Why Future Investors will Focus on Materials Innovation
What do Investors Look For?
Let’s start at the beginning. Investors, no matter what type they are, angel, debt, equity, investment banker, fund manager, venture capitalist, are all looking for the same thing – Return on their investment, or ROI. A former boss of mine had a great saying, “Make sure you put all of your children to work for you!”. In other words, make sure every dollar you earn is working to increase its value.
ROI is not just maximizing revenue gains on the investment dollars, but also minimizing risk; because no matter what the investment, there is always some inlying risk.
So, how do investors, large and small, maximize returns and minimize the risk? Basically, it’s in the research. They need to know a few things about the companies they are investing in like:
- What is the market reach and opportunity for this company and/or products?
- Is the company innovative and does it develop breakthrough products?
- Is the company or product considered “disruptive”? Meaning, does this product make current products obsolete (think word processor/typewriter or automobile/horse and buggy)?
- Is there, or will there be, significant demand for their products?
- Is there a path to gain market acceptance? Can they move past the early adopter stage to a broader, more mainstream market?
- Are there competitors that operate in the same space, and how will they fight them off?
- What are the capabilities of the management team?
- Does the team have a diverse set of experienced advisors to guide them through rough times?
(Note, we categorize “services“ as products throughout this article)
All of this is important as investors weigh their options. The companies that can check off all the boxes have the advantage of lower risk, and line of sight to profitable returns.
However, we do recognize that having a great idea is not enough, the company and its leaders must be marketing-led in their approach to business. Meaning that the potential market must drive activity such as:
- Product development
- Brand awareness
- Shaping attitudes
- And a consumer-centric focus to all the above.
We can think back to the video player wars between Sony’s Betamax and the JVC’s VHS format. Most experts agreed that Betamax was technically superior in every way to VHS, however, JVC understood that broad market appeal would be vital to success. The VHS tapes, while with lower picture quality, could record 2 hours as opposed to 1-1.5 for the Betamax; meaning that full movies could be housed on a single VHS tape. Thus the VHS format found its way onto far more video store shelves than Betamax. The leaders understood the power of marketing and product alignment with consumer needs – eventually equaling a much broader market reach.
Investors will take a hard look at the management team to see if they have the proper business acumen to run a company, but also to ensure they have the entrepreneurial/marketing skills to move a great idea into the marketplace.
History of Investment Wins
History shows us that many investments that might have seemed risky at the outset, were actually well thought out and researched. This is especially true during times of economic downturn. It seems counterintuitive, but the worse the market is, the more chance there is to profit. Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.”
Stock markets follow some predictable patterns, and have always recovered from downturns…always! However, when we are in the midst of a depression, recession, or even a mild correction, it’s human nature to be cautious and a bit pessimistic. This is when savvy investors can make huge gains, by backing those companies that will create new products, new industries and even new movements. Those downturns always led to periods of prosperity, and those companies who were prepared (and had investors) at the starting line, reaped huge benefits.
The late 70s were a time of runaway inflation and investor caution in the U.S. but those who invested in Steve Jobs‘ and Steve Wozniak‘s idea of small computers for the individual profited greatly. In 1977, Mike Markkula, an angel investor saw the future of this “home computing“ and invested $250k in Apple. By 1980, the economy turned, computers took off, and today, that share is worth billions.
Investor boldness doesn‘t need to be tied to socio-economic conditions, sometimes it is just the ability to see the future. In 1998 Andy Bechtolsheim, co-founder of Sun Microsystems, put $100k into a company that didn’t even exist yet. Why? Because he could see the future of the Internet’s power over commerce. That company? Google.
History is rife with examples of investors seemingly taking huge risks with not only unknown companies, with completely unknown industries! What are those unknowns today? We believe it’s in the materials innovation space.
Innovation and Its Role in Driving Opportunity
Innovation is the lifeblood of most industries. It’s the competitive edge that propels companies like Apple, Google and Amazon. Innovation and disruption help bring about positive changes in society (case in point, ESG). ESG mandates are directing our society towards a greener and more sustainable future. We have also seen innovation in areas like medical devices that have led to advances that extend our lifespans and improve our quality of life.
Innovation is most commonly associated with new technologies, new manufacturing methods and new adaptations of materials. It can also be an outcome of “gaps” in the marketplace. These gaps, for example, could have been transportation related. In the early 1900s, most people moved about by horsepower (the original horse power that is) and there was a “gap“ between how people got around, and how they wished to travel; the automobile filled that gap.
50 years later there was a gap in the outright power and speed of those automobiles, and the safety they provided. The innovative products that filled that gap included seat belts, air bags, crumple zones, and even RADAR speed detectors. Gaps in the market always represent opportunity, and savvy investors look for, and identify those gaps.
As with most innovative ideas, it’s not just one technique or technology advance that spurs growth, it’s usually a combination of technologies, materials and ideas that foster the advancement. This is why we believe that materials innovation will be at the forefront of investment speculation for years to come.
In the same way that the industrial revolution relied on multiple technologies and ideas (steel, oil, electricity), we believe material advancements will take place on a few fronts. We see general improvements to product quality and lifespan, products that take less energy and resources to produce, to raw material supply chains that are more localized and include more bio-based materials. These innovations will intersect and bring about new materials, better products and more efficient methods to manufacture them. Whatever the innovations, expect them to be disruptive.
Product Development and Disruptive Technology
Product development is paramount in gaining a competitive edge in manufacturing. Think back 10 years and ask yourself, “Is any leading manufacturer still producing the same portfolio of products“? The answer is – probably not!
Makers of cars to computers to washers and dryers, all tend to introduce new products at a regular cadence. However, how often is that introduction something truly innovative and disruptive? Compare the first iPhone to the release of the iPhone 13. Both were necessary for Apple to keep a competitive edge, both required a ton of resources to launch and included innovative ideas, but only one was disruptive.
The term “Disruptive Technology” first popped on the scene in the mid-1990s, but disruptive technologies have been around for hundreds of years. Think the Cotton Gin, the Steamboat, or even the Wheel!
Today, we may overuse the word “disruptive” when talking about product development, because the word has so much power. However, consistent development is not always innovative disruption. Companies, even those with steady levels of development, must be on the lookout for disrupters. Investors must be on the lookout for them as well.
Let‘s go back to the videotape era to see a perfect example of disruption. When Blockbuster was approached by a novel technology company that sent digital copies of movies to subscribers (first CDs then via the Internet), they (Blockbuster) were still in a comfortable phase. No one at Blockbuster seemed too interested in the digital path this company was taking, and in turn, declined to invest in them. That company? Netflix. Was the Netflix model disruptive? You bet (and Blockbuster bet wrong). However, Blockbuster at the time was still developing a relatively new business model, even though it was widely accepted in the marketplace.
From a conservative investor standpoint, it might have looked like Blockbuster was a safer, more consistent investment (and at that exact moment, it probably was!). But those investors who saw the disruptive opportunity that Netflix offered, profited handsomely.
Another note on disruptors; they are usually small and/or startup companies. Why? Because by nature, they look for niche opportunities where they can outperform the status quo. The most successful then turn that niche into widespread market acceptance of their innovations.
Why Investors Should Look at Materials Innovation
Investors should look into materials innovation because it is an industry that has the most potential to grow exponentially in the coming years, and has many opportunities to be ”disruptive”. There are thousands of materials in use today, and some date back hundreds of years. This opens the door for disrupters.
Innovations in the materials industry are also one of the most important future factors for a number of sectors, including automotive, aerospace, building products, packaging and consumer goods.
In the past, investors have been investing in innovative technology like AI and AR/VR, and they are most likely the future of consumer-focused markets like entertainment and electronics. But in reality, these technologies alone are not going to be able to solve the world’s biggest problems.
To tackle climate change, pollution, population growth, food distribution and world-wide healthcare issues, we will need a steady stream of new materials that are eco-friendly. Let’s face it, we live in a consumption-based economy and that’s not changing anytime soon.
ESG, Sustainability and Market Opportunity – Materials Innovation For the Environment
ESG is short for Environmental, Social, and Governance. It is a term used in the investment industry to refer to companies that take proactive steps in these areas. Sustainability, ESG, renewable energy, all terms that have been receiving a lot of attention lately. Everyone agrees that to maintain life on this planet as we know it, we need to be more mindful of how we take care of it. Sustainability is simply learning to live in harmony with the Earth.
Human activity over the last 150 years or so (since the Industrial Revolution) has been improving technology, improving our lifestyles and on the downside, damaging our environment. It’s understandable, as early on during the revolution, we didn’t have the data on how the planet was suffering, nor the means to collect and interpret that data. In turn, we did not fully understand the negative impact we were having on our environment. Today, thankfully that has all changed.
Sustainability is now on the front burner, and getting the attention it deserves. Along with the data and attention, comes action. On the corporate front that action is in the form of ESG measurements and mandates. An ESG mandate is a requirement to comply with specific environmental, social, and governance standards. These requirements can be implemented at either the company level or by regulators themselves.
From the Environmental angle, most companies are looking to measure emissions from standards called Scope 1, 2 and 3. Scope 1 and 2 are internally controlled and revolve around power usage and conservation to limit greenhouse gasses. Scope 3 are the external properties (like the raw materials used) that are much harder to control and measure. Because of this, companies that are focused on the Scope 3 efforts will be filling a huge void, and there lies the investment opportunity!
Furthermore, an ESG mandate can either be retrospective or prospective in nature. Retrospective ESG mandates require companies to examine the behaviors that have already taken place whereas prospective ones focus on activities that are yet to occur. Prospective, or proactive mandates look ahead to the future, to set strategy on increasing a firm’s sustainability. Again, here is where materials innovation will be front and center.
Managing scope 3 emissions is about finding ways to reduce their impact on the environment through steps like buying responsibly sourced materials. This means that companies that can measure, track, and demonstrate the positive effects of their bio-friendly materials (e.g., lowering the carbon footprint), could see the largest opportunity for growth over coming decades.
Estimates are that over $5 trillion will be invested annually in sustainability-related businesses and activities. This could prove a huge shift in investor sentiment when it comes to companies and their commitments to a better environment. This trend will not be limited to investors, but consumers and employees as well. The bottom line is that if companies want to thrive in the next few decades, they, and their investors, will have to have a keen focus on their sustainability strategies and implementations.
The Shift from Negative Screening to Positive Screening, and Ultimately to Proactive Engagement with ESG
Investors in sustainable companies have seen a shift in how they gauge opportunities. Early on, the investors would exclude companies from their portfolios that did not meet standards for sustainability, or had some negative press tied to environmentally unfriendly activities. They would screen out, or take a “negative screening” approach to those companies that had a bad reputation and simply look to invest in other directions.
Then, sediment shifted to a “positive screening“ viewpoint, meaning companies that had better reputations for environmental awareness and activities, now got another look when it came to investment dollars. Companies that had the reputation for positive environmental actions, were actively considered a better choice for investment.
Today, it’s all about corporate strategy and the proactive measures that companies take and report on, to be sustainable. Now, it’s not sufficient to simply have a good reputation for sustainability, you have to prove it. Investment managers are including ESG factors in their fundamental analysis and identifying ESG strategies as paramount to a company’s success.
Investors are now looking at the management team‘s commitment to sustainability with the same intensity as they examine their operations, finance, sales and marketing plans. They are looking for compliance, especially as it relates to new SEC reporting requirements (likely to be put into effect in late 2022).
The Securities and Exchange Commission (SEC) has proposed these new rules https://www.sec.gov/files/33-11042-fact-sheet.pdf that would require public companies to report detailed accounts of their climate-related risks, greenhouse gas emissions, and ultimately their net-zero transition plans. This will leverage companies into making sustainability a core consideration for their businesses. Not just because the regulations exist, but because investor speculation will favor those who demonstrate higher levels of corporate responsibility, and the competitive landscape will shift to align with customers’ and investors’ attitudes towards environmental causes.
Materials Innovation – The New Demand for Sustainable Materials
Manufacturers make products, products are made from a collection of raw materials, and raw materials have been slow to adapt to the changing landscape that focuses on climate change.
Today, we still make products from many of the same materials we used 50 years ago, wood, steel, and petrochemicals (oil). Many textiles are made of natural materials like cotton, or man made polymers like nylon. Homes are constructed with wood, concrete and stone. Skyscrapers and bridges contain large amounts of steel. However, there’s a shift in thought towards raw materials, as our current path is unsustainable.
There are only so many trees to cut down, raw ore to be mined and oil to be pumped out of the Earth. I know landowners who contract with loggers to harvest hardwood. These trees are sometimes 200 years old or more. Do we simply say, “Come back in a few centuries, and we will have more trees for you“? Of course not, even though wood is considered renewable, it simply cannot grow at the pace we need to sustain our planet’s raw materials needs.
Nor can we mine or drill for the resources we will need to satisfy the demands of the future. We will need materials innovations that can keep pace with our society, and that brings more meaning and weight to the word, “Sustainability“.
We will need to find new, bio-friendly and bio-sourced materials that don’t add to the weight of our material shortages, and supply chain interruptions we see today. In other words, we need more in the way of materials innovation to keep pace with our consumption patterns and at the same time, reduce the negative impact we have on our environment.
Investing in Materials Innovation is Investing in Our Future
Companies that invest in new materials innovation for the future, will certainly see growth and may even ”leapfrog” the current competition. History shows that the most profitable companies in the world are constantly investing in research, development and innovation. These investments are key to staying ahead of competition, keeping up with technological advancements, and creating new markets.
Materials innovation is the key to making the world a better place. It’s the key to solving our sustainability crisis and it’s the key to unlocking these new opportunities for economic growth.
Materials innovation is not just about creating new materials, it’s about rethinking how we use them and how we can do more with them. It’s about finding ways of using less material and making what we already have go further.
This is why investing in materials innovation is investing in our future – because it will help us meet some of society’s biggest challenges, from avoiding climate change to leveling social inequality, and eventually ending poverty and food insecurity.
Increased levels of manufacturing and our human consumption of those products, has led us to this critical inflection point. We know consumption will only continue to rise, the answer is in creating new materials that are more eco-friendly to make, more eco-friendly to use, and more eco-friendly to dispose of (if we dispose of them at all)!
In the past, sustainability practices were only adopted for the sake of environmental stewardship. But more and more companies are adopting these practices to get a competitive edge in their industry. This means new, innovative materials will bring on disruption and in turn, market acceptance, and in some cases – market dominance. This is why savvy investors are setting their sights on companies who will challenge the status quo when it comes to new materials.
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