Four Technology Investment Themes for 2019

To kick off the third series of the award-winning GrowthInvest Adviser Hour, we gathered a panel of leading industry experts to talk about the biggest opportunities and challenges in the technology investment space. Chaired by Lawrence Gosling, the panel line-up featured Louise Farley from Deepbridge Capital; Matt Ellams from Jenson Funding Partners; Dr Ilian Iliev from EMV Capital; and Charles Breese from Newable Ventures.

If you missed the live show, you can still catch up on-demand here – or read on, for some of the technology investing trends that came to light.

1. Applications, Not Buzzwords

With no shortage of technology opportunities in the UK and Europe, new tech trends and buzzwords appear in our inboxes and Twitter feeds every week – but it’s important to remember that investable opportunities are the ones that typically have clear applications: they are solutions built to solve problems.

“Technology should be an enabler” said Matt Ellams from Jenson Funding Partners; “we see a lot of ‘tech for tech’s sake’ and this is a real problem”.

Charles Breese from Newable agreed: “A key filter for us is looking for businesses that improve productivity for clients and customers. ‘Tech for tech’s sake’ is popular, but it’s only when a founder shows you how they’ll deliver the benefit that you can see how well they really understand the supply chain in which they operate.”

With a lot of apps and fads in the market, the panel agreed that real life user cases, practical applications and market fit are the essential ingredients for investable technology opportunities.

Louise Farley from Deepbridge added: ‘We’re really wanting to look at the research and development of goods and services that already exist in most of our everyday lives. Sectors can incorporate anything from augmented reality to artificial intelligence but it’s how you look at these things on a consumer level (e.g. wearables) or business level (e.g. enterprise software) that affects us in our everyday lives.’

First point to note: tech investment isn’t a case of blue sky thinking; investors are looking for businesses that know how to solve problems.

2. Risk Profiles in a Knowledge Intensive Market

Another key market trend has its roots in the government’s Autumn 2017 Patient Capital Review, which shifted the focus onto Knowledge Intensive Companies: ‘companies carrying out research, development or innovation’.

Dr Ilian Iliev from EMV Capital commented: “Even before the changes came in, backing knowledge intensive companies is what we’ve always done at EMV Capital. Now, the government is giving tax breaks for innovative companies, compensating tax payers for taking on the additional risk.”

Ilian continued, assessing the growth of the market more generally: “What’s interesting is that a few years ago, the EIS investment space wasn’t very mature – but now, it’s institutionalising rapidly, linking up with mainstream Private Equity and Venture Capital, not only in the UK but internationally.”

As the industry matures, advisers considering where to place capital have a mandate to get comfortable with changes to asset-backed schemes and the current risk profiles of SEIS, EIS and VCTs. As the panel advised: advisers don’t necessarily need to understand the granular mechanics of Augmented Reality and Artificial Intelligence, but they do need to be confident weighing up risk appetites and risk profiles in the alternatives market.

3. The Power of Pivoting

Another key theme for technology investing: it’s important for management teams to be agile; but pivoting can bring its own set of challenges.

Charles Breese said: “A key point to think about with management teams is how they are going to make decisions. No plan ever goes to plan, so as an investor you want to know that when an unforeseen problem hits, a founding team will take a fact-based approach”.

Matt Ellams continued: “The pace of change is so fast now that one of the challenges we have as an early-stage SEIS and EIS provider is starting off on one particular trajectory, with a typical 90-day plan, but then having to pivot. That’s just the nature of the beast”.

For other later-stage providers, or those in hardware or deep technologies (such as EMV Capital), it’s important to remember that pivots can be enormously costly, sometimes equating to millions of pounds in lost revenue. Ilian noted: “It’s very rare, therefore, that we’ll look at something at the seed stage. We don’t mind paying a higher valuation if it means we can have confidence in the right product-market fit”.

With the line-up of successful pivoting tech companies including Twitter (which started life as a podcasting platform) to Netflix (a mail-order DVD service), and even Slack starting out life as a video game venture, it’s clear that being agile has its merits. But another challenge for investment managers is the ability to keep management teams focused on the core purpose of their business.

With new technologies opening up multiple applications and possible verticals, it’s important for founders to remain focused on building a product that really delivers.

Louise Farley added: “Technology often disrupts existing markets, but it can also create entirely new marketplaces. If you’re looking at a new market, you need to look at the skillset of the managing team, as well as the target market size and real need. It’s also important to focus on IP creation and defensibility strategy”.

4. Investor Interest in Underlying Companies

Finally, the panel closed discussing the growing interest in underlying companies – not just from fund managers, but from underlying investors themselves.

Louise Farley observed: “Long gone are the days that advisers used to only ask about past performance and tax reliefs. Now, we see many more questions about underlying companies. Advisers and clients are looking for real-time answers, not just historic evidence”.

As the EIS market continues to institutionalise, the role of fund managers, advisers and investors will start to mature with it.

For fund managers; it might be the ability to offer real-time data on underlying companies. For advisers; confidence in the risk profiles of new technologies, as well as continued education on market providers. For underlying investors; an increasingly active role in backing early-stage opportunities in a rapidly developing technology and innovation market.

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Footnotes

For live panel webinars like this one, click here to register for the award-winning GrowthInvest Adviser Hour webinar series.

For media investment opportunities on the GrowthInvest platform, please click here or contact our dedicated Client Services team on enquiries@growthinvest.com or 020 7071 3945.

For more information about the Deepbridge Technology Growth EIS Fund, please click here.
For the Deepbridge Life Sciences EIS Fund, please click here.

For more information about the EMVC Evergreen EIS Fund, please click here.

For more information about the Jenson EIS and SEIS Fund, please click here.

For more information about the Newable EIS Scale-Up Fund 3, please click here.