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Don’t go chasing unicorns: How to find sustainable success in underlying industries

Investing in underlying systems rather than the foundational industries could prove to be a better option for the long term.



Back in February, I wrote an article about how investors’ frenzied search for unicorns is causing anything less to become little more than background noise. Venture capitalists are primarily interested in the biotech and software industries, and more than half of total investments go to these two spaces, according to a report by the Martin Prosperity Institute.

But while VCs (and the press) give rising tech stars all the attention, there’s actually a world of investing potential outside the unicorn bubble. Foundational industries in our society—think agriculture, manufacturing, commodities, etc.—offer lucrative opportunities to investors who don’t have the same risk appetite as a VC. These investments may be decidedly unglamorous, but they aren’t necessarily subject to the speculated 90 percent failure rate of startups.

They’re the workhorses to Silicon Valley’s unicorns.

The search for underlying advantages

Investing in the components that make the flashier industries tick is playing the long game, and it comes with distinct advantages. The chipsets required for mobile devices, the monocrystalline silicon that powers solar panels—all these components belong to lasting industries benefiting from the latest booms (and beyond).

Support industries have similar growth opportunities as the high-risk, high-reward ventures they serve—but the underlying systems don’t come at a premium. And unicorns might not be as high-reward as people think: Research from TechCrunch indicates that they tend to be overvalued by more than 25 percent and rarely arrive at liquidity events.

Underlying systems also provide an upside in the brand-agnostic exposure they provide. Tesla may be a big name in electric vehicles now (comprising around 45 percent of the total U.S. market between January and June of 2017), but tons of other car companies are rushing into space and refining their current offerings. Rather than investing in a specific brand, you can invest in resources needed by the entire electric vehicle market, such as copper, which is used in electric car batteries and electric motors.

You don’t have to settle for small returns in foundational industries. In fact, it pays to watch disruptive spaces. Correctly identifying the materials and underlying markets that disruptive industries depend on can produce seriously big returns while keeping you insulated from tumultuous risks.

Here are three examples of industries that support today’s unicorns.

Diversified mining

Copper is an important metal for the creation of the batteries that run everything from electric cars to smartphones. And it’s not the only one. Alongside copper, lithium, cobalt, nickel, and zinc are all key components in both electric vehicles and existing combustion engines.

Emerging power sources

Certain industries, such as marijuana farming and cryptocurrency mining, require huge amounts of energy and can cause massive increases in local utility rates when left unchecked. With the consequences of climate change becoming increasingly apparent, these demands on the grid will have to be met with renewable energy sources. Thus, the outlook for the energy sector—from solar panels to wind turbines—is looking particularly bright.

Old-school players ready for a comeback

Mainstay industries that have long lost the spotlight are now ripe for technological disruption—things like healthcare or the stock markets. At TMX, for instance, we’re looking to adopt blockchain technology in various capacities across the organization—whether it be blockchain-based proxy voting, our partnership with the Bank of Canada for Project Jasper, or other initiatives we’re exploring.

Other incumbent players can similarly benefit from new tech advancements and developments to become more efficient at the things they already do well. Similarly, though healthcare has long been considered a slow adopter of technology, we’re seeing an increased focus on telemedicine and virtual counseling. The discerning investor should investigate these prospective platforms.

Studying market trends allows you to monitor the products selling like hotcakes and those that are not generating any ROIs at all.

Studying market trends allows you to monitor the products selling like hotcakes and those that are not generating any ROIs at all. (Source)

Finding your workhorse

To identify promising underlying investment opportunities, take these three steps.

1. Follow the hype, but don’t fall for it

Rather than taking a hyped-up company’s success at face value, identify the ingredients necessary for that success and invest in the ones that will cater to the entire industry. Without big names or flashy numbers, these ingredients will receive a tiny fraction of the media attention, but they’re destined to grow with the industry, no matter which individual company happens to be clinging to the top.

2. Study the trends

Which companies are most likely to adopt new technologies? What industries are they in, and why will these advancements change the landscape? Whether it’s blockchain, machine learning, or a new source of renewable energy, look to the areas that will see sustainable growth.

3. Choose substance—every time

You can always trade, but if you’re looking to hold on to a stock for the long term, it’s important to buy on a real, sustainable investment thesis. Just remember: there was a time when Myspace was valued at $12 billion. When Facebook emerged, that number and the social media platform itself became ancient history. You never know what’s around the corner for buzzy companies—just look at the plummeting stock prices of Match (the company behind Match, Tinder, OkCupid, and PlentyOfFish) since Facebook announced its foray into the dating scene this week.

Unicorns receive tons of attention for groundbreaking ideas, but by the time they’re ready to issue an initial public offering, their growth has often flatlined, leaving everyday investors with little to gain. Looking past the hype to public venture capital will give retail investors the peace of mind that they’re investing in industries that are here for the long term. After all, the last thing you want is to invest in the next Snapchat just to realize that it’s already been milked for all its worth.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Brady Fletcher is the managing director of TSX Venture Exchange, the world’s premier public venture market. Every year, hundreds of early and growth-stage companies raise billions of dollars via the TSX Venture Exchange. With a background in computer engineering, Brady spent almost a decade in investment banking, primarily focused on financing and advising technology and diversified issuers through strategic transactions. Throughout his career, he has advised hundreds of companies on business strategy, capital raising, public and private markets, and exit strategies. He has successfully executed more than $500 million in growth equity financings, secondary transactions, and sell side advisory mandates. The views, opinions, and advice provided in this article reflect those of the individual authors. This article is not endorsed by TMX Group or its affiliated companies.