Declining Cost Curves Create Opportunities for Investors

For many angel investors, enabling change to make a positive impact for humankind is a driving force behind investment decisions.  Even with the desire to drive this constructive change, it can be challenging for an investor to know where to begin.  Deep technology is that space where meaningful change can be made while also positioning for potentially greater returns because of important economic trends in several technology fields, with the understanding that there are significant risks associated with investing in this space.

Swati Chaturvedi founded Propel(x) with the goal of helping more angels invest in world-changing science and technology startups. She combines a strong belief in supporting breakthrough, deep science with experience in smart investing practices and insights from history.  She sat down with me after the 2018 Angel Capital Association Summit to explain how declining cost curves for certain technology sectors have led to great markets in the past, and are now creating new and impactful investment opportunities for angels.

“As an investor, it is helpful to learn from history,” Chaturvedi said.  “Past experiences deliver insight into what industries were successful and what enabled their success.”  She shared three sectors that are experiencing huge declines in costs, helping products become widely accessible to the masses and the companies and investors behind them to be wildly successful: computing power, gene sequencing, and energy storage.

Think about the cost and power of your computer 20 years ago - most likely it was very expensive and clunky.  Now consider the fact that millions of people carry a phone with computing power that is much more sophisticated than two decades ago, and for a fraction of the cost.  We currently process data at unheard of speed and volume.  What does this mean for future computing technologies?  Artificial intelligence is likely to emerge from advances in computing power, and multiple factors are coming together to make the growth of AI more viable.  Endless future applications will mimic intelligence, such as self-driving cars and the facial recognition software, that companies such as Facebook and Google already have in use. And the amount of data collected continues to grow, offering opportunities in life sciences, energy, financial services, automobiles, and defense among others.  Investors have already had successful exits in the AI space with acquisitions above $500M (DeepMind acquired by Google and Cruise Automation bought by General Motors).

Gene sequencing is another sector that is experiencing huge benefits from declining costs and becoming more accessible to larger groups of customers.  Companies such as 23andMe, with a valuation of $1.75B, offer genetic testing at low prices.  The declining cost curve tells Chaturvedi that we will soon be seeing even more examples of how gene sequencing will become accessible and beneficial through personalized medicine.  Gene therapies will likely become much more prevalent, with targeted treatments for people based on their individual genetic constitution.  This is expected to provide information such as predisposition to diseases and personalized therapies.  More data will be incorporated with genetic, environmental and lifestyle data, and companies will be able to utilize this information to develop tailored medications specifically for everyone. Chaturvedi believes personalized medicine is on the horizon.

Chaturvedi also charts sharp drops in the costs of energy storage, noting a 5X decrease in vehicle lithium-ion batteries between 2010 and 2016 with advances by Tesla and General Motors.  She believes this will translate well into a new “Grid 2.0.”  Energy currently must travel through large grids, sometimes through multiple states, to arrive at a destination to power your home, business, school, etc.  This is not the most efficient way to deliver energy.  Declining costs of energy storage are opening doors to many developments and reducing the size of energy grids, creating new systems to use and store energy.  With more availability of resources, we expect to be able to develop a method to store energy locally to use as needed, even at the neighborhood level.  She said, “By changing how energy is stored, our footprint on the environment will be drastically improved.  As better batteries emerge, electric cars will have a longer range needing less fuel, drones can fly longer, and planes will not have to use as much jet fuel.  As energy storage methods advance, how we generate, distribute and use energy will evolve into a process that is cost efficient and environmentally friendly.”

The market opportunities for these “declining cost” technologies are compelling, but I asked Chaturvedi if angel investments in related new firms come with additional risks or differences from other kinds of angel deals.  She said many start with university research and non-dilutive grants from government agencies such as the National Science Foundation and National Institutes of Health.  As they grow, however, they likely have larger valuations than other startups and require more rounds of investing, all of which add risk and investment dilution for angels.  Some of these risks can be addressed by investing via syndicate of investors and keeping “dry powder” for follow-on investments. Deal terms and due diligence for these companies is also like most angel deals, although she said, “Angels should ask more questions about data from technology testing and the need for more capital.”

So, what does this mean for angel investors?  These sectors are positioning us for potentially greater financial and impact returns.  History shows what conditions yield the highest returns -- significantly declining costs and growing markets.  In addition to the opportunity for returns, investing in these deep technology sectors is creating purposeful ways to address some of the biggest global challenges, including sufficient energy for all, cures for diseases, prolonging healthy life and abundant food for everyone.