Why smart money is being placed on disruptive technologies.
Technology investment shows no sign of slowing down. Smart investors would do well to understand the areas in which tech is expected to undergo rapid growth. Here are five:
1. Artificial Intelligence and Robotic Process Automation
In 2014, when Alphabet, the parent company of Google, bought the artificial intelligence (AI) company DeepMind from Founders Fund and other venture capitalists for £400m, AI intelligence seemed futuristic. Now, it forms the basis of so much current thinking and R&D in the tech industries. Machine learning helps companies to thwart cyber-attacks, while computer vision is a key element of driverless cars. It seems as if every week there are new technologies being developed with AI as a bedrock.
Andrew Pinder, of Investec Bank, believes that the clear winners of the AI market will likely be those companies that take an industry specific approach to rollout out their products.
“Clients need powerful AI tools that can be applied to industry-specific workflows, such as in legal and healthcare, so that users can get immediate return on investment. Solutions need to fit around industry-specific workflows, rather than users having to change their workflows to fit generic solutions,” he says.
A requirement for the investor is being able to separate real deep technological advantage from marketing hype
Peter McLintock, corporate partner and private equity legal specialist at law firm Mills & Reeve, believes investors should be looking for software and hardware developers that are using this powerful combination of data and computing grunt in new niches, where the possibilities are seemingly endless. “Who would have thought that a machine could lay bricks five times as quickly as a skilled human equivalent,” he says.
Ahead of wide-spread adoption of AI, Robotic Process Automation (the use of software with AI) and machine learning capabilities to handle high-volume, repeatable tasks that previously required a human to perform), is today laying firm foundations on which it can build. Robotic Process Automation has been garnering a lot of interest and is changing the way many industries are operating by transforming their working practices. A glance at Blue Prism, the enterprise-grade Robotic Process Automation software provider, proves that investors can reap the rewards with the right type of company. The company had a market capitalisation of £48.5m at the time of its London IPO in March 2016 and, following a period of strong international growth, is now valued at £700m.
The combination of high profile data breaches, huge cyber-attacks such as WannaCry and the incoming EU General Data Protection Regulations (GDPR) means that cybersecurity is an area which investors are keeping a close eye on.
With attacks getting more sophisticated, businesses are looking for the very best IT security products and services, meaning it is an area which is not likely to slow down any time soon. The challenges are only going to intensify and the development of machine learning and AI solutions focused on cybersecurity heralds a new wave of the battle.
“It is a cat-and-mouse game worth millions. It could be a great investment opportunity if you find the right business that is as clued up on security as the hackers,” says McLintock.
3. Internet of Things
Whereby everyday items are connected to the internet and with each other, has been causing a stir. The impact of the internet of things (IoT) on all aspects of human digital life is, say many, potentially bigger than the impact of the internet itself. Boston Consulting Group expects the IoT market to reach £200bn by 2020. The Japanese conglomerate Softbank acquired UK chip builder ARM Holdings for £24bn in July 2016, and it expects ARM to deliver one trillion IoT chips over the next 20 years. This was a grand statement regarding the importance of IoT in the years to come.
The value of IoT is in the data that is collected and analysed. However, there are security concerns about IoT and McLintock says that as a result, smart IoT investors are focusing on data protection compliance in any opportunities they may be considering.
4. Virtual Reality
In March 2014, Facebook agreed to acquire Oculus VR for £1.3bn in cash and stock, and the following year Oculus VR acquired Surreal Vision, a British start-up focused on 3D reconstruction and mixed reality. But the areas of virtual reality (VR) and its less immersive cousin, augmented reality (AR) and are still relatively immature, with businesses and investors are still unsure of their value. Facebook is responding and with the launch of Oculus GO at a lower price point is looking to drive widespread adoption of VR.
According to McLintock, the secret for professional funders lies in backing developers that have a track record in spotting niches. “When you consider the scalability of a popular app or game, it is easy to see the potential ROI,” he says.
5. Digital Transformation
This area is not about specific technologies, and therefore deals or opportunities are harder to spot, but instead about the role those technologies may play in changing future behaviour. It must be considered in any potential investment situation.
“Digital transformation is the underlying theme to all of the other technologies. The likes of social, mobile, analytics and cloud have been a focus for investors for over a decade and are therefore mature, but there are pockets of immaturity such as AI, automation, VR, AR and MR [mixed reality, where virtual reality is used in combination with real-world situations],” says Pinder.
Pinder explains that the big deals within each of these trends were the culmination of months or years of interest and investment rather than the beginning of a domino effect in that particular area of technology.
There is no doubting the popularity of technology with investors. Richard Blakesley, co-founder and CEO of Capital Pilot, a platform matching investors with start-ups, says his firm is helping 250 early stage technology companies to prepare for fundraising, and over 50 per cent of them fall into the five topic areas mentioned above.
But Blakesley warns that a number of tech companies are linking buzzwords like AI and IoT to their businesses to enhance their chances of getting funded and improving their valuation.
“A requirement for the investor is being able to separate real deep technological advantage from marketing hype,” he says. “That’s not easy to achieve. Then, they have to ensure that the technology is being deployed by a team that knows how to productise and sell.”
Sooraj Shah covers the tech industry for Forbes, New Statesman, Computing and more.