paid half a million dollars to climate scientists last year to research and present the arguments on climate change.  Do you think it was a good investment?

Gareth Morgan's book on climate change
Gareth Morgan's book on climate change

It certainly enlightened him. John Key said to me the other week that he had heard that the book was well regarded, and he had it on his to-do reading list for Christmas. If you can have influence at that level it is 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.

I think there are aspects of it that are problematic, like carbon credit exchanges and all those sorts of things. They’re all a little 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.

Do you miss the buzz of running a company like Trade Me?

I probably miss the people more than anything. But there are 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 up in Hamilton holding a Kiwi and looking at their pest proof fencing technology, and that sort of stuff.  And before that I was down in Fiordland with DOC looking at what they’re doing with pest eradication and saving forests. I love the variety.

Trade Me produced some great entrepreneurs, Nigel Stanford, Rowan Simpson and the StarNow guys among them. Is it still a breeding ground for entrepreneurs who want to do web start-ups?

Yeah I think so. But if you join Trade Me today you’re in a 150 person organisation, and you’re in the middle of the dev team, or wherever.  You don’t have that same perspective, so it’s probably doesn’t continue to throw them out systematically.  It’s something that’s more a product of the early years.

Former Fairfax boss David Kirk had a rather unceremonious departure from the company last year. Did the newspaper group’s board really appreciate what he did in buying Trade Me?

I know that there’s certainly no regrets about that transaction. Trade Me is still a fast growing company relative to a newspaper that’s generating heaps of free cash that 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. I had dinner with David the other week in Sydney, and he’s good. He’s now the chairman of Hoyts in Australia, among other things.

Will the Apple iPad save the print media?

I think the fundamental problem they have is that there is just so much more media you’ve got access to.  And barriers to entry are very low, you don’t have to own a printing press or employ many journalists, if any. So I don’t think it’s fundamentally changing that.  It might provide them some additional revenue stream but who is going to buy a thousand dollar device and use that to read their newspaper?  They already do that with their computer. I don’t think it will turn up on the newspaper P&Ls in a hurry.

Your old nemesis from the Trade Me days Telecom is having a rough time with mobile network outages, being slammed for breaching the Fair Trading Act and losing market share to competitors.

When the mobile network went down, I got e-mails from Telecom about it every 3 or 4 hours giving me really good updates. But I’m on Vodafone!

You know, the country needs Telecom. They needed a bit of a shock, and they were given that, and I was all for throwing punches in that fight.  I think we need to lay off now, let them perform, but I think we probably need to get proper structural separation of Telecom.

But I was on the phone this morning to foreign countries for two or three hours. I used Skype, So Telecom have to innovate quickly.

What do we need to do to fix the internet in this country?

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 six hundred million dollars and I think, you know, you can make that happen.  You do a cost plus model, and you sell some bandwidth to the likes of TVNZ and Sky TV and Vodafone, big corporates.  You put a little cable across to Australia, so you get the Australian demand as well, and you’ve got a business there.

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 mentioned you’ve been on the road looking at DOC projects. Are you becoming a bit of a greenie

You know I was never really into the old conservation thing particularly, but every now and then you see a model in there which really works, and makes a lot of sense. I’ve been looking around at what the Department of Conservation is doing in New Zealand, at Maungatautari up in the Waikato.  So I kind of have an idea now, at least I know the difference between a Kakapo and a Kiwi bird. I didn’t before.

You go up to Maungatautari and you’re walking around in a forest with a perimeter fence that has been up for a few years.  The forest is completely different. You have shoots coming out of the ground, little rimu, and kauri, just little shoots.  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 kind of a bit of a ticking time bomb.

1080 use is still such a polarizing issue.

It is divisive but, you know all the data shows that if you want to save your forest, it works.

So would you chip in money to Government run conservation schemes?

Yes I would 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, but, you know, they have different objectives, or they’re at cross purposes. Private sector style models often work better at the innovation and the early stage sort of stuff.

So what’s this about you buying into a cattle farm in Brazil?

There’s a family up in the Waikato, the Wallis family, and they farm around ten thousand head dairy cattle up there, one of the biggest suppliers.  About 10 years ago Simon Wallis went to Brazil and has built, in those interim years, basically a New Zealand-based dairy model in Brazil.  So they’ve got New Zealand cows, and New Zealand farming practices, with Brazilians manning the milk stations.

The main thing about it is the productivity there is three times what it is in New Zealand. We are getting, 50 tonne of dry matter per hectare per year. The economics of dairying in New Zealand are just embarrassing by comparison.

So I think there are some quite interesting models out there where, the Icebreaker model of basically just having designers here and ownership here, and increasingly being in Portland.  I think we need to, be internationalising like that. It is an exciting kind of path for us to take.