Philosophy
Picking future winners is challenging. Many investors have been scarred by visionary ideas that failed.
We look at Technology investing through a differentiated lens:
Ideas with a history of previous failure are good hunting grounds.
Some visions fail because they are premature; the core idea is attractive but the first iterations are inadequate. Either the core technology still needs cracking, or there are other prohibiting factors, like the supporting eco-system of companies being underdeveloped. Once hurdles are overcome, a stubborn Tech company – which kept plugging away through the tough times – may suddenly find itself operating a valuable ‘tollgate’ in a large end-market with limited competition (others have quit). This early leader may then enjoy a virtuous flywheel which entrenches its dominance: only it has the required technical experience to keep improving the product and set industry standards. This leads to scale effects and a compounding advantage. Those early to spot a company entering this sequence can invest at compellingly low valuations. Other fund managers are disbelieving (or have stopped looking at the area altogether), having seen it fail several times. The rise of passive investing is also reducing the amount of individual company scrutiny. The key is knowing how to collect evidence and assess whether the latest iteration of the Technology really works. Our experience and specialisation in this field (>30,000 company meetings and >70 years’ combined experience) is a major advantage.
Lifecycle of a Typical ‘Multi-Bagger’ Idea
Familiarity with S-Curves.
Each technology has an ultimate destination in terms of end-market penetration. We consider what percentage of the potential customers will adopt in the long-term, and how steep the adoption curve might be. No two ideas take the exact same path, but common patterns may emerge – for example, viral network effects or early signs of market saturation. Knowing how to spot them helps identify the right moments to buy and sell.
What causes a technology to ‘cross the chasm’?
The early pioneer of a new technology (whether hardware, software or a mixture) must often invent a ‘soup to nuts’ business model, as there is no existing supply chain. The outcome is a ‘clunky’ product which achieves minimal adoption. Other entrepreneurs, however, spot an opportunity; they form new companies which make the sub-components/tools more efficiently. Typically, after several failed attempts, one or more next-generation pioneers emerge. By harnessing the new supply chain, they crack the winning customer proposition. The next stage sees lower-value processes, which may sometimes include the making of the final product, getting commoditised (only producers with a strong moat can escape this fate). The falling cost curve allows lower price points to be hit, stimulating mass market adoption.
Who are the lasting winners?
Both final product makers and component/tool makers can be good investments, depending on how much value they contribute. It is usually wise to avoid the early pioneers with a high chance of failure. The best picks are companies that operate robust ‘tollgates’ and have real pricing power. Firms carrying out low value-added processes may see strong growth initially, but competition soon erodes their margins. Inevitably, copycats (of the good companies) will also emerge. However, if the leaders have erected high barriers to entry, they will shrug off such challengers and enjoy a long period of dominance. In the best examples, this can last for decades, but all companies – even the ‘multi-baggers’ – ultimately have a lifecycle, and become vulnerable to new disruptive threats.