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The road less travelled: alternative ways to invest in AI, Blockchain and more

George Danner - featureIt’s not always easy for firms to employ transformational technologies – often you don’t know when, or where, to get started. George Danner, President at Business Laboratory, takes us on a journey of exploration and shows us the different ways that firms can invest in transformational technologies from AI to IoT.

As equity investors we are naturally attuned to powerful technologies that open up opportunities to participate in a rapidly automating economy. Not a day goes by without some young company introducing a product that can transform markets, beat incumbent players, and generate valuable returns, all enabled through a set of emergent technologies. Investors jump in, firms grow, and a very few make a lasting difference. The landscape itself is exciting to watch.

But this is not the only way to participate in the "new new" economy. To illustrate, we can take lessons from the "old old" economy. The late 1700s were an exciting time in Britain. It was without a doubt the leader in global trade, and the centre of industrial activity at that time. A pivotal event was the commercialisation of the steam engine starting around 1790. Boulton & Watt, a leading manufacturer founded in part by James Watt, lasted well over a century and rewarded its private investors with generous returns.

Not only can we invest in the enabling technological advance itself…we can invest in those industries that are transformed by the technology.

Just as rewarding—perhaps more so—were the investments in the industrialisation of the textile industry, a leading component of the economy at that time. Similar paths were blazed by the steel industry, both being transformed by their use of steam engines in newly commissioned factories. The knock-on effects of steam power in rail and marine transportation created a force of commerce that was undeniable, generating wealth in every active corner of the Western nations.

What does this show us? Not only can we invest in the enabling technological advance itself, but also—just as promising, we can invest in those industries that are transformed by the technology. As active investors, we can even create a playbook around this concept.

Buy low, sell high

In my profession I get to see many, many firms large and small, in every industry and in every conceivable corner of the planet. In conversations with the leadership of these companies, the same message comes across: we wish to reinvent and reimagine ourselves with some of these transformational technologies… but we do not know how, or even where to get started. The active investor with practitioner-level knowledge of these technologies: AI, Machine Learning, Optimisation, Blockchain, IoT, Visualisation… can bring to bear a healthy dose of algorithmic transformation in just the right places at the just the right time, forming a wholly new firm from the ashes of the old. Operational transformation then becomes value creation.

I was recently with a company that provided specialty transportation services for the automotive industry. In short, they haul new cars from depot points to dealerships across a wide region. How to load one of these auto transporter vehicles, when, and in what order, is as complex a math problem as faced by any global airline or package delivery service. At the heart of the plans for the new company is an optimisation model that takes over for the army of human experts previously deployed to do the same job of loading transports. That one simple step is poised not only to push this firm into best-in-class status among its peers, but also sets in motion a strategy for acquiring weaker competitors and performing a similar overhaul of the acquired firms with its newfound optimisation prowess.

Not your father’s GP

Now it should be noted that this idea is perpendicular to the conventional strategy of using industry veterans well placed in portfolio companies to engineer a turn-around. In those cases, many GPs feel the need to distance themselves from the operations of the portfolio firms out of deference to the installed leadership, whose bonuses depend on strategies they own and execute. Good, sound leadership acumen is always welcomed; however, I believe that the playbook is shifting to one where the GP takes a much more active role in the economic value strategy of the portfolio firms.

Part of that is a core competence within the firm around the “art of the possible” with a range of transformational technologies. Specialists should know how they work, how to apply them, what their limitations are, and the componentry to make it happen. Due diligence 2.0 includes a whole new layer where such experts carefully examine the operational structure of the business to look for ways to engineer more value with surgical doses of “just right” technology.

The new normal

In my experience the number of firms that hide pockets of yet-to-be-unlocked operational alpha is limitless. These are well-run industrial businesses with long-standing track records that are missing an element or two of analytical sophistication. The good news is that these firms do not necessarily need some vast, sweeping change to make them work better, faster, and cheaper by orders of magnitude—rather, the most common setup I see involve a coordinated set of seemingly small process changes to affect a disproportionately large value outcome. You just have to know where to inject that medicine.

I do foresee a day when certain funds orient their entire investment thesis around Operational Alpha through data, analytics, and technology. That day is coming faster than you might think, as technologies get cheaper and simpler to apply. My suggestion: get ready before that day comes. Become a student of the “science” of business at a practitioner level. This will become a prerequisite for the equity buyer in the new era.

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Under the spotlight: George Danner

George E. Danner is President of Business Laboratory, LLC, an award winning consultancy that uses the very latest scientific techniques and methods to improve the performance of mid-size and large organizations through problem-solving, the optimization of existing practices and advanced forecasting.  He is the author of the leading book about business problem solving, “Profit From Science”, published by Macmillan. 

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