View the full paper “Investing in Innovation.” An excerpt follows.
We believe innovation can be found in any part of the economy and seek to invest wherever innovation occurs, regardless of sector classification, market capitalization or geographical location.
There have been significant breakthroughs in many sectors. To organize the change occurring in the economy, we have outlined five major evolving platforms of growth. These are not intended to be completely inclusive; in fact, we hope they are not. We expect these five platforms of growth to generate considerable economic value over the next five to 10 years.
We believe global e-commerce is an arena of tremendous opportunity. Per estimates, global sales were only 14% penetrated by e-commerce pre-COVID.1
Today, with the new reality of COVID, we have seen estimates of between 22%–25% penetration.2
Even in the United States, so-called “highly” penetrated industries, like travel, books, office supplies and media are, on average, only 41% penetrated.3 And, there are many more industries—like groceries and global transportation—that are only modestly penetrated by e-commerce.
Within global e-commerce, beyond companies like Amazon and Alibaba, we see significant opportunity in industries like fashion, automobiles, travel, ride sharing, restaurant delivery and even textbooks.4 We also see opportunity in payment companies that significantly remove friction, both in terms of ease of use, security and safety from the system.
Other opportunities include business-to-business (B2B) procurement, and software that enables brick-and-mortar companies to have an online presence. Drone manufacturers and other new ways to deliver packages and products could also become potential investments.
The common perception may be that global e-commerce is late stage. In our view, there is so much further to go.
The sequencing—or decoding—of the gene is one of the greatest accomplishments of our era. The gene was discovered in 1953,5 but first sequenced during the Human Genome Project in 2003 at a cost of US$2.7 billion.6 The cost of gene sequencing—or mapping DNA for diagnostic and curative purposes—has fallen rapidly in recent years. We believe the industry is on the cusp of creating meaningful diagnostics and therapeutics—and, as a result, wealth creation. We are particularly interested in companies within the diagnostics, gene editing and gene silencing arenas that will likely benefit from this dynamic.
Today, mapping a genome costs roughly US$1,000; at this price, we believe there should be an explosion of possibilities. These opportunities may go beyond human gene therapeutics, to agricultural and even artificial intelligence applications.
Artificial intelligence or machine learning is permeating every layer of product development. From using simulation tools, to advanced graphics, to designing products and getting immediate feedback as to points of weakness in a structure, or real-time intelligence on wear and tear that can feed back into new designs—smart machines are involved.
If the last 30 years were spent organizing data with mainframes, personal computers and mobile phones, we believe the next 30 years could be set up to take that data and change our lives in the physical world. We expect to see opportunities in companies that intelligently design, manufacture, transport and maintain physical machines, in addition to investing, of course, in the machines themselves. We view this as a virtuous cycle, which will have shorter and shorter feedback loops, making improvements to physical goods much faster.
The future of production will include individualized products designed specific to the needs of the customer. Efficiencies created in the design and manufacturing process, employing massive amounts of data, will enable that level of specificity and customization.
We believe access to capital is one of the fundamental differences between developed and developing countries—the grease that allows efficient transfer of value. We believe there are three vectors that drive access to capital.
The first is our concept of what constitutes money. In the past, people bartered for goods and services, which can be very inefficient. We have moved from barter to precious metals—backed by their own innate scarcity—to fiat currency backed by the full faith and credit of a government. Today, we are talking about currencies backed by algorithms.
Similarly, the other two vectors, efficient pricing and methods of exchange, have also significantly evolved. In the past, the better barterer determined the price of your goods and services; then it was a loan officer at a bank with all his/her intrinsic biases.
Today, we are increasingly using data to appropriately price risk, allowing us to allocate capital in more efficient ways. Methods of exchange are also evolving with the trends in e-commerce, allowing mobile payments and digital wallets to gain traction.
Underlying virtually all our investment themes is the constant of data. Without data, none of these platforms can be successful. But data isn’t virtual—there is a physical component to data that is often ignored. We need to clean the collected data, then store and deliver the same data. That requires massive amounts of data centers, fiber-optic cable, and cell towers—among other supporting infrastructure. To use data for something like artificial intelligence, computing power and memory are crucial. Graphics processing units, central processing units and field programmable gate arrays represent some of the many components necessary to process that data more efficiently.
The creation, cleaning, storage and delivery of data will lead to new applications like augmented and virtual reality, artificial intelligence and machine learning, software as a service, and the sharing economy. There are many investment opportunities in companies that play critical roles all along this value chain. Some have postulated data is becoming the oil or gold of the new economy. We agree.
Any Sector. Any Market Cap. Anywhere. Right in Silicon Valley for Over Half a Century.
As active managers, we recognize the importance of having the flexibility to invest in any sector, any market capitalization, and any place—because innovation is everywhere. Outperforming the market is hard and we have designed our process and product to be as flexible as possible. Being in the heart of Silicon Valley allows us to work side-by-side with some of the world’s leading innovators. Our team is constantly talking with thought leaders across industries; reading up on the latest developments; and meeting with companies, public and private, to understand the technologies and ideas that could have transformative potential. Change is happening rapidly, and we believe that only through active management is it possible to identify and capitalize upon significant inflection points.
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What Are the Risks?
All investments involve risks, including possible loss of principal. The technology industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants as well as general economic conditions. Investments in fast-growing industries, including the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.
1. Source: Lipsman, A., “Global Ecommerce 2019: Ecommerce Continues Strong Gains Amid Global Economic Uncertainty,” eMarketer, June 2019.
2. Source: MoffettNathanson,”Payments: From Tidal Wave to Tsunami—Our Proprietary eCommerce Forecast, Updated for COVID-19,” as of May 22, 2020.
3. Source: Lipsman, A., “US Ecommerce 2019: Mobile and Social Commerce Fuel Ongoing Ecommerce Channel Shift,” eMarketer, June 27, 2019.
4. Source: Heather, J. M., and B. Chain, 2016, “The sequence of sequencers: The history of sequencing DNA,” Genomics, 107(1), 1–8.
5. Source: Singh, S., 2018, “The hundred-dollar genome: a health care cart before the genomic horse,” CMAJ: Canadian Medical Association journal = journal de l’Association medicale Canadienne, 190(16), E514.