Israeli-based investment firm The Trendlines Group is entering 2023 with a different strategy. Instead of scouring the medtech and agrifood sectors for new start-ups to invest in, it is now focused on growing its existing portfolio of “precious” companies to a more mature level and maximising its chances of profitable exits.
Trendlines, listed in Singapore in 2015, has 58 companies in its portfolio. In an interview with The Edge Singapore, Todd Dollinger, one of the two co-chairmen and CEOs of the company, insists on the need to “spend more time with these companies”.
“The key issue here is with a maturing portfolio, [I want Trendlines] to be focused on that and help bring those companies to exit,” he explained the strategy change on Nov 21 last year.
This strategy shift will require fewer people to help see through than making active new investments. Trendlines projects a cost reduction of some US$2 million ($2.64 million) in FY2023 versus FY2021 — the last full year the company reported operating expenses net of consolidated portfolio company expenses and grants.
Dollinger denies the shift was initiated because the challenging market conditions of 2022 are expected to continue in 2023. Instead, he observes that when stock markets are down, more money will move into private markets and investment companies like Trendlines.
“In good times when the markets are going up, people are happy and have excess capital, where they’re happy to take out part of a public position or to use other private funds and invest alongside us. But surprisingly, when the markets are ugly, and people are nervous, we still do okay,” he adds.
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Investors from the start
Trendlines only invests in early-stage start-ups or, as Dollinger would put it, “Day 1 start-ups”. These are entities that have yet to register as a company. In contrast, many venture capital firms prefer to invest in later-stage start-ups, as they give a better chance of a profitable exit although returns are lower.
“We’re with you from Day 1. You come to us with your idea and we’re going to start a company with you. So, we [do] true company creation. You can come to talk to us about an idea that you just have written down on a piece of paper,” says Dollinger, citing how Trendlines has in place a very stringent due diligence process that takes into account three key pillars: The start-up’s founder, the market’s needs and the technology that the start-up offers.
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The way Dollinger sees it, there may be risks to investing in start-ups at such an early stage. However, each of these investments tends to be low, around US$2 million or less. If the start-ups need more funding, Trendlines can tap into its networks and pull in other investors ranging from family offices to high-net-worth individuals to chip in.
This is more important than investors willing to write out a cheque. “When other guys are out there raising US$4 billion valuations, we’re doing raises that are maybe US$10 or US$20 million. So, when we go out and talk to you about putting US$3 million in, we don’t have long conversations about the valuation,” says Dollinger.
Monetary support aside, Trendlines is an incubator, accelerator and VC firm. It provides cash to get things started, helps identify industry opportunities, opens the right doors, and inspires partnerships not originally imagined, says Dollinger.
Under Trendlines’ guidance, several start-ups turned into “big blockbusters”, claims Dollinger. For example, in 2020, Trendlines booked at least US$13.2 million from the sale of its stake in ApiFix to Nasdaq-listed OrthoPediatrics Corp.
On average, Trendlines typically sees its original committed capital increase by about four times upon exit. To date, Trendlines has exited 10 portfolio companies, with an average return on investment of 9.7x per exit and a weighted average internal rate of return of 175%.
Of course, just like any investment, there are risks — certainly more so for investments in start-ups which Trendlines does. In 2014, B. Braun, a German medical and pharmaceutical company, bought a controlling stake in Stimatix, a Trendlines portfolio company. Stimatix makes products for colostomy management, and Trendlines held onto a 28.14% stake even after B. Braun took control. Over the years, Trendlines was paid some US$2.7 million in dividends, and the sale of assets of Stimatix after commercialisation began in 2019.
However, in July 2022, Trendlines was forced to write off its remaining carrying value in Stimatix worth US$7.9 million after B. Braun decided to “refocus” its product portfolio and halted the sale of Stimatix products. Dollinger explains that the write-off represents future revenue that it was supposed to book from royalty fees, not the exit of its investment in Stimatix, which has already been completed.
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Lumpy revenue and earnings
As Trendlines would only book the proceeds from investments upon exit, Dollinger claims that the accurate valuation of its portfolio needs to be adequately reflected in the balance sheet. As the investments are in start-ups that typically do not book profits, the valuation in the statements is far less than what Trendlines believes the valuation to be.
As at June 30, 2022, Trendlines reported a portfolio value of US$81 million. “I’m not saying it’s worth over US$400 million, but I’m going to tell you it’s not worth US$100 million. It’s worth well more,” asserts Dollinger.
In addition, unlike companies with steady earnings streams, Trendlines’ bottom line is subjected to significant shifts year to year because of the practice of booking returns only when it exits the investment.
Between each reporting period, Trendlines’ portfolio value has remained largely steady over the past year at just over US$80 million. However, its bottom line had fallen from earnings of US$4.1 million in 2HFY2021 to an $11.9 million loss in 1HFY2022.
In results for the latest 1HFY2022 ended June 30, 2022, Trendlines recorded a loss of US$11.9 million, reversing from earnings of US$4.1 million a year ago. The earnings were weighed down by a US$7.9 million write-off of the value of Stimatix. In all, the loss in fair value of investments in its portfolio companies was US$7.4 million in 1HFY2022, compared to a gain from a change in fair value of investments of US$6.2 million in 1HFY2021.
Dollinger maintains that the nature of this business means its revenue and earnings are naturally “lumpy” and cannot be changed. The only way to have a smoother income line is to spread out investments in “1,000 companies”, he points out.
He says investors will see a spike in Trendlines’ profits when it exits an investment or when a high-value investment is made. On the other hand, the company will also lose when write-offs, such as its case with Stimatix, need to be made.
Thus far, investors have not exactly taken to Trendlines’ shares, which are typically thinly traded, if at all. As at June 30, 2022, its net asset value per share was 16 cents. It closed at 9.8 cents on Feb 8, down 10.9% over the past 12 months, valuing the company at about $85.8 million.
Nonetheless, its largest shareholder, Librae Holdings, is constantly increasing its bet on the company with a series of placements. The most recent tranche of US$1.1 million worth of new shares at 12 cents each was made on Jan 10, raising Librae’s stake to 27.34% from 26.47%. Two other investors, Palm Tree IV and Avztim came in around the same time. They put in US$312,500 and US$150,000 for around 3.52 million and 1.69 million new shares.
Mission-focused
Just like how Trendlines has chosen to focus on growing its existing portfolio companies instead of making its new investments, Dollinger and his team — even if they are making new investments — will keep their focus on the two core areas of healthcare and agrifood technologies. After all, these are two sectors with long-term structural growth, an ageing population and food security for the latter.
For Dollinger, there has been an “unbelievable amount of change” that the planet’s population has gone through in the last 50 years, and “the population on this planet couldn’t be anywhere near the size if it weren’t for technology, in agriculture and food”.
Dollinger thinks that “there is no question of growth” in these sectors. But the more important question is how the group can achieve its goals. He adds: “Are we going to be good enough? Are we going to be smart enough? Are we going to work hard enough so that investors will want to join us every day to develop these companies and to join us on our mission to improve the human condition?”
Photo: Albert Chua/ The Edge Singapore
