Last Friday I had a meeting with the chairman and the CEO of £SCE (a company in which I am an investor), the developer of carbon fibre reinforced ceramic products. Their principal products are brakes for high performance cars and aircraft, the key features of which are light weight (reducing unsprung weight improves performance) and that they are hard wearing (which reduces life time cost). Although commercial progress has been slow, which may frustrate some investors, Surface Transforms is a good illustration of:
- the patience required by both the executive team and investors to develop game changing businesses.
- the benefits for an investor of running an 80/20 portfolio, with >80% invested in established businesses and <20% invested in early stage businesses. Investors need to develop their own definition of what they regard as 'established' , in my case I only invest in companies conforming to the LCFR investment template and my definition of established means companies making a pre-tax profit >£1 million.
The reason why it takes so long to develop a company such as Surface Transforms is that significant profitability will only be achieved if the technology is taken up by major OEMs. However, the latter are risk averse and the indications over the last few years across a number of sectors are that this attitude has been increasing. In addition, even when an OEM has decided to adopt the technology (after a lengthy trialling period), it is most likely to be incorporated into a new model, which in turn involves a development period of years rather than months - then combine this naturally slow pace with the recession over the last three years!
The pace at which life moves can be illustrated by work being undertaken on the braking system for a next generation of US military transport vehicle. A development contract was won in 2009, which generated sales of c. £300,000 in the year to May 2010 and the overall project then involves testing through to the end of 2012. Surface Transforms had expected some sales on this project in the year to May 2011 to replace parts which had failed the testing programme but none have been required and the feedback has been very positive. What appeals to me about this project are the benefits which Surface Transforms' brakes bring to this application, namely the ability to carry a larger payload (due to the…
