In an earlier post, we explored five must-have success factors that we think are essential for a modern tech investor that wants to thrive in today’s dynamic global market. Now we would like to turn to the actual investments. What is an outstanding investment? Also, we’re introducing the Technology Impact concept, a three-step investment philosophy.
The financial goal of an investment is simply to generate a healthy return. The higher the returns, the better the investment. An investment is even better if the returns are also positive for society, the environment, job creation and the greater good.
The challenge is not, however, to evaluate the investment in hindsight, but to figure out a good investment beforehand. How can you be confident to make an investment that makes a profit at all? Of all the possible ways to invest money, an investor has to find an investment that stands out from the rest.
A good way to start is to have a solid investment philosophy. For example, to only invest in what you understand, because it is familiar, and thereby maybe less risk. Another investor might want to invest in businesses and sectors that others are shying away from, a contrarian approach. Or take Warren Buffet’s classic value investing philosophy, looking at intrinsic value that exceeds market value.
In private equity (venture capital, growth equity and buyout), investors invest in shares and other instruments in unlisted companies. It is one of the most complex disciplines of investing, because it is usually long term investments that play out in very dynamic environments, like fast changing technology markets, while typically relying heavily on entrepreneurs and key managers to achieve success.
How do private equity investors pick investments? For example, in typical buyout investments, investors look for mature quality businesses with operating improvement potential and steady cash flows to pay off debt used in acquiring the company. In early stage and venture capital investing, when you have to make a bet on a usually unproven business, investors typically invest in people (“we believe in this great team”), markets (“we think bitcoin is booming”), a product (“we like the user value”) or a pain point (“we see an unserved need in the market”).
A growth capital (or growth equity) investor incorporate elements of both venture capital and buyout, looking for established companies that can benefit from capital and other resources to accelerate growth.
Standout is a Nordic technology growth capital investor in the mid-size segment. We recognize that investments in technology markets are risky, and that the pace of change and development is ever increasing. Innovation is exponential, not linear. Our point-of-departure is that technology macro trend is transforming business and society, and will have an impact on all companies. We have developed a three-stage approach to investing in these technology companies.
1. Growth company
First we identify outstanding companies that are growing, and match our criteria like great founders and management, growth metrics, customer acquisition and retention, profitability and other signs demonstrating a good business.
2. Value creation
Secondly we evaluate if and how we can create even more growth and value in the company, by injecting growth capital and working actively with the business. While the criteria differ, these two first steps are pretty standard procedures for most growth investors.
3. Technology impact
Thirdly, we apply a Technology Impact perspective to check if we think that the business is defendable from a dynamic tech market perspective. The company can either fail the test (it will probably not be around for long) or pass the test (it fits well in the macro trend and is likely to succeed.)
In Megatrends 2015, Ernst & Young wrote: “Fuelled by the convergence of social, mobile, cloud, big data and growing demand for anytime anywhere access to information, technology is disrupting all areas of the business enterprise. Disruption is taking place across all industries and in all geographies.”
We believe this is true. A key element to Standout’s investments is viewing all companies, products and markets from the perspective of digital change and transformation. This approach helps us in identifying new business opportunities early as well as avoiding portfolio companies being caught in old business models displaced by new ones.
Examples of opportunities and risks include a company that can drastically gain or lose from markets undergoing digital change; for example yellow pages companies vs Google. A company can also disrupt an existing market, thereby influencing the market dynamics, for example Uber and AirBnB. An established company, on the other hand, can leverage its existing customer base to new platforms and offerings, like Netflix that moved to streaming media or a traditional retail chain moving online offering e-commerce.
Digital change, transformations and disruption will shift large fortunes in the coming years, from established businesses to new ones, through the development of existing businesses into new digital offerings and the automation of old jobs. These shifts will create opportunities for investors that can grasp the technology impact on companies, markets and society.