IMPOSSIBLE TECHNOLOGIES: SAVING INVESTORS BILLIONS

Technology is a polarising sector, and throughout history, has attracted people, inventors, buyers, users, and investors. This simple piece is intended to save billions of wasted capital and bring clarity to non-technical financiers – a key part of our business.

We have all seen them.

Let’s paint a picture and you can choose what comes to mind. This technology seems so big, so great that the pursuit of it alone is attractive. It will require lots of money to commercially develop, and is often a “first”, a “next generation of”, or “new way to”, and it may sound too sci-fi to be real but so did everything great that ever existed teleologically.

The logic is “if the world adopts it, the people who delivered it would be rewarded handsomely”, but the operative word is ‘if’, and through this piece, we will be exploring what stands between ‘if’ and ‘actual’. To play devil’s advocate, none of the great pursuits of mankind would’ve been accomplished without a brave few willing to ignore convention and create change, the great innovations.

Technology does however tend to attract some bad actors and people who use superlatives as an average means of communication, markets are noisy, standing out is hard, and in the imperfect world we live in, we know success doesn’t always belong to the best but sometimes the audacious and ostentatious.

It has a way of drawing you into a bigger picture, a larger vision - it requires it. In the realm of growth capital with equity, not debt, investors are betting on the success of a company and using every metric, technical and fundamental to guide their share purchasing decisions. In the absence of strong financials and available data common in emerging/developing markets (technical), a stronger reliance on fundamentals is required.

The character of the management/founding team, their accolades, the market size, the potential size of the company etc, the list goes on, but this leaves much to speculation- the truth becoming what is communicated by the authority (which in a technical world can often be the company, not the investor).

For us as an investment bank for Technical companies, we are far more interested in what is not communicated, the barriers and bottlenecks. We are not here to just look at what is possible, but to identify impossible from the perspective of investors, and protect the capital that hangs in the balance.

There is a hard line between innovation and commercial reality and a few things that you can look at when evaluating technology investments.

Here's a few rules of thumb that can help you save Millions, in some cases, Billions:

DO NOT OVERPAY BEYOND LOGIC

Look at your general equity stake in regards to valuation. To earn a return on your equity in private markets (considering their illiquidity in the short term) you’ll most likely be expecting a liquidity event, through M&A or IPO. Irrespective of terms you’re generally betting the company share value will be higher than it was when you purchased it.

Investing £2m at a £2bn valuation (0.1% ownership) for a company that at best will see a £20m exit, your equity stake will be worth £20k on the backend, a loss, whereas if it were correctly valued with the £20m exit in mind, 10% ownership would at least return the capital in the exit. This ignores the concept of pre/post-money valuation and is an extreme example but the idea is to earn a return not give money away.

GENERAL SAFETY

To look at things that may hinder the success of a company and be the difference between a £2bn exit and a £20m exit could be as simple as a general safety issue. Without discussing specific ventures, a Technology that could be unsafe to use at scale or implement would heavily influence it’s commercial adoption.

Finding a new way of doing something is one thing, but doing it differently safely is another. From a commercial perspective there is a quagmire of different factors when operating at scale- and make no mistake, £2bn exit will require scale. Legal issue exposure, social friction, fear of usage, reputational damage etc.

To put it into perspective, a lot of the things used today that we would consider potentially dangerous were developed and refined since the 60s and took many lives in the process. The argument could be made that for the future we could just be at the same turning point as the 60’s and the investment and development is required to bring us forwards, and there is a case for that, but our question is, for what problems?

Our world is incredibly developed and in the 60’s we were solving critical development problems for example globalisation. Factories were 100 years old, flight 60 years old, critical components even younger, on the backend of 2 world wars and a nascent financial system with poor regulatory measures, there was both demand, capital and conditions that laid a foundation where the ends justified the means, and development had very little constraints.

Now our world is different, the problems we are solving are for luxury, cost, comfort, ease, and optimisation. There are still lots of developments to be made that will bring our world forwards in many areas but making 1 area 1% better will be a lot more difficult when safety hangs in the balance, creating an adoption barrier that if ignored, will devalue an entire company.  

AVAILABLE COMPONENTRY AND MATERIALS

Supply chain risk is a huge consideration. Different technologies and their companies are built on different levels. Multinationals that have a vertically integrated business may have direct contact and interaction with mining companies to source materials at a fixed price because it impacts the end price of their product and their ability to deliver and distribute it globally – therefore the control of that factor could be critical to the business.

Alternatively, companies that deal with componentry and materials, the general availability of them is a strong consideration. This is less important because with the right capital, this can be brought in-house, but there lies the other problem. If you can’t buy it, you must build it, which will require an investment in equipment, the human capital, the time expense, the materials, the mistakes, and in-turn a different capital level and different risk level also.

The silver lining is, this could be spun out as a strategic business unit where the business provides it's IP, and proceeds to third-parties (competitors and aligned businesses) to offset this risk and actually make the company more valuable.

For investors, acknowledging this may have to be the case, and recognising the difference in finance required to realize the predicted terminal value, could be the difference between moving forward with the investment decision and holding off- now your analysis moves to availability of human capital, supply chain, opportunity, probability and risk, in just this area.

The Levyne Group is a vertically integrated Investment Bank helping secure Capital Raises, M&A, and product sales for companies within the technical economy.

If you wish to invest in technologies, these are just a few things we look out for, get in contact today to discuss how we could be of service to you.