The history of hi-fi and video technology flops is long and sometimes fun, as long as you don’t fall victim to it.
Imagine the disappointment of the family who enthusiastically took to a 3D TV, paying £ 50 a head for glasses, only to find that the picture left them stunned. Or the movie buff who, in the late 1990s, invested in “the future of home entertainment” – an expensive LaserDisc player – just as Hollywood was abandoning the format.
Years ago my father proudly showed me his Betamax VCR. Soon after, it was replaced by VHS and became little more than an ornament on the sideboard. It served a useful purpose, however. It taught me to invest in technology.
Together with my co-manager Laura Foll, I spend most of my time researching the big UK companies of tomorrow. Sometimes that means identifying yesterday’s leaders who have the potential to reinvent themselves (think Rolls-Royce with nuclear power and aircraft engines that run on sustainable aviation fuel).
More often than not, it’s about finding promising and upcoming technology companies. One area of particular attention right now is clean energy, given the need to rebuild our energy infrastructure in this country and around the world. We have four holdings of listed companies in this area, each offering different methods of energy storage.
AFC Energy in Surrey is a leading supplier of alkaline fuel cell systems. These combine hydrogen and oxygen to produce electricity, heat and water. Originally developed for space missions, the technology could be used to power Two high-speed trains and navigation. It could also provide an off-grid backup power source for data centers and power-hungry construction sites. The construction industry currently accounts for nearly 40 percent of global energy-related emissions, mainly produced by diesel-powered equipment.
Ceres, a spin-off from Imperial College London, takes a different approach. Its SteelCell technology generates energy efficiently from conventional fuels like natural gas and sustainable fuels like biogas, ethanol or hydrogen. It can be used to provide combined heat and electricity for commercial and residential buildings. It can also be used in data centers and to extend the range of electric vehicles.
ITM Power has one of the largest electrolyser factories in the world. Based in Sheffield, it can recover excess renewable electricity and use it to produce hydrogen gas. Hydrogen is considered a central element of the new energy mix. As new wind farms come on stream, we will have times of the day when we generate more electricity than we need. The ability to convert this into a clean energy store, like hydrogen, can prove to be invaluable. It can then be used in cars (like the Toyota Mirai), trains or trucks and a myriad of other applications.
Ilika produces solid-state batteries, a less flammable alternative to conventional liquid-based lithium-ion batteries. These can be miniaturized to a scale of a few millimeters for use in next-generation active implanted medical devices.
These are all exciting companies, but it’s easy to get excited when you meet enthusiastic experts who are developing cutting edge technology. How do you choose the winners? Unfortunately, there can be no guarantee of success, but there are considerations that can help you mitigate or reduce risk as a private investor.
Market opportunity: Good tech companies almost always suffer losses early on because they require a lot of investment. They are difficult to assess. Sales figures offer little guidance as a metric, as there are often none. So look at the addressable market. What excites us about these companies is the scale of the opportunities if they are successful. The risk is asymmetric.
Diversification: It’s a mantra for any savvy investor. Due to the market opportunity, we can afford to support multiple players. Some won’t make it, but if we identify a winner the payouts can be more than ten times that much. This can easily compensate for the losses.
Patience: We only buy listed companies and even then we have learned not to jump too early. After its IPO in November 2004, Ceres’ share price jumped to £ 26, but it eventually fell and stagnated between 50 pence and £ 2 for eight years. We first bought the shares in August 2018 at £ 1.60. They started taking off in 2020 and are now £ 9.40 [5 Jan 2022]. It often takes time for the technology to reach commercial viability, much longer than expected. Yes, you can miss the early wins by sticking it out, but it’s generally safer. Be prepared to hold a winner. Investors often cash in their winnings too early.
Test the waters: Sometimes we buy a small stake and take the time to get to know the company better, following its development more closely. This means that we are in a better position to know when to build a position.
Partnerships: We are particularly attached to commercial partnerships. ITM has a joint venture with the global chemicals company Linde. Ceres has partnerships with Bosch and the Chinese company Weichai. It is the Bosch partnership that gave us the confidence to make our investment. These multinational partners can bring resources, distribution and broader expertise to a growing technology company.
Management: Another clear green light for us is when proven management is in place. The Ilika team has been around for a long time. The company’s scientific director, Brian Hayden, was one of the founders of the company and is a professor of physical chemistry at the University of Southampton. He is a pioneer in surface science and has been studying solid state materials for over 20 years. He is surrounded by experienced managers who have the necessary mix of scientific expertise and entrepreneurial talent.
It is impossible to say which of the four clean energy technologies we have supported will work the best. They may all have a role to play – action on green energy is unlikely to be satisfied by a single solution. And it might not be the best technology that wins.
Many outdated technologies – LaserDisk, Betamax, DAT audio tapes – were considered superior technology, but each had a downside or ended up being replaced before it could take hold. You can’t accurately predict the determinants of success, but I hope the tips outlined here – some learned the hard way – help you.
James Henderson is Co-Manager of the Henderson Opportunities Trust