It feels very appropriate to talk about investing in disruptive innovation at a time when all of our lives have been so seriously disrupted by Covid-19.
Many investors are drawn to the “retail” investments peddled by banks and insurers. Huge amounts of money are given to East African governments in the form of Treasury Bonds and Bills that pay between 9% and 15% per annum before withholding taxes are applied. And post-Covid what will your KES, UGX, ZAR, TZS or RFR actually be worth? And how safe do you think East African government debt will actually be? The default investment for many East Africans has traditionally been property but in a damaged economy property looks like the most illiquid of assets – and a likely victim of a global correction in prices.
Of course there is a place for retail investments – low risk, short and fixed terms, average return, taxable, passive income. But in a world where access to markets has never been easier, the digital economy grows exponentially, and technological innovation has the potential to transform economies, it makes sense for investors to disrupt their own investment portfolios and to increase the risk-return ratio for a small proportion of their wealth.
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It is notoriously difficult to pick successful investments into technology companies. It is also an incredibly risky investment as generally the only thing that they own is their own intellectual property and in a failing business this is worthless. They are also very rarely cash positive businesses and so they have to continually raise operating capital which repetitively dilutes shareholdings. As well, there is way too much blind luck as to whether the applications they develop become successful and therefore desirable to a buyer of the business.
Rather than speculatively investing in technology that may disrupt we favour investing in sectors that are disrupting. The dictionary defines disruptive as “innovative or ground-breaking”.
In business theory, a disruptive innovation is an one that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market-leading firms, products, and alliances.
Some of the sectors that offer the highest levels of disruption include national warehousing and distribution as global supply chains are weakened by the Corona virus; healthcare for the same reason; health products; medical technology as the world population continues to age; flexible manufacturing where very agile facilities exist to manufacture anything and everything at short notice (think personal protective equipment!); agri-tech such as indoor farming; and legal marijuana to satisfy a $100bn market for medical, recreational and even hemp manufacturing demand.
Also read: Addressing conflicts, embracing tech could enhance Africa’s food security
My business, Investment Owl, works with a small number of young businesses to help them find investors to fund the development of their organisation or to complete specific projects. Our skill is in identifying a business that is expert in a new or growing sector andthat has a great business plan, a good management team, and a competitive advantage over others.
In the last three years we have helped to raise nearly £15m to support two British companies involved in the legal marijuana industry. It has been both rewarding and fascinating to watch both these companies grow exponentially. As more and more countries legalise marijuana for medical, recreational and manufacturing applications the opportunities in this industry will increase.
The second of the marijuana businesses that we helped has increased its valuation from £1m to nearly £20m in less than a year. Both our clients and our investors are very, very happy with us! The reason for its stratospheric rise in value is that it owns all of the value chain for its products – it has licences to grow and harvest, a laboratory to develop product, patent applications in place, manufacturing to make their products, and an online and retail outlet route to market. They have achieved this at a relatively low cost. We estimate that the clients we introduced to both these businesses as investors will make a return of between seven and 30 times their initial investment. The investment period for both is less than three years.
For many reasons it is incredibly difficult for a new African business to try and take market share from an established European or US business. However, in new, innovative, disruptive markets we can compete on a level playing field – or even one that is skewed in Africa´s favour.
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We are still in the very early days of the marijuana revolution and it is an extraordinarily lucrative market at all levels. It is estimated that an acre of farmland for marijuana growth nets $1.1million as opposed to crop growing at $1000 per harvested acre. Nearly all of the “noise” around the legal marijuana sector in Africa has been about the growing of marijuana in Africa for European or US pharmaceutical companies but to once again sacrifice all of the value addition would be nothing short of criminal.
With a relatively small investment of around £6m an African disruptor in this industry could:
- Gain permits for marijuana growing and harvesting.
- Secure long term leases on substantial farmland – say 500 acres.
- Fence and secure the orchards.
- Plant, grow and harvest the first crops.
- Build a small laboratory and processing facility.
- Apply for patents for their own unique strains of marijuana.
- Create a packaging and shipping facility.
- Launch six unique cannabis products.
- Establish a brand.
- Open an online and physical retail presence.
The low costs of both, agricultural land and labour in rural East Africa, the excellent growing conditions, and the availability of qualified, unemployed graduates offers a substantial competitive advantage over a European or American rival.
Within three years the business would be cash positive and be valued at between £30m and £60m. East Africa has the personnel, climate, agricultural heritage, qualified workforce, and logistics to deliver such an enterprise.
For investors who choose to back such a business the risks of investing in any disruptive industry are mitigated by extensive research and the very small number of these investments that meet our very high standards. Our retail investments average an annual return of around 15% per annum. Our disruptive sector investments have returned an average of more than 300% over an average 4-year period.
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Furthermore, many governments are incentivising this kind of support for new businesses by way of tax breaks. We, too, always arrange for investments like these to be offered within structures that mean there is absolutely no tax liability for gains or capital return in the country where you are tax resident.
In a world where bank interest rates are likely to fall even further and second tier currencies are under increasing pressure it makes sense to spice up your portfolio with some slightly more speculative investments and to consider any and all options for starting businesses in these new disruptive sectors. Happy disruptive investing! But do stay safe.
Jon Pedley is Chief Operating Officer, Investment Owl. For more information contact Jon at:jon@investmentowl.com
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