Technology commercialization via venture development provides a superior risk-return profile in the age of hyper low-interest rates and overpriced assets
Since the mid-1970s, the U.S. and overall global interest rates have been on a constant decline. The fear of high inflation from the oil shocks in the 1970s dissipated due to strong central bank action. As a result, more relaxed policy became the norm during the Goldilocks economy in the 1990s, the tech crash in the early 2000s, and through the financial crisis in 2008. This also included unprecedented quantitative easing measures to avoid a more serious depression, which created an environment where central banks have followed extremely dovish policies.
The graph below shows that current levels of both long-term and short-term interest rates are at their lowest levels in 5,000 years.
The fundamental impact of such low-interest rates is directly correlated to overall asset prices. According to the International Monetary Fund (IMF), “public equity markets are overvalued globally, and credit risk premiums seem to be too compressed relative to fundamentals.”
As a result, investors need to evaluate where best to allocate their capital. Since the price of money is at an all-time low, it makes sense to allocate resources in strategies that have a long-term view and the ability to generate significant returns.
We believe that given the current macro scenario, venture development offers the best risk-return profile available in the market today.
Focusing on the long-term, less liquid strategies means that the dispersion of return between the top and bottom performers is vast; it implies that skill matters.
For a strong alpha generation, one must:
- identify a market opportunity with significant deal flow but with few players and capital competing for those deals,
- build a world-class team,
- build solid investments with due diligence processes,
- apply rigorous vetting by looking for strong top-down macro and industry trends, coupled with the bottom-up vetting of underlying technologies and opportunities, and
- identify processes that are proprietary, diversified, and de-risked once the investments are backed by substantial research capital that has been (and will continue to be) invested by top research institutions.
The graph below comes from the Kaufman Foundation and shows data for a large sample of angel investments over a 10-year time frame. While the mean return for angels was 2.6 times during a three-and-a-half-year holding period, the impact of strategic due diligence made a significant difference in the return. Angels that performed low due diligence had 1.1 times return, while those that performed heavy due diligence had returns of 5.9 times their capital. Also, heavy due diligence decreased the chances for negative returns, with 40 percent of deals losing capital versus 60 percent for those that performed low due diligence.
By performing more due diligence, measured by the amount of time taken to evaluate the opportunity, investors went from simply getting their money back to making 5.9 times their money. Comparing this scenario with liquid markets means that the extra time spent on understanding the investment has a significant payoff.
We believe that investing in technology commercialization via venture development will lead to these significant payoffs. It offers an abundance of opportunities, with over $70 billion invested in basic R&D at U.S. universities. As untapped as the universities themselves are, they invest less than one percent of that funding into the commercialization of their technologies. Add to that a geographical focus on the Midwest, which receives 25 percent of all basic U.S. R&D, but only three percent of VC investments. The result is exponential commercialization opportunity.
At Ikove, we see ourselves as venture developers. We focus on identifying and vetting disruptive technologies, and launching the ones that we feel have significant potential to grow into successful startup companies.
We apply a bottoms-up analysis on the selection of the technologies coupled with fundamental top-down macro and economic research to evaluate the best industries to go into.
We apply our technology allocation into four thematic verticals: STEM (science, tech, engineering, and mathematics), MedTech, FinTech, and AgriTech.
This strong involvement and multiple points of contact create a strategy that is unique in a space ready to be disrupted.
Our venture development strategy has five key characteristics:
1. We go to the source of innovation.
Ikove is actively pursuing technologies that have been developed and reinforced by significant R&D investments at leading research institutions.
As we identify disruptive technologies, we thoroughly vet them through our Startup Nursery. If the technology survives the vetting process, we will recruit talented CEOs and operators to be a part of the founding cap table for the new company.
2. We focus where few are looking.
Our Startup Nursery is headquartered in the Midwest, where we have access to world-class technologies, infrastructure, and teams at a fraction of the cost of the East and West Coasts. Our CEOs can relocate the companies where they see a strategic fit. The companies still have the benefits of lower costs and valuation arbitrage while the operations settle into places like San Francisco, New York City, or Hong Kong.
This also implies less dilution for shareholders as we leverage the billions of dollars already invested in developing the technologies through universities, utilize the current infrastructure of the leading research labs and the much lower cost structure to operate the businesses.
3. We are founders.
Ikove is heavily involved in the launch and operations of the business alongside each company’s management team.
Since we go directly to the source, we have access to founding equity in the companies launched alongside the management team, the inventor, and the research lab or university. This makes all the difference, as valuation is the key determining factor of potential return.
This implies founder-level valuation and equity, which is extremely rare. Even our seed rounds are based on calculated valuations where a 20 times or larger ROI can potentially be achieved with average-sized exits.
4. We invest in pain killers and not in vitamins.
We focus on deep tech businesses that solve real-world problems. We are not investing in or developing the latest trending app; we prefer to focus on deep tech with significant market potential and are backed by strong intellectual property.
5. We build to sell.
We build our companies to become fast-growing, profitable businesses that can go all the way to IPOs. But given current exit dynamics, we position our portfolio companies in a way that they can be acquisition targets. We develop our companies with a clear “build-to-sell” focus.
In an age of hyper low-interest rates and all-time high asset prices, Ikove’s venture development approach to technology commercialization is massively profitable and proven to generate uncorrelated alpha in the upcoming age of asset underperformance.