In my previous Real Money column I set the stage for investing in microcaps. SInce individuals cannot invest in the most promising start-up “unicorns” (companies that have gone from valuations of $0 to over $1 billion while still privately-held) we have to wait for those companies to go public.
Unicorn IPOs can be risky, especially if bought on the first day of trading, complicating the effort to gain exposure to the start-up ecosystem. We want to invest in the companies that have the ping-pong tables and bean bag chairs–and more importantly, ideas that can change the world–and are stymied into investing in the FAANGs, all of which lost that startup vibe many years ago while transforming into monolithic mega-corporations.
Successful start-up investing begins with identifying economic problem areas and concludes with finding the entrepreneurs that have the ideas to solve them. Sometimes the problems are less obvious than others. I always hated shopping in stores, but it didn’t register to me that it could be eliminated. I am happy Amazon (AMZN) founder Jeff Bezos did. I grew up watching horrendous 80s TV shows like Knight Rider and Growing Pains simply because they were on. Netflix’s (NFLX) Reed Hastings certainly has added to the world’s viewing options.
To hit a homerun with a small stock, though, it is important to find a sector into which capital is flowing. The most attractive microcaps are positioned in sectors that also have well-funded private companies competing in them. That competition is healthy and adds what Silicon Valley-types refer to as “proof of concept.”
We are at a time of immense change in the way humans move about the planet, but the ideas are still so far ahead of the reality. That leads to an important industrial problem that will offer geometric returns to the company or companies that solve it: Electric vehicle batteries aren’t very good.
I’ll let Tesla’s (TSLA) Elon Musk have his moment of glory while I try to figure how a company’s revenues can increase 70% sequentially while SG&A costs decline in dollar terms in the same timeframe. I will continue to explore Tesla’s aggressive accounting in future RM columns, but it’s important to remember that the auto world is bigger than Tesla. Every major automaker is introducing a slate of battery-electric vehicles in the next two years.
So, a reality check is needed. Lithium-ion batteries take too long to charge, don’t go far enough (range is still much less than cars powered by gasoline or hydrogen fuel cells) and so-called “fast charging” stations still take half an hour to get to an 80% charge, which is too damn long.
The problem is in the anode, where graphite has limitations in terms of ion capacity and is prone to degradation over repeated charging cycles. The solution is to add more silicon to the anode, which increases capacity dramatically; some in the industry claim a 25x improvement in energy density is possible with an anode made solely of silicon. So “siliconization” of the anode is the key to better BEVs, but the tendency of silicon to swell during the charging process has limited its use to about 10% in current-gen batteries. Every major battery company–and some of the auto OEMs on their own–are attempting to develop next-gen lithium-sulfur batteries. That would be the killer app, and, in my opinion would allow BEVs to finally achieve cost parity with cars equipped with internal combustion engines.
The problem is in the delivery of the silicon and the solution lies at the molecular level. My favorite microcap, Applied Minerals (AMNL) , which I have discussed in several previous RM columns, might have the killer compound through its ownership of the world’s largest deposit of halloysite clay, a naturally occurring aluminosilicate with a nanotubular structure at its Dragon Mine in Utah.
Efforts toward siliconizing lithium battery anodes are hardly limited to AMNL, though. Capital is flowing quickly toward this sub-sector. Sila Nanotechnologies, which works in partnership with BMW (BMWYY) , recently raised $70 million from Siemens’ venture arm and Japanese battery giant ATL. Amprius counts Kleiner Perkins and Eric Schmidt among its investors and Enovix (Cypress Semi (CY) ) and Enevate (DFJ, Presidio Capital) have also attracted funding from VC giants and publicly-listed companies. .
Siliconization will happen, it’s just a matter of time. If it is done using the material resources held by the tiny company headquartered in Brooklyn, Applied Minerals, then my clients and I will be very, very happy.
I’ll have more societal problems and the companies that could solve them in my next RM column. If it takes a market crash to get investors to once again focus on companies that solve problems instead of worshipping at the altar of a few West Coast giants, then so be it.