A Quick Guide on Investing in Innovative Companies, according to an expert from Temasek

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In a world where innovation catalyses growth and transformation across all industries, discerning investors aim to pinpoint and nurture the frontrunners of tomorrow. The challenge lies not only in identifying these innovative companies but also in possessing the acumen to assess and invest in them strategically.

 

To uncover insights on evaluating the potential of innovative companies, we spoke to Aftab, Managing Director at Temasek who leads the Innovation Investments team, and manages global venture and early growth tech investments at Temasek.

 

Actively Seeking Innovation While Maintaining a Balanced Approach

To invest in innovative companies driving economic growth and transformation across industries, Aftab’s team systematically scans the market to identify emerging companies with several key indicators to suggest potential candidates.

 

“Our investment team conducts broad market studies and sector deep dives, focusing on identifying emerging and innovative growth areas,” says Aftab.

 

“We look to identify potential leaders emerging in these spaces, with a view to track them closely and engage them as they begin to scale. We also leverage our fund partners and platforms to expand our reach.”

 

In line with this approach, Temasek caps its early-stage investments at 6% of its portfolio. This disciplined investment cap ensures that while the firm actively seeks innovation, it also maintains a balanced exposure to risk. In addition to the opportunity to double down on winners as they scale, Temasek recognises that early-stage investments offer an avenue to identify trends of the future, and gain insights into emerging technologies and business models.

 

The team at Temasek seeks to build an early-stage portfolio that is a diversified and multifaceted one, with investments across startups, funds and platforms that spans various sectors and geographies, thereby mitigating risk through diversification. The team’s methodology combines a macro-level analysis with micro-level diligence, in order to capitalise on opportunities while managing disproportionate risk concentration.

 

Beyond the Surface

To capture innovative opportunities, investors need to delve deeper beyond the trends, according to Aftab. He shares some of the key factors which his team examines:

 

 

  • Market size and competitive dynamics: Companies operating in an industry with a large total addressable market opportunity – that are solving existing industry pain points with a truly differentiated and economically viable value proposition.
  • Business differentiation: Companies that have a well-defined patent portfolio and an emerging track record of executing with growing commercial traction. Key winners often have a combination of superior differentiated technology with a well-defined and proven go-to-market approach.
  • Growth and commercial traction: Companies that are demonstrating rapid commercial traction with customers willing to engage in long term relationships. Engagement with large blue-chip companies (Fortune 500 etc.) provides further validation of the company’s solution or product.
  • Strong founders: Superior execution capabilities of the founders are critical at the early stage of the company’s journey. We closely assess the skillsets, capabilities and experience of the founders (including openness to feedback, ability to recruit talent, etc.) to assess whether a founder is set up for success.

 

Essential Skills for Investors

 

Aftab also shares the skills that he and his team believe are imperative for identifying innovative companies that have the potential to drive economic growth:

 

  • Agile mindset: Study new emerging sectors, technology and industry dynamics and quickly synthesise the information and understand the key issues and value drivers – including the pain points it addresses and corresponding value proposition to the end-user.
  • Pattern recognition: Recognise emerging patterns across key metrics and “connect the dots”. Developments in one market can potentially inform our views on how a particular technology could eventually pan out in another market, based on user behaviors, adoptions curves, spending patterns etc.
  • Open-mindedness: Keep aside personal bias and approach new ideas with an open mind. Develop deep investment theses and well-informed risk-mitigant frameworks objectively.

Staying Informed and Engaged

To keep updated and abreast of emerging trends, Aftab shares some techniques:

 

  • Market engagement: Deep engagement with key technology hubs globally, maintaining active dialogues and exchanging views with key players in the early-stage ecosystem including investors, incubators/accelerators, founders and even corporates.
  • Deep ecosystem connectivity: Leverage our fund partners and platforms to gain insights and track emerging trends across the early-stage ecosystem.
  • Investment exposure: Directly invest in new technology companies, and track companies closely through board / shareholder level representation.

 

The Long-Term Vision

Investing in innovative companies requires a balance of patience and precision. Aftab shares the importance of supporting founders while closely monitoring technical and commercial milestones.

 

“These milestones are based on technical and commercial metrics that are agreed upon at the time of investment, and we actively track them quarterly. If a company is unable to meet their near-term milestones, then as stakeholders, we assess the reasons for this and recommend various actions for management teams to consider,” says Aftab.

 

 

“Further, adopting a staged approach to early-stage investing is crucial. The deployment of follow-on capital is dependent on a company delivering on its plans and achieving its critical milestones on a quarterly basis.”

 

Conclusion

Investing in innovation goes beyond capital. It’s about understanding the intricacies of the market, the unique dynamics of each company, and the visionaries behind them.

 

For those who are keen on diving into this exciting realm, WMI’s Certificate in Investing in Innovation programme will help you hone the necessary skills to identify and capitalise on high-potential innovative companies. Learn straight from current leaders in the private equity and venture capital space to navigate the complex investment landscape with confidence and strategic acumen.

 

Learn more about WMI’s Certificate in Investing in Innovation

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