Time will tell if Trendlines has mastered art of early investing

THIS year, as the Trendlines Group celebrates its 10th anniversary - and second year of being a publicly listed company - a big question on investors' mind is: Will its stock trend higher after its steady fall?

Share performance of the Israel-based startup incubator has been disappointing since its November 2015 Catalist listing. Except for a short spurt above its initial public offering price of 33 Singapore cents, the stock has been on a downward path to its present value of around 15 cents.

For an uptrend to happen, Trendlines must - as this column has suggested in January - "build great companies" that are aligned with its vision of improving the human condition and achieving exits through a trade sale or public listing of its companies.

The group is poised to achieve both. That much is evident from my recent trip to Trendlines' seventh annual company showcase in Tel Aviv, where Trendlines demonstrated how, as an "intense investor", it will spare no effort to invest in and build companies that could one day revolutionise the medical and agricultural industries.

Of its 75 companies built since 2007, six have been acquired by healthcare giants including Ambu, Baxter and OPKO, and two listed on the Tel Aviv Stock Exchange. Short of revealing targets, Trendlines said that there are exits in the pipeline this year. Last year, it attained one exit: ETView Medical, the sale of which generated US$3.6 million in cash.

The group's 10 most valuable companies are valued at some US$57 million, 68 per cent of total portfolio value. Six out of the 10 are in revenue stage - and these include EdenShield, a natural plant-based crop protection solutions firm with sales in Israel and Europe, and is expecting positive cash flow in 2018; and ApiFix, which has created a minimally-invasive Scoliosis treatment device, and has sales in four countries. Trendlines will be adding diversity to and greater synergies within its portfolio, as it is looking to assimilate more than 30 companies to its portfolio over three years, and expand into new markets Germany and China. Last year, it launched Trendlines Medical Singapore, its first medical technology (medtech) incubator outside of Israel.

As an incubator unafraid to get its hands dirty, Trendlines provides its portfolio companies with a host of services including business development, financial consulting, fundraising, market research, marketing communications, facilities, tech consulting and overheads. This is sensible as companies can then focus on developing their tech, product and market.

Typically, Trendlines' first investment into a portfolio company is US$1.24 million, a decent sum. This comprises an Israeli government grant (non-dilutive) of US$670,000, and a Trendlines cash investment of US$120,000 and in-kind investment at cost of US$450,000 over two years.

In what is an indication of a disciplined investment strategy and robust due diligence process, Trendlines reviews some 500 projects a year, but eventually invests in and incubates only 2 per cent, or 8-10 of these. When it comes to investing in a company, Trendlines pays most attention to the founding team, which makes sense, because the team's dynamics and operational capabilities are most important at the earliest stage of a startup, where most experimentation takes place.

To boot, in-house expertise and external collaborations will continue to serve Trendlines well. Its senior management team consists of veteran entrepreneurs with know-how from a wide range of industries, and decades of company-building experience. Its strategic partners include B Braun, Bayer, and two medical device firms based in Japan and the US.

Lumpy revenues are common for an incubator, exit activity of which occurs irregularly and is subject to volatile portfolio valuations. To mitigate this, Trendlines is banking on recurring income streams from its in-house innovation centre, Trendlines Labs, which earns royalty income from inventing products for hospitals or medical devices companies. Last year, Trendlines Labs got US$1.1 million in revenue, more than double 2015's US$0.4 million.

Early-stage startups are essentially fledgling, high-risk companies, in which Trendlines is not averse to investing. According to Igal Magen, chief technology officer of water treatment firm BioFishency, Trendlines is possibly the only incubator in Israel that offers seed money for agricultural technology startups. This means that should these companies score an exit (which typically take six years), Trendlines, an early investor, will stand to gain significantly.

But the fact is that there is a high chance of startups failing. Even as Trendlines incubates more companies to multiply its chances of success, it will inevitably also face more failures. For now, only time will tell if Trendlines has mastered the art of early investing - which includes betting on the right people and correctly deriving market potential - and building great companies.

As for the future direction of its stock price, what Trendlines needs are sizeable breakthroughs and exits to make up for the costs in incubating more companies.

For faithful investors, this line from The Third Wave: An Entrepreneur's Vision of the Future by Steve Case, best known as the co-founder and former chief executive officer and chairman of America Online (AOL), may be of interest: Startups are generally backed by venture investors who see the potential for ten or even one hundred times the return on investment.