Noahs' Arc 2022 Q3 Newsletter
Finding innovation in places you wouldn't expect it...
After 6 newsletters focusing on inflation, we’re finally switching gears a bit towards a less pessimistic angle: innovation. We’ll be talking about the massive gains in productivity that are ripe for the taking as Deep Tech comes into focus.
No aspect of this material is intended to provide, or should be construed as providing, any investment, tax or other financial related advice of any kind. You should not consider any content herein or any subsequent services provided to be a substitute for professional financial advice. If you choose to engage in transactions based on the content herein, then such decision and transactions and any consequences flowing therefrom are your sole responsibility. Noahs’ Arc does not provide tailored investment advice to any person directly, indirectly, implicitly, or in any manner whatsoever.
Executive Summary
The US Dollar & Innovation - Positive feedback loops ensure that people and companies within the US continue to change the world.
The Capital Cycle, VC, & Deep Tech - While a bias towards consumer facing software products has been seen in Venture Capital, investors are starting to take risks on solving problems that haven’t received as much attention.
Asymmetric Returns in Boring Industries - From garbage companies turning trash into fuel and gold mines being run by robots, we discuss a few places in which we’re already beginning to glimpse the impacts of Deep Tech innovation.
The US Dollar & Innovation
US innovation has been the pillar supporting our economic growth, especially recently. The internet and other developments not only bring about change and cost savings in many industries, but they also increase foreign direct investments (FDIs) in the US.
When international investors read about the innovations across the US, their first instinct is often to buy, not build at home. With global information flow, of course this makes sense. After all, whatever you invest in over here will make it back to your country of origin eventually.
As of now, global investors have collectively put over $5 trillion in US ventures and businesses, a number that is up 40% since 2016. It’s a win-win, allowing the US to reap the rewards of innovation and the investors to get a return.
However, this creates a feedback loop that is not immediately obvious. While information and innovation spread across the globe, the initial adopters tend to be geographically near where the innovation took place. It’s why some of the best, cutting edge drugs are on the US market first, and why autonomous cars are making strong progress in San Francisco rather than Vietnam. Innovation tends to take off fastest in the places it originated.
A society adopting life saving drugs before others enables millions of people to contribute and innovate in ways that they could never in other societies without such medical advances. These individuals then compound our discoveries, leaving us in an exponentially better spot than before.
Take the American Psychologist Albert Ellis, who has been instrumental in the fields of cognitive behavior theory and early psychotherapies. Psychology Today noted “No individual—not even Freud himself—has had a greater impact on modern psychotherapy.”
Dr. Ellis was diagnosed with type one diabetes. Today, this is a manageable condition. But before 1922, the average life expectancy after diagnosis was only 1.5 years. Without insulin, Dr. Ellis would’ve never lived to make the discoveries and breakthroughs he did. The compounding effects are likely unquantifiable.
A society that can enter an accelerating cycle of innovation is one that will build an exponential lead over much of the rest of the world. In a globalized world, this lead-effect is muted, as our desire to share breakthroughs and discoveries has kept the playing field more even. But, as we wrote in our Q1 letter this year, these connections/vehicles to share information are starting to fray.
Pre-COVID, China was a prime example of global information sharing. Western companies were investing in China, and its students were studying at increasing rates in western universities allowing for a strong flow of information sharing.
However, COVID reversed this. China’s hesitancy to adopt western mRNA technology for vaccines has created a society that’s going on almost 3 years of lockdowns. The effects are profound. Western firms are rethinking their investments in China, and the number of Chinese nationals studying abroad at western universities is down almost 50% from pre-COVID. China is cutting itself off from the information flows that help it to grow and innovate. For those who are going abroad, E-Class visas from China and India to the United States are expected to reach a record high this year when the program resumes. Some of their best talent is leaving. They’ll take their ideas, innovations, and capital to the US, accelerating the cycle here.
In the US, we potentially stand to benefit from this global shift to decentralization (in the short run). Strong universities and high foreign direct investment keeps money flowing into the US, causing the US dollar to be strong, and imports to be cheaper. Even though it may not seem like it, this has blunted the pace of inflation in the US while allowing us to have readily available capital for startups to use to commercialize their innovations.
So, the point: the US is still a Mecca for innovation. Positive feedback loops translate into quite substantial opportunities, especially as the gaze of technologists begins to shift towards Deep Tech.
The Capital Cycle, VC, & Deep Tech
At risk of straying from our area of comparative expertise, we digress here for a brief discussion on Venture Capital and Deep Tech. First, though, what is Deep Tech?
From Boston Consulting Group and Hello Tomorrow: “Deep-tech innovations are disruptive solutions built around unique, protected or hard-to-reproduce technological or scientific advances”; TechCrunch adds that these are not end user centric products.
In other words, when we think of Deep Tech, we don’t picture Amazon’s retail site or Meta’s social media platforms. Rather, what comes to our minds may be small robot dogs scampering around construction sites to collect data, or 3D printing shoes from a vat of resin. Even Machine Learning (ML) and Artificial Intelligence (AI) fall into the category of Deep Tech, especially when we think about their application in the Internet of Things rather than for Tik Tok.
Over perhaps the last 2 decades, there has been a general bias away from Deep Tech in favor of consumer facing software solutions. Peter Thiel has been articulating this since 2014 as the difference between investing in “bits” (software) and “atoms” (deep tech). While that may seem like a long time, in the world of multidisciplinary, year long engineering projects, it’s really not.
Attention is just now being paid to the Deep Tech space and how to apply some of the gains from consumer facing software inside of old industry companies. The delay makes sense, too - software is easier to rapidly iterate on, create a customer base for, and just generally test before funding has even been secured. On the other hand, Deep Tech ventures include significantly more risk and longer lead times - years of R&D can go into a product that never makes it to market.
However, as is the case with any capital cycle, whenever you see an undersupply of a good or service, the returns associated with supplying that good or service goes up. The same can be said about investing in deep tech. While we can’t tell you where money will go with certainty, we can tell you some technologies that are making us excited for the future of the companies that we’re following.
Asymmetric Returns in Boring Industries
The lack of investment in Deep Tech has left a large opportunity set for asymmetric returns within old industry companies. Rephrased, in the long term, implementing high tech solutions in boring companies will yield multiples of what it costs to do so.
As an example, consider a rail company partnering with Google to migrate operations and scheduling to the cloud, or connecting a series of smart sensors to train tracks and using Machine Learning to predict areas of rail that will soon need to be repaired, are under too much stress, or may have someone crossing over them. Together, these innovations can save hundreds of millions of dollars in gains in efficiency and reduction in accidents and delays, and even possibly save human life.
And that’s just the tip of the iceberg… Imagine a gold mining company spending $100M on giant, self-driving mining rigs and their associated infrastructure, or a waste disposal company converting the methane emitted from their landfills into compressed natural gas to power their garbage pick up fleet!
These are just a couple examples of some really exciting developments that we’re seeing in companies that can completely change the game. That same gold mining company moving to machines has had problems maintaining its workforce in the past, and the garbage disposal company has been historically vulnerable to fuel costs. These innovations aren’t random; they solve very real pain points. If your employees are computers and your fuel comes from the garbage that you’re paid to get rid of, you put yourself in a significantly more robust position than you were before.
Innovation is alive and well, and it’s not just being applied to making sure that you see the right Facebook post or that you can get chips and soda delivered to your door 30 minutes after you order them. Despite everything that’s going on, we’re excited for the future - we have faith in the ability of traditional, boring businesses to innovate, innovate, innovate, changing the world and increasing the bottom line along the way.
A Personal Note
This summer was both busy and fulfilling, as it should be.
Noah and I had the chance to travel a bit, both on our own and with each other's families in adventures ranging from France to Maine. It was a blast and a summer that we can say was one of our favorites ever. Even though we’re only seniors in college, we’ve picked up on the fact that life moves way too fast and are doing our best to catch it (where have the last three years of school gone?).
From a business perspective, we’ve been privileged to bring aboard more investors, hire four interns to help with our research, develop our tools, and generate performance that is tracking well ahead of the S&P 500.
In addition, we have a new project we’re working on directly related to Noahs’ Arc, but we aren’t quite ready to share what it is just yet. Sorry to keep you on the edge of your seats; you’ll just have to wait til’ next time to hear all about it.
Till then, we wish you the best,
Noah & Noah
DISCLAIMER
> The information and opinions contained in this newsletter are for background purposes only and do not purport to be full or complete. The information herein is not personalized investment advice or an investment recommendation on the part of Noahs’ Arc. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.
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> Certain information contained in this document constitute “forward- looking statements,” which can be identified by the use of certain terminology, such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof, or other variations thereon or comparable terminology. Any projections or other estimates in this document, including estimates of returns or performance, are “forward- looking statements” and are based upon certain assumptions that may change. Due to various risks and uncertainties, actual events or results, or the actual performance of any investment vehicle, portfolio or product described herein may differ materially from those reflected or contemplated in the forward-looking statements. Actual events are difficult to project and often depend upon factors that are beyond the control of Noahs’ Arc.
Great work Noah & Noah! I like the pivot to innovation!