Lesson Learned: Great Technology Doesn’t Guarantee a Great Business
November 22, 2020
“Technology is what links science to human experience; it is what makes science real for us.” – Daniel Sarewitz, Professor and Director of Consortium for Science, Policy & Outcomes (CSPO) at Arizona State University.
Technology might make science real for us, but it doesn’t guarantee that a great business will emerge post-development.
Many investors enjoy geeking out on innovative technologies. It’s fun to think how technology can improve humanity, whether by making modern life safer, healthier, wealthier, or more efficient and convenient. But that doesn’t remove the need for objectivity.
As a young engineer and investor, I was a little naïve about the realities and difficulties of commercializing innovative technology. It’s one thing for a company to make a presentation at a conference describing how its technology platform will change the world. It’s another thing entirely for an early-stage company to become a viable business, let alone change the world.
My naivety was exposed and challenged pretty early in my journey as an investor. In late 2013, I became the editor-in-chief of a synthetic biology conference. During my tenure I toured labs and interviewed founders of tiny start-ups no one had ever heard of (Editas Medicine, Ginkgo Bioworks, Twist Bioscience, and countless others) and some of the first publicly-traded industrial biotech companies (Amyris, Codexis, Intrexon, and Solazyme). I was even a shareholder in a couple of them.
Problem is, these were the worst investments I’ve ever made — even to this day. How could that happen? I’m a bioprocess engineer, after all, and I had access to information many others didn’t.
Well, I learned pretty quickly about the pitfalls of information distribution on the internet, how corporate marketing (this includes investor presentations) and conference platforms actually work, and that Silicon Valley is fueled in large part by hype and storytelling. What’s great for venture capitalists isn’t always great for individual investors.
Making matters more complicated, I learned the hard way that great technology doesn’t guarantee a great business. A company will often point out the most flattering metrics for its technology platform — the power of gene editing, highly accurate synthetic DNA manufacturing, or the ability to avoid deforestation by using microbes instead of palm plantations to make useful chemicals — and avoid pointing out notable hurdles, which almost always involve technical obstacles and challenging economics.
Looking back, I leaned a little too much in the direction of being a cheerleader, rather than an objective analyst. It’s difficult to think clearly when you’re holding pompoms.
My Investing Approach and Framework
My early mistakes as an investor have molded my investing style into what it is today — and hopefully you can learn from my mistakes, too. I now use a bottom-up approach comprising three distinct layers of research.
First, I dig into a technology in great depth through a combination of scientific literature, interviews with independent scientists and engineers, and (when not in a pandemic) tours of labs and facilities. Then, I leverage that research to better understand the differences between companies taking different approaches with the same or similar tools, including mass information (digital publications, industry publications, and corporate presentations). Finally, I dig into SEC filings for specific businesses to understand operating metrics and financial outlooks.
The goal is to find technology platforms that are solving important pain points in their respective industries (ideally with simple solutions) and that have high potential for commercial success. How has this impacted my returns? Well, I have a more concentrated portfolio because it’s more difficult for a company to make it through the vetting process, but I have been early on a handful of great investments such as Fate Therapeutics, Iovance Biotherapeutics, and Repligen.
My first three recommendations as a 7investing Lead Advisor have been vetted by this framework. To let you in on a little secret, my original choice for my December 2020 recommendation failed this framework. The business is viewed relatively favorably by Wall Street analysts and individual investors, and it met several criteria I value highly, but I uncovered some notable red flags that could derail commercialization efforts. That led me to abandon my original choice for a different company — after the team had already locked in our picks — that passed my framework with ease. You’ll learn of the recommendation on December 1.