As technology investing through EIS grows in popularity, Deepbridge Capital Head of Marketing Andrew Aldridge demystifies the tech speak
In the twenty-first century, technology is all around us and is shaping the world we work and live in.
To this end, it is natural that technology-focused companies will form part of investment portfolios and this is never truer than in the EIS sector where the Government is increasingly incentivising investment to focus on ‘knowledge intensive companies.’
As the ‘tech revolution’ continues we are often asked what sectors are ‘hot right now’ and we witness flurries of buzzwords as people seek to jump on the next bandwagon. As the technology and life sciences investment experts, we invariably see these trends emerge and disappear and it is important that we focus on the credibility and opportunity offered by a prospective investee company rather than being distracted by the crowd.
However, while we as a sector-focused manager might understand all of the terminology and trends, we recognise that not all advisers will feel so confident in broaching these subjects with a client, even if recommending, for example, a technology focused EIS or SEIS product to them.
‘She blinded me with science’ isn’t just a great pop lyric but it can be a truism in many markets, especially when the market changes so quickly, new tech is being unleashed all the time, and firms are seeking real competitive advantages by pushing the envelope day after day.
With that in mind, it’s always useful to appreciate some of the basic terminology and trends, especially if you’re an adviser active in the tax-efficient space. How else might you answer a client on why an investment manager is investing in one company over another and what is it seeking to do with the client’s investment monies in order to develop, grow and target that all-important return?
So, let’s look at some of the current ‘buzzwords’ in the technology sector.
First up, the much-talked about Blockchain – very much associated with – but not limited to -cryptocurrency, Bitcoin. Blockchain are blocks of digital information that can be distributed across many networks but can’t actually be copied. It’s for this reason that there’s great interest in Blockchainbased transactions as they provide a degree of security of information.
Blockchain creates ‘digital value’ – it is shared information that can be reconciled/updated continuously and as Don and Alex Tapscott, authors of Blockchain Revolution put it: “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
2. Artificial Intelligence
But what about other tech terms may be banded about? Artificial Intelligence (AI), or machine intelligence, is in contrast to natural intelligence shown by humans and machines. So, in tech/computer sciences AI can be viewed as tech which responds to its environment and takes action by itself, based on changes in that environment, in order to maximise the chance of it successfully achieving its goals.
It’s a lot to do with machines ‘learning’ and ‘problem solving’ and it’s meant to mimic how a human being might adapt and find a solution based on the factors it encounters. For those of a certain age, this might seem a little too close to the Terminator films, however, there are clearly benefits to be had from tech that learns, adapts and makes quality decisions based on a greater understanding of its environment.
3. Virtual Reality
Another term that may well be heard is virtual reality (VR), alongside augmented reality (AR). Essentially, with VR you can create a virtual, immersive environment within technology; utilising VR, users can be transported into their VR ‘world’ which can resemble real life or conversely look nothing like our own world. AR is based on a ‘live view’ of the world but adds digital elements to it – the most famous example in recent years is probably Pokemon Go, where people were using their phone cameras to ‘catch’ Pokemons on the ‘streets’.
Avoid buzzword investing
Many of the investee companies we work with are using some (or all) of the above to shape their propositions, products and services, and while some will be pretty far down the road in terms of their business ‘life’, some might just be an idea which has the potential to be grown, adopted and change all kinds of environments. The important thing to remember with any investment manager is that they should not be investing in the ‘buzzword’ – in fact, a company or individual that tries to shoehorn these words into a business plan or a description is likely to be doing more harm than good, and would certainly be off-putting to us.
So, what do we want to see? Well, it makes sense to marry the technology with the other assets the investor company has at its disposal. Don’t get me wrong, the technology is vitally important – this is the intellectual property and it is absolutely vital to have a robust strategy around the IP’s development and future usage. After all, it’s the asset that’s being invested in and we would undoubtedly be looking for any hardware to have the necessary patents and, while software can be difficult to patent, the firm should have, or be in the process of, securing copyrights and developer restrictive covenants which may actually form part of that intellectual property strategy.
However, the other ‘asset’ is just as important and that’s the team behind the innovation. A robust IP strategy coupled with a committed and engaging founding team, plus a product or service which is globally scalable, and one that has multiple vertical markets at its disposal, adds up to a truly engaging investment opportunity. Using these criteria we seek to maximise returns and ensure our approach continues to sit comfortably with the Government’s Risk to Capital and Knowledge Intensive Companies criteria and intentions.
So, as can be seen, the ‘tech speak’ is useful to understand but it is perhaps more important that advisers work with investment managers that know how to identify, value, commercialise and exit tech companies – having access to such sector experts is invaluable when seeking to maximise opportunities.