I’m speaking at a conference later this week Photonex, where I’ll be repeating my mantra about never investing in materials companies. I’ve been banging on about this since the early days of nanotechnology, when buckyballs and nanotubes were the hot materials.
The fashionable materials business model is tried (and for reasons that escape me) trusted and goes like this:
- Identify a hot area of materials technology (nanotubes, graphene, quantum dots etc) where there is lots of hype and speculation;
- Find a way of manufacturing the material;
- Raise some cash to set up a plant to make the material;
- Pray that you find a customer before you run out of cash.
If you can manage to get onto the public markets – and the general rule here is that first to IPO will get a good floatation away, the second may just scrape through and any subsequent IPOs will fail – then there is an additional twist that can raise some more cash to buy some breathing space.
Four years on from Peak Graphene most of the initial bunch of public companies seem to be badly struggling and have lost 80-90% of their IPO value. That’s not too bad for hard-nosed professional investors, or those with EIS relief who will have sold down their initial holding at a profit or minimised their losses but leaves smaller investors who believed the hype out of pocket, and management with a bunch of worthless stock options.
The problem all materials businesses face is finding that unmet need that will allow you to find a market for your product. Nobody actually needs graphene or nanotubes, despite what everyone at a nanotech conference might think.
It’s worth revisiting a note from Shard Capital on Haydale Graphene Industries plc from April 2014:
It seemed to us that the Graphene space could have been a bit of a bubble. We were fearful that the hype surrounding Graphene plays could have led to an inflated valuation and at £23mln we thought it was a bit too expensive. The broker forecasts did not excite us and lacked revenue visibility. Graphene undoubtedly has a lot of potential, but we just felt the valuation of this particular company was a tad toppy.
But it’s not all bad news. A few publicly quoted materials companies are doing pretty well, take a bow Versarien and Nanoco, but these are outliers who made it through a combination of luck, skill and timing. The vast majority of materials companies won’t.