The greatest technological trends… (Confidential)
A new wave of technologies is about to change the world...
As investors, it's a window of opportunity we're unlikely see again in our lifetimes… the kind that leads to extraordinary profits.
Investing in up-and-coming technologies, or growth stocks, might seem counterintuitive today. Government debts are at record highs. The Federal Reserve, the European Central Bank, and the Bank of Japan are all printing ridiculous amounts of money. Economic growth is weak the world over.
But few people understand two underlying trends…
The first is the accelerating rate of technological change, propelled by the impact of "exponential technologies." Artificial intelligence ("AI"), robotics, network sensors, synthetic biology, 3D printing – these technologies are all advancing at exponential rates.
At the core of exponential technologies is the microprocessor, the "brain" of any computing device. For the last 45 years, the power of these microprocessors has been doubling every 18 to 24 months. As a result, we have progressed from the most basic forms of computing (like addition and subtraction) to completing complex algorithms at speeds far faster than the human brain.
At the same time, the costs for this processing power have been dropping exponentially. Computing power that used to cost tens or hundreds of millions of dollars is now less than $1,000 and accessible to the average consumer.
Today's average smartphone is more than 32,000 times more powerful than all of the computing power used for the Apollo missions to send astronauts to the moon. And it fits in your pocket.
Some of today's cars are "smart" enough to drive by themselves. In just a few years, millions of self-driving cars will be shuttling people around more safely, more efficiently, and more cost-effectively than any human driver could do.
Artificial intelligence capabilities are also improving by the day.
Tesla cars, for example, use AI for their self-driving technologies. This allows the cars to learn, improve, and deploy their new skills via automatic software downloads to the fleet of Tesla vehicles. Every iteration delivers more safety to Tesla's customers. The company collects data from a million consumer miles… every 10 hours!
The laws of accelerating returns and exponential growth are firmly entrenched, and will impact every aspect of our lives.
Consider this…
Over the last few decades, it took the average Fortune 500 company almost 20 years to reach a $1 billion market capitalization. Compare that to social media giant Facebook (FB), which reached a $1 billion market cap in a little more than five years. Today, Facebook has a $321 billion market cap. It took in $18 billion in revenue over the past 12 months alone.
Online transportation company Uber hit a market cap of $1 billion in about three years. Uber is still private, but it's estimated to reach $26 billion in gross bookings this year.
Slack, a workplace-productivity software platform, reached a $1 billion valuation in a mere eight months. (It, too, is a private company.)
How is this possible?
In short, it is simply easier, cheaper, and faster than ever before for companies with a fantastic product or service to bring them to market.
Cheap computing power, simple-to-use development tools, Internet infrastructure, and more than 3 billion smartphones deployed around the world all contribute to this acceleration in innovation.
These are all very real businesses generating extraordinary revenues, thanks to exponential technologies.
Another contributing factor is the rate of technology adoption. When the first personal computers came out 25 years ago, the cost was prohibitive – from $3,000 to $5,000 (in 1990 dollars). Today, you can buy the latest technology for less than $1,000. And many services provided via smartphone applications are often offered for free (at least, initially). Dramatically improved distribution platforms, highly automated manufacturing, and affordability have been catalysts for more rapid technology adoption.
The chart below shows the time it took for certain technologies to reach widespread adoption...
It took the telephone about 60 years to reach a 75% adoption rate. Electricity took about 35 years. The radio and color television took about 20 years. The cellphone and the Internet reached 75% adoption in only about 15 years.
The time to adoption will become even shorter with new technologies. The positive impact on society will be faster… and the profits made from investing in the right technology companies will be greater than ever before.
Thanks to this acceleration in innovation, the average company lifespan on the S&P 500 index is plummeting.
Back in the 1960s, the average company remained on the S&P 500 index for 60 years. By 1980, it had dropped to about 35 years. By 1990, less than 20 years. And by 2010, it had dropped all the way down to about 15 years. Current projections for 2030 are even less than that.
This is because most leading-edge technological development is happening in private, venture-capital-backed companies, not the ones that have been around for the last 30 years. Slow-moving, incumbent companies find themselves out of business (like Kodak) or having to sell themselves to another large company before they die naturally (like AOL).
Exponential technologies, coupled with exponentially decreasing costs to use those technologies, has created the perfect environment for rapid innovation.
Just 16 years ago, it cost $5 million to launch an internet technology company and bring a product to market.
It was even more for those that made computer hardware (like semiconductors) – typically $15 million to $20 million.
However, with the development of free, easy-to-use development tools, and cheap, ubiquitous computer processing resources, you can launch a company and a product today for a mere $5,000.
That leads me to the second underlying trend that few people realize…
Over the last five years, the financing of technology companies has changed dramatically. Fairly modest sums of capital can now create billion-dollar companies.
Back in the late 1990s or early 2000s, if a private technology company had $20 million to $50 million in revenues and was generating free cash flow (i.e., its cash balance was growing, not shrinking), it was time to go public. By selling shares via an initial public offering (IPO), companies received the capital they needed to reach the next stage of growth.
Today, more and more technology companies are using angel investors (funds from private individuals) and venture capital (VC) dollars (funds from private investment groups) to bring their products to market. They are able to fund research, development, and revenue growth without the scrutiny and expense of being a publicly traded company.
Venture-capital financing in the U.S. has been on a strong uptrend over the last 10 years. The graphic below shows $77 billion in VC financing in 2015… the highest level of funding in the last decade. That's a 13% increase over 2014, and about double the level invested in 2012.
It is also important to note that while the amount of VC capital is increasing, the number of deals is decreasing… indicating a larger number of large deals. 2015 had only about 86% of the deals closed in 2014.
For the past five years or so, large banks, hedge funds, and other institutions – such as mutual funds, hedge funds, family offices, and asset managers – have been allocating larger percentages of their investment portfolios to private companies, primarily technology companies with the potential for exponential returns. Hundreds of billions, in fact, have flowed into venture-capital-backed firms.
In 2009, the investments by non-VC entities were mostly in the single digits. By 2015, the number of investments being made by these entities went through the roof...
By a factor of 15 for hedge funds
By a factor of 11 for mutual funds
By a factor of 30 for family offices
By a factor of eight for asset management firms
In fact, by September of 2015, 78% of the billion-plus financings were led by non-VCs, up from 60% a year before.
With so much money at play from non-VC sources, it was necessary for VC firms to invest in larger and larger private deals. Each deal takes a lot of effort. For example, if a fund has $1 billion to invest in a given year, will it do 100 deals of $10 million, or 10 deals of $100 million? The answer is that it tends to gravitate toward a smaller number of larger deals.
This explains financing deals like Uber. In August 2015, the company received $1.2 billion from several Chinese companies. Uber was valued at around $50 billion at the time. It has since raised funds with a valuation of $62.5 billion.
The private financing of technology companies has caused the entire technology IPO market to dry up over the last few years.
In 2015, only 24 technology companies went public, representing only 14% of the total IPOs for the entire year. These are the lowest levels seen since the 2008-2009 financial crisis. In 2007, or pre-crisis, 60 tech companies went public, responsible for 28% of total funds raised in the public markets.
New companies with fantastic, leading-edge technologies have been able to raise private capital in the hundreds of millions or even billions… giving them time to develop their products and business models before going public.
And this dynamic – the ability to stay in the private sector longer – is creating the most exciting investment opportunity of our lifetimes.
Once a company goes public, it is typically under much more scrutiny. It's subject to reporting requirements that can be distracting to a quick-growing business. Hence the desire to delay the IPO process.
This has led to a huge backlog of companies waiting to go public… And some are among the greatest technology companies in history.
Think of it like a massive bottleneck… a dam ready to explode.
VC investors, investment banks, hedge funds, and institutional investors put money into private technology companies for one reason: to make outsized profits. They are willing to be patient… to a point. Eventually, the investors expect more… they demand an exit.
Exits sometimes come in the form of an acquisition by another technology company. But the really massive gains come from taking these companies public via an IPO.
And you have a chance to get in on these next generation technology stocks ahead of the crowd.
My Exponential Tech Investor subscribers have already had a number of big IPO winners, including gains of 97%, 100%, and 239%.
And these are only the first of many companies that will go public over the next two years. As the "dam breaks," these companies will access the public markets, raise billions of dollars, make fortunes for investors, and replace slow, outdated companies on the S&P 500 index.
Unless you've been part of the senior management team of a private company that has had an IPO, or you're in the world of investment banking helping companies go public, the IPO process is likely a bit of a mystery.
It's a well-defined procedure that thousands of companies have followed over the years. But about three years ago, something interesting happened… The process became secretive and much less transparent.
But on April 5, 2012, the "Jumpstart Our Business Startups Act" (JOBS Act – H.R. 3606) was signed into law. Buried within the act in section 106, entitled "other matters," is the following clause:
Any emerging growth company, prior to its initial public offering date, may confidentially submit to the Commission a draft registration statement, for confidential nonpublic review by the staff of the Commission prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed with the Commission not later than 21 days before the date on which the issuer conducts a road show…
Thanks to this clause, companies can submit confidential IPO filings. This allows them to do a lot of the leg work for going public many months in advance, without making its intentions known to the public.
Being able to file confidentially has significant advantages. The IPO prospectus – known as "S-1 filings" – are very detailed. They provide specific information about the health of the business, strategy, products, revenue, costs, key contracts, etc. If this document is public, it means that the competition will also have access to all of this information. It also means that investment banks will be contacting the company nonstop to sell their services and help the company IPO. Keeping the details of the company confidential prevents any competitive disadvantage, as well as unwanted distractions.
The JOBS Act defined an "emerging growth company" as one with annual gross revenues less than $1 billion U.S. in its last fiscal year. The vast majority of companies aspiring to go public meet this criterion. And they're taking advantage of it…
By the second year of the JOBS Act, about 87% of all companies filing for IPOs did it confidentially. The Wall Street Journal recently referred to these confidential filings as the "Dark Pipeline."
The ability to fly under the IPO radar might be great for businesses, but it's frustrating for investors and investment banks. They can longer see what companies may be preparing to IPO.
An S-1 filing used to be the only way investors and investment banks could know which companies were preparing to IPO. Now that companies have the ability to file their S-1s confidentially, an S-1/A and a road show are the first publicly available signs that going public is imminent.
And when I say "public," I mean public only to those scouring SEC filings and tracking news on any road shows that might be taking place. At best, you might have two or three weeks' notice on whether or not to invest in an IPO. The average investor only becomes aware of these new companies months or years after they have gone public… often missing the largest potential profits.
The only way to know about these opportunities is to have done a tremendous amount of research and analysis well in advance.
Over the last five years, I've been studying the most interesting exponential technologies and the key private companies working in that space. This is critical preparation for determining whether or not an IPO will be a worthy investment for us. I've also been looking at each company's sequence of financings, the size of each round, and the actual entities that are making the investments. This kind of information signals whether a company is getting ready to go public.
Time is short once we know a company will IPO. Those days are spent analyzing any updated information about the company, the S-1 and S-1/A filings, the pricing and valuation of the IPO, and any updates about the products, industry, and competition.
To that end, I have "shortlisted" 20 companies that could IPO within the next 24 months. Many of these companies will make fantastic investment opportunities for my Exponential Tech Investor subscribers.
Some of these companies will likely be acquired before an IPO by larger technology companies. That doesn't necessarily mean that the investment opportunity has been missed. In fact, the acquiring company might become an interesting investment as a result.
Either way, we're preparing to take advantage of these exciting opportunities. This is critical to being a successful small-cap, high technology investor.
The most transformative and disruptive technologies and business models are most often driven by small, secretive, venture-capital-backed companies that almost no one has heard about.
And we want to get in on the ground floor of these companies as early as possible.
Here's how we're going to do it.
Regards,
Jeff Brown
Source: http://pros.bonnerandpartners.com/
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