The small company investment mantra: ‘Tell investors we’re going to change the world and hope for the best’.
Of course, I am being facetious but there is a real point there – changing the world and generating sustainable cash flow are apples and oranges. The dream obviously is for both to engage in a positive feedback loop that makes laissez-faire capitalists weak at the knees. As we know all too well though, often all management presents to investors is a blank chequebook and a sleazy smile.
This is a particular problem because of the nature of many small firms.
There is often a single innovator behind them. He or she serves as CEO in addition to leading scientific or technical efforts. This centralisation of control can be fantastic for company direction but often fails given that innovators, in my (albeit limited) experience, tend to not be as adept at capital allocation as a veteran executive.
This brings me on to my main point: talking about one of my latest investments – DeepVerge (LON: DVRG) – and how excited I am about the business model.
What DeepVerge and its transformative CEO Gerard Brandon have done is take historically mismanaged businesses – with huge data and intellectual property moats – and bring them together under one roof. This has all happened within the last few years. As such, the market in my view values DVRG like a startup even though its subsidiaries have been in operation for more than 10 years.
On to those subsidiaries then, and there are a few. We’ll start with Labskin, which has produced ‘the only commercially available lab-grown, full thickness human skin model with entirely human collagen production for cruelty free skin testing.’ This overcomes three key obstacles:
- Eliminating often unethical testing of products on animals, but also humans.
- Overcoming logistical and time issues regarding procurement of clinical trial subjects.
- Reducing human error in clinical skin trials.
As one can imagine, this is very much in the nouveau ESG mould. What’s more is that Labskin are augmenting their offering through offering personalised skincare packages – available to consumers this year. Essentially a swab is taken of one’s skin and sent to DeepVerge. They then get back with a personalised skincare plan based on that individual’s genetic makeup. The below slide from DeepVerge’s December 2020 investor presentation sums it up well.
You may be wondering: how does Labskin do all this? Couldn’t a larger competitor usurp them? It’s certainly a very valid concern and one I’ve written about before. Fortunately, their aforementioned moat is so vast that that concern is greatly diminished. According to DeepVerge, Labskin have 13 years of data and have written 30+ research articles. Naturally, this is not something that a company can usurp without large sums of money and – even more elusive – time. This is precisely why according to the December 2020 investor presentation Labskin are testing products for 18 (!) of the top 20 largest global cosmetics companies.
So Labskin may be about to enter a market worth $189.3bn in 2025 with a personalised, unique skincare offering, in addition to revolutionising how the industry thinks about clinical skin trials. What (in my opinion) tops even this?
Modern Water Group (MWG), which DeepVerge in fact secured 100% ownership of today.
MWG are attempting to modernise the water monitoring industry. At present, the convention is to take a sample, send it to a lab and then wait typically a few days for the outcome. MWG, using artificial intelligence from the Rinocloud subsidiary and predictive analytics, now aim to a) identify and b) predict virus clusters in wastewater in real time. The technology thus enables proactive pandemic/epidemic management based on likely outbreak centers. It is only too easy to imagine how this could have helped ameliorate the effects of the Covid-19 pandemic in the UK. The November 2020 wastewater monitoring summary for SAGE says as much.
Why are MWG the team to change the way we monitor wastewater? Well, they’ve got a bit of a reputation. Over 100 patents, 30 years of brand recognition for the ‘Microtox’ product, and 700+ scientific research articles are a few of the highlights. Oh – and they have more than 3000 units installed in more than 60 countries. Huge amounts of data, cutting edge algorithms and a fantastic patent portfolio; now that is what you call a moat! It is a matter now of retrofitting existing units with AI capabilities for live water monitoring and prediction of pathogen clusters. That is before we even get on to installing new units in (for example) China and India, the former of which has set aside over $270bn to combat water pollution according to DeepVerge. They have contacts and knowhow in these places that is unachievable without years spent selling a premium offering.
Finally, a brief snippet on their potential cruise ship offering. The below DVRG slide again does a good job of articulating the potential market size for this offering. It involves a patented breathalyser licensed from PulmoBioMed for the Microtox BT breath test and a Microtox PD, AI-driven wastewater pathogen detection system. In short, this would be instrumental in protecting cruises not only from coronavirus outbreaks, but also any other outbreaks (remember the norovirus panic anyone)?
Of course you would be right in thinking that Microtox BT has other applications. The passage below from this article explains its potential in opening large venues here:
‘The Company believes Microtox BT has the potential to enable instant real-time testing of people within the community. This could be capable of providing daily triaging of everyone who may or may not demonstrate levels of infection. To “open the economy”, Integumen (now DeepVerge) has incorporated a 24-hour Digital Health Pass that indicates if the person tests positive or negative for infection. Matched with blockchain secure date and time stamp of the test, the company believes Microtox BT and the Digital Health Pass using “one second” QR Code scanners could potentially contribute to enabling the economy to re-open with personalised go/no go entry into venues such as work, events, social locations, public transport and airports.’
The combination of all these businesses, tied together under the DeepVerge moniker, has the potential to yield some truly explosive growth. In fact, it already is. Revenues were up more than 300% in 2020 to £4.4m, and guidance is for 2021 to be another year of revenue more than doubling at £10m. DVRG, based on even capturing a small sliver of the addressable markets above, could generate hundreds of millions of pounds in revenues – at high net profit margins – by the end of the decade. Any more specific guidance is bound to be wrong with how fast the company is growing.
The market capitalisation at today’s close is £55.45m. To put that into context, at a 15x PE ratio it is pricing in the equivalent of c. £3.7m in annual net profit, in perpetuity. Based on the above I for one think that DVRG has scope to outperform significantly on this in the coming years. Even if their £3m funding facility does not prove enough for their financing needs, assuming even 100% dilution the company is significantly undervalued in my view. There are multiple ‘shots on goal’ from subsidiaries with huge moats. If they manage to capture a significant portion of any of their addressable markets, the share price quite clearly can see a re-rate.
Thankfully, the directors agree with me, with a combined 15.03% shareholding in the company. This includes over 5% held by Gerard Brandon himself. As of the end of last year, Helium Rising Stars Fund also held 6.55%.
In summary, DeepVerge to me is an investment worth making on multiple accounts:
- Multiple innovative products
- Huge addressable markets
- Significant moats with data and patent advantages
- Respected brand – rare for a small-cap
Of course, every investment has risks, not least a small cap but the risk/reward is asymmetric in my view – and it is why I have confidence in DeepVerge to deliver. An early adopter of the AI-as-a-service business model and a highly unusual small company, DVRG is one of those that really can do good for the world and potentially help out some of its shareholders a great deal.
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