 |
Feb. 4, 2005 – Small tech is emerging as the next great technology revolution. Over the next few decades, it will fundamentally change the way we work and live, transforming our day-to-day lives. Over the next few years there will be a wave of microtechnology-based products that will have significant impact.
After this wave, we will start to see the emergence of nanotechnology products. But we are early in the revolution. Only a few small tech products are currently in regular use.
 |
Given the potential of this amazing field, it also will draw in people looking to make lots of money.
As the Internet bubble proved, some people will make extraordinary amounts. The bubble also proved that even more people could lose large sums of money. As more people get interested and excited about small tech, one of the big questions is, when and how to invest in the field.
Since small tech is still so early I would recommend the average individual investor avoid the field for now. If you are a professional or serious investor in information technology, life sciences or advanced materials, small tech is going to cause a fundamental restructuring of your investment space. To the degree that you invest in these areas, it may be appropriate for you to start allocating investment dollars to this new category.
Here is a list of specific investment questions that you should ask when considering investment in a small tech company.
What product will be sold? How will it be sold? And are there fair profit margins for each channel participant? In small tech, companies are often looking for funding before a clear product opportunity has even been identified. If you don’t know what the product is or how it will be sold, how do you know the company can make money?
Why will it be compelling for someone to buy this product? Does a customer really need the product? Or would it just be nice to have? If there isn’t a compelling need, it may take a couple of years longer to build a sustainable revenue base. The time lag could harm your return on investment.
How big a market is there for this product and its successors? Many small tech products will lead to good $10 million to $50 million annual revenue companies. If you are investing in a company expecting an IPO, you need to be looking at companies that will generate hundreds of millions of dollars in annual revenue.
Can the product be made in large quantities with high quality? There is a huge gap between a university-built device and a manufacturing system that can build large commercial quantities with high quality. Don’t underestimate the years, dollars, and problems associated with this gap.
What is the competitive landscape? Don’t believe the company if they tell you that they don’t have any real competition. If nothing else, there are probably companies in the macro world with products performing similar functions.
What is the intellectual property situation surrounding the technology? There are two parts to this topic. First, there should be strong patent coverage for the underlying technology in the product. Second, look at what other IP might be out there that could either stop your product or cost you a lot of money in royalties or litigation — potentially a serious problem for this field.
Is there an experienced management team in place? If the company doesn’t have a strong management team, don’t invest. Great technology and solid product opportunities don’t make great companies. People do. Also, keep in mind that a management team will often need to change and evolve with the growth of the company.
What is the plan for getting a return on investment? Have you thought through the following questions: What is a reasonable return to get on this investment given the risk? How many years will it take? What form will it come in? (That is, are you counting on an acquisition of the company, an IPO, etc.?)
Even if you find an investment opportunity that passes these tests, remember you are still getting involved in a high-risk situation. Investing in early stage companies in a new field is not for the conservative investor. On the other hand, you may find a company that will help improve the world and make you a great financial return in the process.