Once upon a time, seven years ago(!) I wrote an article about pie-in-the-sky tech.
I made my life easy with this one. The tech — fusion power — is no good. Hasn’t been for ages, won’t be for ages, but I wish it was. Here is the article, for what it is worth, targeting a prime example of what investors shouldn’t target.
I think it retains some value for people interested in tech investing. Today I want to take the same questions and pivot them to investing news we can use.
We’ll ditch the fusion power angle from that old article, but we’ll stick to power generation, and we’ll use a real-world example.
Just like applied physics or engineering, it’s a hard thing to bridge the gap from a proposal to a funded project to real-world applications. With all the money being thrown at tech these days, I think this needs saying now, perhaps more than ever.
First off, here are the original five questions from the aforementioned article:
- Is the announcement tied to a publicly traded company?
- Is there sufficient investment?
- Is there a clear path to revenue?
- What is the potential market size?
- Are the infrastructure and resources to support the technology available?
Finally, we need a proper topic, and we’re going to discuss hydrogen fuel cells.
The first question is pretty easy. Yes, there are hydrogen fuel cell plays. Let’s move on for the sake of brevity.
Is there sufficient investment? The short version is that industry and government are pouring in ever-increasing amounts, along with investors, and we have a number of publicly traded options that are well-capitalized.
Is there a clear path to revenue? Yes, and we’re going to save this one for a bit later on because momentum toward cost parity compared to other energy sources matters a lot.
What is the potential market size? Hydrogen fuel cell tech has a lot of potential but we should always attempt to focus on the “low-hanging fruit” — the stuff that will make money, or at least make the tech better, soon and fund market penetration later.
I read this recently and, while it isn’t directly applicable, it should be in the back of the minds of anyone thinking about deploying tech in the real world, especially when capital costs are high.
All heavy transportation needs apply here. Hydrogen power is advantageous becausethey weight a fraction of battery power systems and because weight considerations for batteries scale up but never down. Think about rockets. Physicists and engineers figured out how bad carrying all of the fuel you need can be over a century ago.
Long story short, at least vehicles that burn fuel remove weight as they go. Battery-powered machines do not. The bigger they are, the more they carry from the journey’s start to end. You’re still carrying all the steel, nickel, lithium, copper, etc., in batteries at the end of a trip around half the globe (freight by sea), or from coast to coast (freight by road), as when you started. Sure, cargo carriers don’t need to hit escape velocities, but they live or die making nickels and dimes.
Global numbers are a bit of pain, but for transportation costs alone, seaborne global shipping is estimated to be around $100 billion. And that’s far more efficient than the intermediate and “last mile” shipping heavy trucks do on land. We’re talking trillions over even short-term and midterm time scales.
That leaves us with two questions. To go back, “Is there a clear path to revenue?” And to move on, “Are the infrastructure and resources to support the technology available?”
Pushing past the basics, we finally get to the good stuff.
We finally get to the three pillars of tech investing that can make us some money, that move the magic to the mundane.
- Companies need to be insulated from rapidly dropping capital and material costs.
- Companies need to offer a persistent cost advantage even as they race to the bottom within their niche.
- Companies need to go beyond a marginal efficiency advantage over existing tech that has already been paid for.
We have a wonderful case study we can compare hydrogen fuel cells to here with solar power.
Solar cell cost for installation companies and consumers fell around 90% over the last decade or so because the cost of the cells themselves fell through the floor. That was great for everyone but anyone that invested in solar cell manufacturers or installers. The early movers were loaded with debt in an attempt to scale up while their competitors that came later were not.
At the same time, they were unable to offer any significant technological advantages over their bargain bin competitors. There was no “moat” and no compelling reason for buyers to choose quality over quantity.
Fuel cell companies are moving in a different direction. They:
- Are removed from the capital cost of producing their fuel source. The applied engineering — actual trains, planes, and automobiles — scales independently from capital cost of power generation. Gas up and go.
- Can maintain “moats,” or persistent tech advantages through easily patentable tech that allows them to avoid the shadow subsidies that a lot of “first mover” tech companies give to their eventual competitors.
- Have real-world tech in the field right now that proves their efficiency advantages over existing competitors, both in the same niche and over other fuel sources.
All of these three aspects of a good tech investment form a feedback loop that can be leveraged to produce more revenue on a faster time table than anyone else that decides to get in on the game later.
A company that can deliver on all three will deliver results that others never will. These kinds of tech investments are the ones we want to find.
Jimmy Mengel shared a hydrogen fuel cell company with his readers that checks all three boxes. It will only be more advantageous to its customers as hydrogen fuel costs drop through the floor. Its tech is on the cutting edge, has easily defensible global patents, and has over 75 million kilometers of real-world travel — enough to circle the glove 1,870 times, on the record.
This is the kind of tech company that bridges the gap from a research lab to a truck stop, from the magic to the mundane.
