Take care of business before getting too carried. Invest in companies that do the same.
November 21, 2021
When I was younger and more naïve, a mentor provided seed money and lab space for me to develop proof of principle for a synthetic biology start-up. My goal was to engineer organelles into fast-growing industrial microbes that would create metallic nanoparticles more precisely than is possible today. Spoiler alert: It didn’t work. Many bacteria in nature really do make metallic nanoparticles, but engineering organelles for precise control over the crystalline structure of the metals was a little beyond the capabilities of synthetic biology tools and know-how in 2016.
As a 20-something, aspiring entrepreneur, one of my obstacles was myself. I thought I had a methodical plan for developing proof of principle, but I was too distracted by what the potential start-up might be able to accomplish. Could microbes manufacture metallic nanoparticles to make more powerful batteries? Could we dope iron-containing nanoparticles into asphalt and enable self-healing roads? (If you’ve ever driven on a Pittsburgh road, then you know why this is almost as exciting as better batteries.) What I should have done was simply focus on the science and, when that didn’t work, pivoted or closed up shop.
I actually received that advice at the very beginning, but I was young and naïve, remember? After hearing my pitch, an older, wiser, and more accomplished individual smiled and shook his head. He paused before dropping his wisdom on me. A former Green Beret, he reminded me of the importance of focus.
It’s great to look out in the field and see your 100-meter targets. But if you don’t take care of your five-meter targets, then none of that will matter.
I’ve put my synthetic biology start-up aspirations on hold for now, but I still think of this advice when evaluating investment opportunities today. It’s especially important when investing in drug developers and understanding the importance of de-risking events.
There are many precommercial drug developers, genomics stocks, and synthetic biology companies with valuation risks right now. There were even more prior to a few corrections in the last month or so. It’s tempting to blame the euphoria in the broader stock market, which is certainly playing a role.
But at a higher level, it seems that many investors are buying into storytelling and slick investor presentations (the 100-meter targets) without really considering whether a company can methodically execute over time (the five-meter targets). Stories and ideas are easy. Execution is not.
Take Nano-X Imaging (NASDAQ: NNOX) as one example. It became a FinTwit favorite in late 2020 and roared to all-time highs in early 2021. The company promised to disrupt the x-ray machine and provide low-cost, accessible radiology tools powered by artificial intelligence algorithms. The Israeli start-up promised to go from zero machines in the hands of customers in summer 2020 to 15,000 deployed globally by the end of 2024.
What do have investors to show for it? A nearly 60% year-to-date decline driven by multiple delays with the U.S. Food and Drug Administration, multiple delays to regulatory and commercialization timelines, an SEC investigation into possible violations of federal securities laws, a subpoena from the SEC regarding questions over the truthfulness of manufacturing cost estimates and timelines, a lawsuit from a former consultant for allegedly unpaid fees, and a management team that berated Wall Street analysts asking reasonable questions on the third-quarter 2021 earnings conference call.
For all the grandiose plans to disrupt x-rays, Nano-X Imaging was never capable of hitting its five-meter targets. Investors had enough information at the time of the company’s public debut to have significant doubts about the ability to execute, but many chose to invest in storytelling – because those 100-meter targets sounded really cool.
It’s very important to remember that investors invest in businesses, not technologies. If the business lacks focus and is struggling with execution, then there’s a good chance the underlying technology being developed will never live up to its full potential. Invest in companies that are hitting their five-meter targets today, as they’re the ones that have the best chances of delivering on their long-term promises, too.
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