Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

The 30-second summary: Three days in Northern California meeting businesses throughout the Bay Area confirmed to us that the bull market in all things technology-related is alive and kicking, so much so that it almost felt like 1999 all over again. The growing digitisation of the world, the benefits of having a large network and the ability to make almost everything more ‘intelligent’ were the key themes that recurred throughout the trip. Many of the key holdings within the Heptagon Future Trends Fund look well-positioned to benefit.

Home to four million people and with the highest median house prices (and the greatest rate of divorce) in the United States, Silicon Valley is the heart of the US tech scene. Indeed, some 30% of all jobs in the Bay Area between San Francisco and San Jose are said to be within the technology industry. Much of Silicon Valley is, however, fundamentally mundane to observe: suburban, filled with office parks and characterised by bad traffic. While there are many companies developing cutting-edge innovations, most of the work is done in access-restricted office buildings, generally hidden from the public. The author of your note was lucky enough to be granted entry to some of these privileged locations – including a visit to arguably the world’s most important data centre and a tour around the Googleplex – during a three-day business trip to the Valley last week. Our key insights follow:

Back to the future: Your author is old enough to remember the hype that surrounded the technology sector in late 1999 and while neither the phrase ‘this time it’s different’ nor ‘paradigm shift’ was mentioned in any meetings, several executives came very close, particularly when describing how almost everything would – in time – be digitised and put into the cloud (discussed in more detail below). Many companies are aggressively buying up spare land in the Valley, everyone is trying to hire computer programmers with some expertise in artificial intelligence and, four-year restricted stock unit grants are becoming commonplace – to lock the best talent in. Additionally, everyone seems still trying to find the ‘next big thing.’ We heard anecdotally how five different cybersecurity businesses had all concluded $100m+ private capital raises within the last month, no doubt inspired by the recent WannaCry ransomware attack. Meanwhile, Houzz (an app which allows users to view properties and then plan their interior design) has become the Valley’s latest unicorn, completing a $400m raise and giving the business a $4bn valuation…

The AI arms race: Nearly every business we met seems to be considering how best to employ artificial intelligence in its decision-making. We heard from one executive that up to 95% of all data in existence could theoretically have AI applied to it. Whether this is accurate remains to be seen, but the emerging consensus from our meetings was that Google and Microsoft seem to be the furthest ahead in terms of developing AI-capable software, while NVIDIA and Google are most advanced in terms of hardware (NVIDIA’s processing units have, for example, seen a threefold improvement in performance within the last two years). At the same time, Apple was generally seen as an AI-laggard, with some catching up to do. Elsewhere, there was a lot of buzz around the announcement by Tesla that it had hired Andrej Karpathy (a highly regarded research scientist) as its Director of AI and Autopilot Vision. This move could accelerate Tesla’s ambitions to have autonomous cars on the road within the next year. The hardware is already latent within Tesla cars; now the priority is to enable the necessary software stack.

Everything is going digital: This was a relentless and insistent message that we heard throughout our meetings. The case was perhaps put most eloquently by Visa, who highlighted that there is a $17trillion global cash/cheque conversion opportunity. In other words, only c10% of all transactions globally (by volume) are currently digital, implying significant runway ahead. Nonetheless, it’s not just about cash: Electronic Arts is, for example, experimenting with streaming its computer games through the cloud (obviating the need for a console, since they could be played on any device – which would deliver incrementally higher margins to the business). Adobe has an even more forceful vision and believes that almost every large business will potentially need to adopt its software (or similar) if it wants to develop an effective digital marketing strategy. The company’s software suite provides, arguably, the market-leading set of tools for digital design, analytics and optimisation.

The Internet of Things – hype versus reality: There was a high degree of debate around this topic. The optimistic view (advocated by Visa, for example) forecasts that by 2020, some 21bn devices globally will be connected, with around 75% of all new cars being linked to the internet. The more nuanced perspective stresses that until connected ‘things’ are made more secure from potential cyberattacks, uptake will be limited. Getting consumers to pay for the benefit of having their device connected securely may, however, be problematic. Overall, it seems that corporates in the Valley are devoting more of their attention to developing solutions for industrial users over consumers at present.

The ‘network effect’ – back the scale winners: This was undoubtedly the most consistent message we heard throughout our trip: scale matters. Put another way, the more users are part of a network, the greater the opportunity cost of switching, and the higher the barriers to entry for a rival. Whether one considers the carrier-neutral data centres of Equinix (the one we visited hosts 250 carriers and has 11,000 cross-connects), the customers of Visa (3bn issued cards that can be used in 44m different locations globally), the strength of the EA gaming franchise (FIFA and Star Wars) or the ‘gold standard’ of Adobe design software (which most customers pay for on a subscription model, where failing to subscribe means loss of access to its Creative Cloud), it seems increasingly difficult to build a superior alternative. The increased R&D spend by all these businesses only serves to reinforce existing competitive advantages.

Regulation – the elephant in the room: We put the question of when scale might become a negative (rather than a positive) to all the businesses whom we met. Perhaps unsurprisingly, none was willing to discuss potential scenarios under which greater regulatory scrutiny might come to their industries or even those adjacent (i.e. Google, Amazon, given their size). It is worth bearing in mind that even after its proposed acquisition of Whole Foods, Amazon will control less than 2% of the US grocery market, while less than 15% of all retail in the US (and sub-10% globally) is currently done online. For now, the pervasive message seems to be one of making hay while the sun shines – which indeed it did on this trip. We continue to pursue consistently a strategy of backing the scale winners in the Future Trends Fund. Not without some irony, FANTASIA is the current ‘buzz’ acronym in the Valley: Facebook, Amazon, Netflix, Tesla, Alphabet,, Intel and Apple. We are investors in several (but not all) of these businesses.

Alexander Gunz, Fund Manager, Heptagon Capital


The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

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