Whatever their level of scientific education, there was one equation that became all too familiar to financiers during the past two years: investment plus technology equals disappointment. Collapsing share prices, flawed business plans and high-profile bankruptcies helped give technology a bad name in the investment community, from which it is only just beginning to recover.
That was harsh on the thousands of companies operating in hi-tech sectors unrelated to the dotcom monster that attracted, then lost, billions of pounds worth of investment between 1997 and 2000. The result was a sharp downturn in the availability of funding for much of 2001, and a struggle by ‘real’ hi-tech firms to repair the sector’s battered reputation.
Happily the indications are that confidence is returning to the investment market.
Earlier this month, Deloitte & Touche, which carries out a major quarterly survey of venture capitalists, reported the first significant upturn in confidence for three years.
More than 90 per cent of the almost 800 venture capitalists questioned said they expect the performance of companies they have investments in to improve or stay the same. At the same stage last year the figure was less than 50 per cent.
‘Venture capitalists appear to have called the bottom of the market,’ says Quintin Barry, Deloitte & Touche’s private equity partner. There were also encouraging signs that investors are preparing to return to technology-led sectors, with 20 per cent saying they expect to focus on those areas.
If that is the case, it would provide some much-needed stimulus for technology ventures all the way along the development chain – from those seeking very early-stage ‘seed funding’ to those at the point of commercialisation.
The investment community has learned some harsh lessons over the past few years, and even if sentiment towards technology sectors improves, caution is likely to be the watchword. But according to Charlotte Moore, analyst for investment bank WestLB Panmure, this should actually work in favour of hi-tech engineering projects as they battle to distinguish themselves from the ‘here today gone tomorrow’ merchants of the dotcom world.
‘One of the great strengths of hi-tech engineering is that it tends to have fairly high barriers to entry, not least because it is difficult stuff to do,’ says Moore. She points out that many new technologies spend up to a decade proving themselves in universities before even attempting to find funding. ‘A company that has spent that long in a laboratory has completed a lengthy learning curve, and may well have something serious to offer.’
Another legacy from the excesses of the late-1990s will be an even greater focus by investors on the end application of any innovation they are asked to back. ‘The way a technology will eventually be applied in its market, and the route it can take to that market, are going to figure very strongly,’ says Ian Lobley, technology group director at investment house 3i. ‘The business skills of people involved in these ventures is going to be at least as important as their technical skills.’
According to Lobley, the upheavals of the past few years will inevitably leave their mark on how investors make their decisions. But he says there is no reason for technology ventures with solid commercial applications to be dismayed. ‘If you look at economies such as the UK’s and what is going to drive them forward, I don’t know anyone who thinks the impetus is going to come from anywhere except hi-tech innovation,’ he says.
Andrew Jones, technology analyst at Evolution Capital: nanotechnology
Jones believes nanotechnology has established itself far more quickly than is generally realised. ‘There is a commonly held sentiment that commercial nanotechnology lies on the distant horizon, say 10 to 15 years away,’ he says. ‘This is simply not the case, and in our view it is commercially relevant now.’
Jones says the use of the technology in drug delivery is testament to this, with ‘at least five listed European companies’ already applying it in this field. According to Jones, high awareness of nanotechnology among US venture capitalists is beginning to filter across the Atlantic to their UK counterparts, with a ‘slow but steady’ increase in investors seeking deals. ‘Whether this is the beginning of a herd mentality akin to that fostered by the dotcom phenomenon is yet to be seen,’ says Jones.
‘We believe in the long-term potential for investment returns from nanotechnology, but we are aware of the need for prudence and due process when investing in any emerging sector,’ he adds.
Ian Lobley, director of technology group at 3i: semiconductors and wearable electronics
According to Lobley, 3i has identified an increasing interest among electronics manufacturers for reconfigurable silicon technology. He says the ability to produce chips flexible enough to be used for different functions, or to respond to product upgrades, could save the ‘disproportionate’ amount of time and money the industry spends redesigning them from scratch.
‘Consumer devices are changing and upgrading faster than ever,’ he says. ‘Building a lot more flexibility and intelligence into the silicon is highly desirable.’ Lobley also notes developments in ‘wearable electronics’ – everyday devices such as mobile phones that can be integrated into the fabric of clothing. ‘These types of development are interesting, although potentially fraught with danger for the investor,’ he says, stressing the need to discriminate between the ground-breaking and the gimmicky.
Dr Richard Leaver, fund manager, Generics Asset Management: mobile medical devices
Leaver has noticed a growing number of plans to make portable versions of medical equipment that would once have involved patients being attached to a system. These range from devices that can be implanted into the body, to wearable sensors that can monitor vital bodily functions.
He says: ‘The implications of these advances are huge, both from a medical point of view and for the quality of life of patients as they undergo treatment.’ He believes they have the potential to offer ‘cradle-to-grave’ benefits, with sensors equipped to warn of a danger of cot death at one end of the spectrum and monitor cardiac functions at the other.
Leaver says the emergence of such systems is an interesting example of how technologies need to evolve in tandem. ‘Using these portable devices brings new power constraints, and if they are going to reach their full potential you have to see advances in that area as well.’
Charlotte Moore, high-tech engineering analyst, WestLB Panmure – fuel cellsAccording to Moore, the fledgling fuel cells industry tends to generate the kind of hype that currently makes investors nervous. The investment community has recently experienced over-excitement followed by catastrophic under-achievement – with losses to match. But Moore is prepared to give fuel cells the benefit of the doubt.
‘There is still a groundswell of opinion that says this is going to be a very important area,’ he says. ‘That feeling is strengthened each time there are noises from big players such as General Motors about what they plan to do with the technology.’
Moore says major investment in fuel cells by blue-chip firms such as GM is likely to be the key to success for many development-stage companies operating in the sector. ‘They need that type of big partner to help them grow.’ .
Alan Duncan, director, Prelude Technology Investments: location mobile services
Duncan says location services have the potential to transform the mobile phone into a tool for navigating your way around and allowing others to find you.
Prelude has a long-established interest in Cambridge Positioning Systems, the UK specialist in location technology that has made big headway in the US. The UK and Europe have been slower off the mark, but Duncan expects that to change.
‘There is no doubt that the mobile network operators see the ability to offer added-value services based on location as an important way to increase their revenues,’ he says. ‘Firms that can offer effective technologies in that area will be well placed.’