Tekcapital CFO confident that portfolio companies can reach US$100m valuations

Tekcapital (TEK Follow | TEK), the intellectual property investment group, has issued announcements relating to MicroSalt and Guidant over the past week as well as its October 2022 CFO newsletter update. 

Whilst impressive as standalone announcements, in aggregate, they can give investors a flavour of the accelerating activities across TEK's portfolio.

Last week, CFO Konrad Dabrowski provided an overview of TEK's corporate strategy, summarised operational and strategic highlights, and offered recent milestones from investment companies Guident, Innovative Eyewear, and MicroSalt.

TEK's strategy for its portfolio is to identify disruptive companies and grow them until they can capitalise on their unique technologies. To this end, TEK aims to deliver liquidity events (e.g. IPOs or trade sales) early in companies' lifecycles while retaining meaningful ownership.

Tekcapital sees this strategy as advantageous to the companies, their investors, and itself. Capital injections can accelerate roadmaps, R&D, scale-up hiring, marketing, and improve economies of scale, etc. as has been the case with Innovative Eyewear following its IPO in August. The IPO enabled the company to hire sales executives who had lifted up major companies previously, as well as eyewear designers coming from leading brands.

Thus, Tekcapital sees early IPOs and other liquidity events as significantly improving the likelihood of a profitable exit for TEK. Further to that end, a key criterion for TEK when picking investments is the presence of a US$1bn addressable market. In the case of Innovative Eyewear, the US eyewear market is valued at US$29bn in 2022, thus even a 1% market penetration would yield US$290m in annual sales.

Another benefit of early liquidity events is less reliance on Tekcapital for funding growth. Presently, Belluscura and Innovative Eyewear are no longer funded by TEK. The company envisions MicroSalt joining them after its planned 2023 IPO. This ultimately means less dilutive funding for Tekcapital, as well as more flexibility regarding new investments.

Tekcapital also said it plans to return value to shareholders via special dividends upon meaningful sales of portfolio company shares. While TEK aims to grow each company to at least a US$100m valuation before any major sales, it said it also considers its own capital requirements as well as potential to provide dividends to shareholders.

TEK also offered highlights from three portfolio companies in today's statement: Guident, Innovative Eyewear, and MicroSalt:

Guident

Last month, Guident and partner Perrone Robotics demonstrated fully autonomous EV rides in hopes of securing another customer for Guident's advanced Remote Monitoring and Control Center (RMCC) technology. Guident also participated in the Lake Nona Verizon Innovation Hub, showcasing precision-guided self-navigation, and attended MOVE: Mobility Re-imagined in Austin, Texas.

Vehicle Remote Monitoring and Control Center (RMCC)

Guident's RMCC technology features a cloud-based software solution that links operators to autonomous vehicle (AV) fleets. Guident's solution is AV agnostic and can interact with any vehicle's drive-by-wire system via a robot operating system (ROS) or API. The remote-control center consists of multiple operator stations equipped with full vehicle controls, including steering wheel, accelerator, stop pedals, as well as HD curved monitor displays. Operators continuously monitor their assigned AV fleets in case they need to intervene in certain edge cases.

Guident says automated supervision and safety driver roles will be critical for decades for all levels of vehicle automation before reaching full autonomy SAE level 5. RMCC-type technology is quickly becoming a legal requirement in several US states and other countries. Guident also points to other types of vehicles besides passenger road vehicles that can benefit from the technology, such as agricultural equipment, mining equipment, and unmanned military vehicles.

Regenerative Shock Absorbers (RSA)

Guident's Regenerative Shock Absorber (RSA) project has been undergoing more rigorous testing as the company works with "one of world's leading automotive companies" on manufacturing a prototype. The technology harnesses energy from shock absorbers to charge an EV battery, similar to regenerative braking.

RSA technology can make all vehicles more sustainable, including ICE, hybrid, and EVs. It increases the energy harvesting efficiency by c. 70% of existing energy-harvesting shock absorbers, and can deliver extra EV range of 6-12 miles per charge.

Additional developments are expected from Guident in the coming months. Notably, Guident's CEO Harald Braun is visiting Europe for discussions with multiple potential customers on last mile delivery solutions.

Innovative Eyewear

Innovative Eyewear's recent IPO has helped it procure talent and improve its organisational structure, product roadmap, and brand awareness. TEK said recent talent hires have solidified Innovative Eyewear's position as an early mover in the tech eyewear space. The two unnamed new hires have "helped grow one of the leading eyewear companies in the world and helped build one of the leading athletic brands".

The recent licensing of Nautica for smart eyewear was a major victory for Innovative Eyewear as Nautica products are sold in over 1700 locations worldwide. Innovative Eyewear is designing and manufacturing a product for Nautica to be launched in Q1 2023.

TEK notes that Luxottica, the world's largest eyewear manufacturer, helped build its multi-billion dollar business by licensing fashion brands and producing eyewear under these brands. TEK sees smart eyewear as a new platform to replicate the same strategy and notes that Innovative Eyewear products already have the same appearance and price as traditional eyewear, but with a lot more functionality.

TEK sees a US$29bn market opportunity, with safety glasses alone representing over US$1bn. Besides the upcoming Nautica smartglasses release, Innovative Eyewear has been busy with its new quadrophonic Lucyd Lyte release, sport styles, safety eyewear, and the Vyrb social audio app.

MicroSalt

MicroSalt shakers debuted at the Expo East Food Convention in Philadelphia in September 2022, with initial sales underway at major retail and food distribution channels this month, soon to include Amazon.

MicroSalt has also received commitments from UNFI, a major North American food wholesaler, for placement in several of its distribution centres. MicroSalt expects first shipments to UNFI to occur by November.

MicroSalt application testing has been successfully completed with large retail chains in the US. Full production tests of snack foods with MicroSalt applied were finished with "outstanding results", TEK said. MicroSalt successfully partnered with Presty! Foods this month to offer low-sodium solutions to their customer base.

The company also received its first bulk B2B ingredient order in July. According to MicroSalt's CEO, interest is very high for bulk B2B MicroSalt sales internationally.

Additionally, TEK announced today that Judith Batchelar OBE has joined the board of MicroSalt. Ms Batchelar is a biochemist currently serving as Deputy Chair of the UK Environmental Agency and sitting on the UK Research and Innovation's Natural Environment Research Council. 

 From 2004 to 2021, she worked for Sainsbury's as Director of Sainsbury's Brand. Previously, she held a similar role at Safeway, spent 12 years in the Food Division of Marks & Spencer, and worked in manufacturing for Mars and Bass. She was awarded OBE in 2015 for services to the Farming and the Food Industry.

View from Vox

TEK's October CFO update offered valuable insight into the company's strategy and vision for its portfolio, particularly on the value of early stage IPOs and other early liquidity events. More recently,  TEK has announced updates from both Guidant and Microsalt whoch points to accelerating activity across these portfolio companies.

For young companies, capital injections can accelerate roadmaps, R&D, scale-up hiring, marketing, improve economies of scale, etc. as has been the case with Innovative Eyewear following its IPO in August. For Tekcapital, liquidity injections mean less reliance on TEK for funding growth, and in turn less dilutive funding and more flexibility regarding new investments, improving the overall chances of a profitable exit.

Encouraging to investors will be Tekcapital's announced intention to return value to shareholders via special dividends upon meaningful sales of portfolio company shares, typically as a company reaches a US$100m valuation.

TEK strongly believes its companies can reach the $100m valuation mark in the foreseeable future as they reach quality of life improvements across crucial verticals while addressing significant unmet needs in billion-dollar markets.

TEK has raised c. US$25m since IPO, which it has utilised to build net assets of over US$70m as of 31 May 2022. Its goal remains to "deliver significant returns on invested capital whilst bringing leading innovations to market, coupled with opportunities for special dividends along the way."

The combined value of Tekcapital's four portfolio companies has grown steadily since initial investment in 2018, from £8.4m in 1H18 to £62.5m in FY21. Tekcapital most recently reported a 13% increase in net assets in 1H22 to a record US$76.9m, with NAV per share increasing 6% HoH to US$0.51. Previously, TEK had announced a 108% net asset increase and a 243% increase in income YoY for FY21.

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