Let’s talk margins, not just ‘investment stories’
09/01/2006
I have long been stating that it is especially important for companies working in the field of micro-nano and molecular technologies to properly assess their true market opportunities. This is simply because these companies - which are, in essence, highly sophisticated material processing companies - are normally very capital intensive, have high fixed costs, and therefore need a sufficiently large market to justify their expensive cost structures.
In many cases, it appears that the markets served are just not big enough to justify a company’s capital expenditures. Some companies try to escape these constraints by trying to develop some sort of platform strategy. For example, the company might develop many different products serving completely different markets using the same technological base. However, it remains to be seen whether this concept can really work out well for nanotech companies.
I therefore strongly recommend that these companies, in their discussions with investors, should not only focus on the technological aspects of their work, but also give a very credible analysis about precisely which market or markets they are targeting, and provide specifics about how they are going to achieve their goals.
We who invest in publicly-traded companies normally don’t have a sufficient understanding of the technology, but we understand terms like market share, competitive situation, projected revenue growth and margin projections. If you want to convince us that your all-embracing technology platform is going to solve major problems in information, energy or materials, then show us your numbers. Technology stories are fine, but make the business case.
Unfortunately, without a clear pathway into a possible industrial implementation, R&D alone won’t be sufficient to economically drive down production costs. It’s the direct and immediate diffusion into the market that enables us to drive down the cost curve through economies of scale - the steady ramp-up of even more efficient production facilities. And once unleashed, it’s the market itself that really will help us to accelerate innovation more than anything else.
Sometimes the market needs to be nudged in the right direction before it can have its impact. One need look no further than the photovoltaics market for a good example. For more than two decades, thousands of researchers all over the world were working on improvements in the material to maximize the conversion efficiency of light into electricity. And yet the real breakthrough for the implementation of solar energy into our electrical grids did not come from any new revolutionizing scientific breakthrough. Rather, it is coming in the form of the political will to prepare the market for this new type of electricity generation.
First in Japan, then in Germany, and now in more countries all over the world, there is a growing trend toward creating political incentives to loosen the world’s dependency on hydrocarbon energy resources. The foremost “solar incentivized” markets exploded, inducing a rapid virtual cycle through cost and efficiency improvements. In Japan today, the subsidies are no longer necessary, and photovoltaics is becoming competitive for electricity delivery.
More countries are going to follow over the next decade. This entirely new market opened up and accelerated considerably the search for new, more efficient and cheaper material developments, starting from new thin-film technologies based on amorphous silicon to cheap polymer materials.
All this shows us that for a better appreciation of micro and nanotechnologies in the economy and in the perception of investors, we need the market first and foremost. In conclusion, focus on the market, be it with or without governmental support. With the increasing importance of micro and nanotechnologies not only in the sectors of energy and the environment, but also in information technologies, healthcare, consumer products, and many other areas, well placed companies should not be too embarrassed to include in their “investment stories” also a “margin” and a “market” story.
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Thiemo Lang is a specialized fund manager at Lombard Odier Darier Hentsch & Cie in Zurich. He can be reached at [email protected].