The Innovation Stack: Building an Unbeatable Business With a Cascade of Interlocking Solutions | H.E.R.O. Issue 2, 21 September 2020

Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose

The Innovation Stack: Building an Unbeatable Business With a Cascade of Interlocking Solutions | H.E.R.O. Issue 2, 21 September 2020

September 20, 2020 Uncategorized 0

Summary

  • The Portfolio of dividend-yielding global H.E.R.O. Innovators rose for the second consecutive week during the week ended 18 September 2020, with the invested portfolio up significantly vs MSCI ACWI All World index +0.1%, Euro Stoxx -0.97%, DAX -0.66%, FTSE -0.42%, and S&P 500/NASDAQ crumbled for the third consecutive week by -0.64%/-0.55% to suffer its longest losing streak in over a year, demonstrating her resilience in turbulent market conditions and extending her overall outperformance against major world indexes since her recent birth on 28 August 2020, during which MSCI ACWI All World index tumbled -3.56%, S&P 500 -5.37%, NASDAQ -7.72% (NASDAQ is down over 12% since recent high in September, led by FANG stocks -17%), and Greater China stocks slumped with Hang Seng index -2.82%, CSI 300 index -2.21% and HSCEI -4.97%.
  • Nordic, Swiss and Japan H.E.R.O. innovators were resilient winners and key contributors during the week, led by: (1) Nordic’s CRM SaaS Leader (+19.3%); (2) Global Leader in Analytical Equipment and Disposables in Automated Cell Counting & Analysis (+13.5%); (3) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+12.1%); (4) Pioneering Inventor & #1 Global Leader Specializing in Helmet Based Rotational Motion Safety and Brain Protection (+10.6%); (5) Global #1 Leader in Advanced Communication and Hearing Protection Systems to Enable Communication In Noisy & Mission Critical Environments (+8.8%); (6) Japan’s #1 SaaS Cloud Leader in Integrated Real Estate and Facilities Management Software (+8.6%).
  • The K-shaped recovery divergence, coupled with the worsening U.S.-China relationship, points towards the new world order in the post-pandemic future that marks the ascent of the quiet Nordic powerhouse region – comprising of Sweden, Denmark, Norway, Finland and Iceland with a combined GDP of over US$1.6 trillion, combined population of around 27.3 million people, and one of the highest regional GDP per capita in the world at over US$62,000 – where they are a Winter War kind of country: innovation happens when things are tough, not when they’re easy and comfortable.
The H.E.R.O. Investment Framework

  • The H.E.R.O. framework, methodology and strategy are powering equity portfolio asset for our institutional client.
  • This is the only equities strategy in the market that focuses on both dividend yield and innovation-driven capital gains to enhance total shareholders’ returns. This is also the only dividend-yielding equities strategy in the market that is entirely not dependent on and with zero exposure to: (1) cyclicals (concentrated in economically-sensitive and rate-sensitive sectors such as financials, property & construction, energy & materials) that may not be resilient in economic downturns, and (2) cheap-gets-cheaper yield- and value traps. It also applies the proprietary forward-looking fact-based accounting fraud detection system that was pioneered and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS), to mitigate downside risks which escape detection by typical western-based forensic tools.

THE INNOVATION STACK: BUILDING AN UNBEATABLE BUSINESS WITH A CASCADE OF INTERLOCKING SOLUTIONS
"Squaring up can spark a series of interlocking inventions called an Innovation Stack, one of the most powerful assets a company can possess. Building an Innovation Stack all begins by choosing to solve a problem that nobody has solved before. Squaring up, righting a wrong, or solving an unsolved problem forces you to be creative even if you don't want to be. That's OK. Oysters don't choose to make pearls." - Jim McKelvey, co-founder of Square

What does it take to build a resilient, world-changing company? In his fascinating book "The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time", Square's co-founder Jim McKelvey shares inspiring stories of Square's early days and reveals a pattern of ground-breaking strategies that was the key to success of Square and other world-changing companies. McKelvey calls the business model secret the Innovation Stack, a cascade of interlocking solutions that creates a massive advantage and value creation - business model strategies that have also forged the enduring and exponential growth trajectory of our quiet H.E.R.O. innovators.

Case Story: Pioneering Inventor & Global #1 Leader Specializing in Helmet-Based Rotational Motion Safety & Brain Protection
[Week (14-18 Sep): +10.6%]
Consider the case of one of our portfolio companies, a Nordic-listed global leader specializing in helmet-based rotational motion safety & brain protection, which is up 6% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.6% over the same period. The rising dividend-yielding company has also compounded 611% in capital gains in the recent 4-5 years vs MSCI ACWI World index +47.6%. Demand for its patented protection solution has been strong and is further boosted by the pandemic and social distancing measures which escalate the popularity of urban mobility in bicycles and e-bikes to help consumers and workers get around town. CEO Mr. S commented: "In the wake of the covid-19 pandemic, bicycling for both commuting and recreational purposes has increased significantly all around the world, which impacts our customers in a positive way."

The inspiring Innovation Stack story at this Nordic global leader started in 1995 when Dr. H, a Swedish brain surgeon working at the Karolinska Institute in Stockholm, began examining how standard helmets were designed, as he was convinced that the helmets generally available were not providing sufficient protection against brain injuries. Founder Dr. H recalls that his idea was met with a great deal of scepticism.

Dr. H shared: "Several decades ago, I was a Swedish brain surgeon at the Karolinksa Institute and professor at the Royal Institute of Technology in Stockholm, and I realized I was seeing too many brain injuries in patients after accidents, even when they had been wearing helmets. So in 1995, I began studying how helmets were constructed, working with the World Health Organization to try to prevent head injuries. When I said to my surgical colleagues, ‘I have to go through engineers,’ they said, ‘That’s crazy, why do you want to do that?’ Well, I want to solve the problem. We have a big problem: we just operate on traumatic brain injuries but we don’t do anything to prevent it. I contacted the Royal Institute to initiate biomechanical research on head and neck injury prevention. At the same time, Mr. H was at the Royal Institute studying engineering. We connected to study ways to make a better helmet. We arrived at our lightbulb moment in 1996: the concept of MIPS (Multi-directional Impact Protection System). The idea was patented in 1998. By 2000, we had the first prototype of a MIPS helmet. We are the first company in the world going beyond helmet production. We want to go further, behind the curtains, and look at the consequences of a head injury, because if you can look in a molecular way, then you can start to develop new helmets.”

Co-founder & CTO Mr. H shared: “The idea behind MIPS was to simulate the brain’s own protective system. We are mimicking the safety system inside our head, where the brain can slide a little, but against the skull in the cerebral spinal fluid. We copied that system into the helmet. We found out that the way helmets are tested today, with a pure linear impact, is not how an accident will happen. Most often the impact is at an angle. If the impact is at an angle to the ground, the helmet can grab into the ground, and we have the rotation. A linear impact can cause a skull fracture or contusion, but a rotational impact can cause a concussion, which is the most common type of brain injury. Wearing a MIPS helmet will result in less rotational energy transmitted to your brain when you hit the ground.”

“People might say, ‘I can put the helmet on my head, and I can move it anyway. Why do I need MIPS?’ If you look to the impact situation, it’s very short with the ground. It’s about 10 milliseconds. During that 10 milliseconds, the force is very large, so it’s like having more than 10 people standing on your helmet during this short time period. Then it’s not that easy to move the helmet if you don’t have this low coefficient sliding layer. A MIPS-equipped helmet has a low-friction layer between the head and the helmet, which enables that relative motion of 10-15 millimeters. It’s designed to reduce rotational motion transferred to the brain from angled impacts to the head—and that focus on angled impacts is crucial."

Today, around 5 million MIPS-patented helmets were sold in 2019 (14.2 million since inception), with over 100 brand partners and over 583 helmet models in the snow, bike, moto, climbing, safety and equestrian helmet industry.

Yet, in the beginning, while Dr. H and Mr. H had complete command of the science behind MIPS, they struggled. Initially, they decided to manufacture their own helmets and hoped to implement the system into motorcycle helmets, but the industry was not ready for it then. As they continued developing the product and solving new problems, they got some funding from Swedish insurance companies that also offered horse insurance, and the solution found its way into the equestrian market. The company transformed into an ingredient brand asset-light business model to sell its patented MIPS Brain Protection System (BPS) technology to the global helmet industry, instead of manufacturing its own helmets. They began getting interest from the skiing and biking industries, and subsequently got into motorcycle helmets. An article about the technology came out in Popular Science magazine in 2012, when the concussion rate in football was becoming a major topic, and that publicity helped propel the brand further.

Since the company does not carry out production directly, but uses subcontractors instead, the MIPS production model is scalable. The operational model require low inventory. In-house R&D capabilities, customer implementation projects for each new helmet model are paid by customers. As part of this process, MIPS handles production of the tools necessary for commercial production of the specific low friction layer, and then bills a fee for production of these tools. When the helmet is approved for production, MIPS usually invoices the helmet brand a licensing fee for the right to use MIPS’ patents, technology and for marketing. Helmets that are equipped with MIPS BPS always display the yellow MIPS logo on the outside of the helmets according to the MIPS licensing agreement that stipulates a very visible and consistent branding.

Higher trust in the MIPS brand is leading to more all-in MIPS commitments from brands. The American helmet brand Specialized received a great deal of attention in bicycle media when they communicated their plan to do this. The multisport brand Bollé and the lifestyle brand Nutcase have communicated that they will offer MIPS BPS in all their helmet models. Both brands will convert their whole range, conversion projects already started. Bollé is the first brand to offer MIPS BPS in all helmets both within snow and bike. Nutcase is the first lifestyle brand committing to have MIPS BPS in all their helmets. MIPS continued to make inroads into new types of helmets and MIPS BPS is now also available in the strategically important safety helmet category. CEO Mr. S commented: "We started working with offering solutions to LEAF (Law Enforcement Armed Forces) already in 2016, and I am pleased that we for the first time delivered solutions to helmets both to the Swedish search and rescue team (SAR) and military units (the latter consisting of a sample order) during the quarter (Apr-Jun 2020). Despite the fact that lead times are often long within LEAF we see the interest for these types of helmets as a positive sign."

Dr. H, who will be celebrating his 74th birthday, remains just as committed to the work as he was 25 years ago: “I will not have time to retire and I’m not interested in that. I will keep working on developing further solutions for preventing head injury. I will focus more and more on the next generation of the MIPS system."

I. Strategic Focus on Quiet Innovators & The H.E.R.O. Investment Framework
This Nordic global medtech leader highlights our strategic focus on quiet innovators. Our investment strategies distinguish from all other tech- and innovation-themed funds with its singular focus on quiet innovators, which present structurally mispriced opportunities and avoid overcrowded misopportunities that stem from the human tendencies to equate flashy popularity with excellence, and have an active ratio of over 95% (vs the MSCI World Index). The portfolio companies are exceptional innovators and focused market leaders in their respective fields with unique, scalable, recurring-revenue and high-profitability business models delivering innovative products and services indispensable to our well-being in daily life and run by high-integrity, honorable and far-sighted entrepreneurs with a higher Purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – Honorable. Exponential. Resilient. Organization.

H.E.R.O. is operationalized into a systematic 4-step investment process and investment framework powered by sustainability & ESG principles to identify the winners, to distinguish between the true innovators and the swarming imitators, between the devoted missionaries forging a greater Purpose and the mercenaries. Not only do the H.E.R.O. innovators generate high profitability at the inflection point of their exponential growth trajectory, more importantly, they are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out.

We use the framework and positive criteria of the United Nations Sustainable Development Goals (SDGs) to integrate environmental, social, and governance (ESG) considerations into the research and investment process in selecting companies that generate sales in products and services that contribute to the achievement of the UN SDGs. The central focus of our impact investing is on innovators who contribute to the UN SDG Goal 9: Industry, Innovation, and Infrastructure — “Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation”.

H.E.R.O. is unique in eliminating the downside risks from accounting tunneling fraud and misgovernance through unusual related-party transactions, consolidation accounting craftiness (opportunistic shifting of expenses and debt into unconsolidated entities), and hidden balance sheet liabilities at the wider pyramidal business group level etc., which escape detection by western-based forensic tools through a proprietary forward-looking fact-based accounting fraud detection system developed by KB, and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS). For instance, prevalent across Asian companies, previously Big-4 audited “cash” in the balance sheet are often misclassified “cash equivalents” disguised from improper short-term related party loans employed by the insiders to expropriate or tunnel out cash from the company after initially propping up financial numbers artificially to create false positive signals to lure in funds.

II. Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose
“Innovators” are companies that generate sales in technologically enabled new products and services that potentially transforms the way the world works. We seek to identify companies capitalizing on innovation in offering faster, cheaper, more productive, more cost effective, more compelling products and services, or that are enabling the further development of an innovation theme in the markets in which they operate.

III. Quiet Innovators Thrive in Stormy Times
Prepare and position a winning portfolio for a post-pandemic world with innovators who thrive in stormy times and transform crises and trauma into opportunities for the future. The coronavirus crisis has helped accelerate innovation and enhanced the leadership of innovators. Market positions are not redistributed during sunny and calm times, but during times of crisis. The pandemic crisis has changed the behavior of both consumers and businesses. Companies offering faster, cheaper, more productive, more cost effective, more compelling and innovative products and services are gaining significant share.

Market leadership and resilient winners in stormy market environment and in the post-pandemic future will be much less about the overcrowded popular trades in mega-cap tech and loss-making tech/biotech, as defined by FAANGT-STAMP (U.S.: Facebook, Apple, Amazon, Netflix, Google, Tesla; Asia/China: SEA, Tencent, Alibaba, Meituan-Dianping, Pinduoduo), who also do not pay any dividends (with the exception of Apple and Tencent), and will be led more by highly-profitable quiet innovators, including dividend-yielding cloud Software-as-a-Service (SaaS) companies.

Notably, of the 90+ cloud software companies listed in the U.S., nearly all (>95%) do not pay any dividends, with many still looped in a negative free cashflow position, while the 20 global SaaS portfolio companies in the Portfolio of dividend-yielding global H.E.R.O. Innovators are unique in being exceptional market leaders in their respective field with ample internal cashflow generative capacity to reinvest for higher-margin growth and still consistently produce rising dividend yield to reward shareholders.

Case Story: Nordic Global #1 Leader in Advanced Communications & Hearing Protection Systems to Enable Communication in Noisy & Mission-Critical Environments
[Week (14-18 Sep): +8.8%]
Another uplifting Innovation Stack story in our portfolio companies is the Nordic global #1 leader in advanced communications & hearing protection systems to enable communication in noisy and mission-critical environments, which is up 12.8% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.6% over the same period. The rising dividend-yielding company has also compounded 294% in capital gains in the recent 5 years vs MSCI ACWI World index +47.6%.

The company has long-term contracts with defense authorities in the USA, the UK, Canada, Australia and Denmark, among others, and its customers include the American Department of Defense, the US Marines and the US Air Force elite unit, British Army, Australian Army, Canadian Army, Belgian Army, French Army, Royal Danish Army, the Guardian Angels, the German, Swedish and Japanese police, etc. The company's solutions make a difference in demanding environments and give operational advantages and increased security for military and security personnel. They also contribute to reducing the costs of hearing loss for individuals and society. A growing awareness of the effect of hearing loss on individuals and society is a further factor in increasing demand for the company's solutions. Hearing impairment and tinnitus are the most common injuries among veterans of the American defense forces, and the American defense forces’ direct costs for care and support amount to billions of dollars annually. The growing significance of communication for military and law enforcement operations entails demands for better access to new or modified communication equipment for a growing number of users, creating structural growth in demand for the company’s systems.

The company's Innovation Stack story originates from Denmark's long tradition of world-leading industry cluster "The Danish Sound" in hearing and acoustics in production of high quality and innovative loudspeakers, hearing aids, test equipment and other communication equipment. The business was established in 1999 in Copenhagen to develop headsets for communication based on bone conduction technology. For more than 50 years the Copenhagen region has been home to several world-leading companies in sound technology, whose success was made possible through internationally recognized and close collaboration with Danish universities and institutes of technology in three related areas: (1) Psychoacoustics – how sound is perceived by humans, (2) Acoustics – the science of sound properties and behavior, (3) Signal processing – how to manipulate sound electronically. The company's strong corporate culture and values on R&D, which is characterized by close collaboration between employees and insights about users and their needs, has been able to successfully recruit engineers with training and experience in these disciplines. By combining different technologies and skills in acoustics, electronics, mechanics and hearing, the company creates innovative and customized solutions that replace traditional methods.

CEO Mr. H: "We are the global market leader within advanced hearing protection and communication systems with more than 200.000 systems fielded globally. This position is based on more than 15 years of mission proven experience using cutting-edge technology, and providing industry leading solutions to the most demanding elite units in the world. We are constantly pushing the limits of technologies in order to protect and enable professionals to operate and communicate clearly and safely in all environments. Our solutions build on a deep understanding of sound and human hearing. Many of our R&D staff have roots in ‘The Danish Sound’ – a world-renowned industrial cluster of excellence in acoustics, hearing and mobile communications based on collaboration between industry and academic research. This cluster has a long tradition of producing high quality, innovative loudspeakers, hearing aids, test apparatus, audio systems, and other communications equipment. systems can be tailored to fit any critical operation or scenario and across different teams and individuals."

"We are intensifying our penetration of the law enforcement and security market. We have received initial orders from new markets in Asia, which may lead to larger orders in the long term. We see two trends in particular that drive demand for our solutions. The strongest trend is the increasing need for modern communication equipment that makes it possible for the police to work effectively and safely in noisy and mission-critical environments. The second trend is a rising awareness of the high costs that hearing loss gives rise to and the personal suffering it means for those affected. The attractive market conditions, together with breakthroughs both in North America and in several European markets, mean that we feel great confidence in focusing on the law enforcement and security market.”

Case Story: Nordic's Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS)
[Week (14-18 Sep): +12.1%]
Another Innovation Stack story in our portfolio companies is "Sweden's Twilio", an emerging global cloud software leader in Communication Platform as a Service (CPaaS), which is up 1.1% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.6% over the same period. The rising dividend-yielding company has also compounded 778% in capital gains in the recent 5 years vs MSCI ACWI World index +47.6%. This highly-profitable and cashflow-generative Nordic SaaS innovator offers a platform for digital messaging services that can be integrated into their customers’ internal or external communications flow and has a solid background in secure communication under extreme conditions. The company serves over 5,000 customers and commands a special position in alarm and safety, healthcare and e-health, as well as e-commerce and logistics.

CEO Mr. J commented: "We are the new provider of messaging solutions to the Swedish Social Insurance Agency in delivering messaging services with the highest requirements regarding data storage, security and personal data processing. The solution consists of SMS alerts via API and web portal, e-identification and subscription services. The framework agreement also opens the way for orders from other authorities. In this procurement, the Swedish Social Insurance Agency has placed the most rigorous and far-reaching requirements for safety and data processing we have seen so far. For example, it has chosen not to approve operators who may be covered by the so-called CLOUD Act. This is the first time we have seen this requirement, which is a clear indicator of how government agencies and government agencies will formulate their demands in the future.”

[The Swedish Social Insurance Agency is one of the largest authorities in the country with about 14,000 employees. The Swedish Social Insurance Agency administers the insurance and contributions included in social security in Sweden. Social security is the economic security system of society. In total, the Authority administers nearly fifty different types of social security benefits.]

Case Story: Nordic's CRM SaaS Leader
[Week (14-18 Sep): +19.3%]
Another Innovation Stack story in our portfolio companies is Nordic's CRM SaaS leader, which is up 10% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.6% over the same period. The rising dividend-yielding company has also compounded 387% in capital gains in the recent 5 years vs MSCI ACWI World index +47.6%. This highly-profitable and cashflow-generative Nordic SaaS innovator triumphed over its Big Tech rivals in Salesforce.com and Microsoft with an Innovation Stack business model by interlocking its CRM solution with a ZoomInfo-like go-to-market business intelligence database platform for sales and marketing teams.

CEO Mr. S shared: "Ever since day one, our overall goal has been to deliver exceptionally user-friendly CRM systems that simplify everyday life for our customers. The balanced mix of commitment and technology has made us one of the market leaders in the Nordic region. Our focus is now on turning all companies into customer magnets who retain their customers and attract new ones. Our CRM systems help our customers to be really good at customer care and sales; we keep track of customers, businesses and projects when good memory, Excel lists and post-it notes are no longer enough, and we gather all the data in one place in our software and we speed up a structure for the company, saving a lot of time for the users and after that, we are helping them build processes in our software to handle the customers in attracting new ones and keeping existing ones. Unlike our main competitors – where sales from Microsoft and Salesforce are carried out through both direct and indirect channels – we only sells our offerings directly and thus covers the entire value chain. This creates a competitive advantage thanks to close and strong relationships with the customers."

"Our cloud-based SaaS services include an extensive library of company information and contact details to nearly all companies in the Nordic region. Administrative work is significantly reduced, as the software comes with information that otherwise would take needlessly long time to register and be hard to find. The available information also forms a critical tool during sales efforts, as the user easily can follow the potential customer’s progress in a simple way. Information such as growth, turnover and number of employees is accessible in the sales rep’s own qualification of potential customers. All in all, the access to information about potential new customers simplifies the sales process as users can learn about the customer’s organisation in a much more effective way.”

Case Story: Nordic Global Leader in Analytical Equipment & Disposables in Automated Cell Counting & Analysis
[Week (14-18 Sep): +13.5%]
Another Innovation Stack story in our portfolio companies is Nordic global leader in analytical equipment & disposables in automated cell counting and analysis, which is up 8.4% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.6% over the same period. The rising dividend-yielding company has also compounded 2,143% in capital gains in the recent 5 years vs MSCI ACWI World index +47.6%.

Highly attractive market conditions for this highly-profitable and cashflow-generative Nordic medtech innovator come from cellular immunotherapies, which seem to have efficacy in curing otherwise incurable cancer patients by means of their own cells, whereby a dose of “activated” immune cells is injected into a cancer patient to specifically attack the patient’s cancer cells. The new regimes originate from the U.S. where several therapies have now been approved by the FDA and many more are expected to obtain approval over the next few years. The development of new cellular immunotherapy regimes is gathering momentum in China, Japan and Europe as well.

The company’s automated cell counter is used in connection with amplification of a patient’s genetically engineered cells before they are reinjected into the patient. The equipment & digital solution monitors the cell count and cell viability throughout the amplification process to ensure that the cells are growing as intended, making it an integral part of an overall approved therapeutic product. According to customers, the equipment is easy to use and produces highly consistent test results. No competing cell counter product offer similar qualities. No calibration is a critical advantage: The method looks at the DNA of the cell nuclei rather than the whole cells (or particles of a certain size). Cell sizes differ, whereas cell nuclei size and amount of DNA or number of base pairs are more uniform. The company has became the quiet global leader with an Innovation Stack business model by interlocking its instrument system with its unique disposable cassette and software.

CEO Mr. S shared: "We specialize in the development, production and sale of high-quality analytical equipment for cell counting and analysis within a broad range of areas. Our analytical equipment is based on a unique patented technology platform that ensures high-quality analytical results, operational reliability, cost effectiveness and ease of use. Our core technology consists in capturing images of a prepared liquid sample through a special-purpose microscope to subsequently perform an automatic cell count and/or analysis using digital imaging."

"This technology allows for high-precision counting and analysis of large numbers of cells at competitive prices. The development of our unique disposable cassette for our instruments is a key factor of our success within cell counting. Cell samples to be analysed are sucked directly into the cassette. Dyes may potentially be harmful and are not added manually, because they are deposited within the cassette during production. The customer then places the cassette containing the cell sample in our instrument and the rest of the analysis is performed automatically. The cell count results are available after a short while, and the software used to control the entire process is compliant with the strict FDA requirements for handling digital data. This is a more simple and more precise concept than the ones used by competing cell counters currently on the market, and it eliminates many of the factors usually causing measurement variations and inconsistencies by calibrating all cassettes individually during the production process."

"With the improved revenue in 2019/20, our revenue has more than tripled over the past five years which was not least driven by our ability to build a particularly strong market position in the immune-based therapy growth area. The development of new therapies in this area is still growing in the USA, Europe and Asia."

"Bioprocessing will be a special focus area for us in future, and we will particularly target the area comprising the production of antibodies and proteins for use in pharmaceuticals – a strongly growing area driven by the development of more and more new therapies within this field. There is a significant need for cell counting and viability determination within bioprocessing, an area involving work with living cells and in which the number of cells are essential. With our new products, we can offer our customers faster analysis and higher analysis capacity as well as great stability of the measuring equipment which reduces maintenance costs considerably. The software used also enables customers to manage data electronically and to automate their data flows. This is of major importance to customers within bioprocessing as a substantial amount of resources is required to meet various documentation requirements and generally to meet the requirements for GMP production. Bioprocessing is a big and lucrative area in which we currently do not have a major presence. Our ambition is to build a new, attractive business area within bioprocessing over the coming years.”

Case Story: Japan's #1 SaaS Leader in Integrated Real Estate and Facilities Management Cloud Software
[Week (14-18 Sep): +8.6%]
Another Innovation Stack story in our portfolio companies is Japan's #1 SaaS leader in integrated real estate and facilities management cloud software, which is up 7.2% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.6% over the same period. The rising dividend-yielding company has also compounded 149% in capital gains in the recent one year vs MSCI ACWI World index +7.2%.

This Japanese SaaS innovator commands a dominant market leadership in J-REIT with a 60% share and is adopted as the recommended system by the National Rental Property Management Association. In the larger REIT & Fund market, the company is also the market leader with over 40% share. Building upon its de facto standard leadership in the “rental real estate” market, the company still has enormous expansion scope and a long runway for growth in the building maintenance and general CRE (corporate real estate) markets where its share is currently ~4% and ~3% respectively. Over 51,387 buildings (of 280 corporate customers) are now managed by the company's  cloud software that is powered by big data analytics and artificial intelligence. Notable CRE clients include Nippon Life Insurance, Tokio Marine and Mitsui Fudosan who switched from their in-house systems to the company's cloud software platform, shifting and entrusting their entire valuable property management work and data (Nippon Life has real estate nationwide valued at over 1.1 trillion yen; rental income from investment properties is becoming an important earnings and cashflow pillar for Tokio Marine) to be carried out using the company's cloud software.

Founder and CEO Dr. I shared: "The center of our customer base is J-REIT, and our cloud software commands around 60% share for J-REIT as a real estate and facility operation management tool. We are proud that our cloud software is the de facto standard for J-REIT. The strength of the business is the height of entry barriers. In the case of REIT, we studied the characteristics, such as high disclosure frequency and precision of data required to report to investors and regulators. The corporate accounting processing is very complicated and strict. We noticed these needs and addressed it from the very beginning of our cloud service. In ordinary accounting software, data cannot be carried over when closing the previous year and information on operational performance is not included in the accounting software. For example, no vacant room rate data will come out. However, if you work closely with the performance of real estate and accounting, smooth correspondence is possible such that you can respond immediately when a vacant room comes out or if a cancellation notice is made and red flags get up. What is important is that you can always see it as a real-time stream without closing the data every year. This is the point of the cloud services.”

WEEKLY MARKET COMMENTARY BY H.E.R.O. (14 Sep to 18 Sep 2020)
The Portfolio of dividend-yielding global H.E.R.O. Innovators rose during the week ended 18 September 2020, with the invested portfolio up significantly vs MSCI ACWI All World index +0.1%, Euro Stoxx -0.97%, DAX -0.66%, FTSE -0.42%, and S&P 500/NASDAQ crumbled for the third consecutive week by -0.64%/-0.55% to suffer its longest losing streak in over a year, demonstrating her resilience in turbulent market conditions and extending her overall outperformance against major world indexes since her recent birth on 28 August 2020, during which MSCI ACWI All World index tumbled -3.56%, S&P 500 -5.37%, NASDAQ -7.72% (NASDAQ is down over 12% since recent high in September, led by FANG stocks -17%), and Greater China stocks slumped with Hang Seng index -2.82%, CSI 300 index -2.21% and HSCEI -4.97%.

  • Nordic, Swiss and Japan H.E.R.O. innovators were resilient winners and key contributors during the week, led by: (1) Nordic’s CRM SaaS Leader (+19.3%); (2) Global Leader in Analytical Equipment and Disposables in Automated Cell Counting & Analysis (+13.5%); (3) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+12.1%); (4) Pioneering Inventor & #1 Global Leader Specializing in Helmet Based Rotational Motion Safety and Brain Protection (+10.6%); (5) Global #1 Leader in Advanced Communication and Hearing Protection Systems to Enable Communication In Noisy & Mission Critical Environments (+8.8%); (6) Japan’s #1 SaaS Cloud Leader in Integrated Real Estate and Facilities Management Software (+8.6%).
  • The K-shaped recovery divergence, coupled with the worsening U.S.-China relationship, points towards the new world order in the post-pandemic future that marks the ascent of the quiet Nordic powerhouse region – comprising of Sweden, Denmark, Norway, Finland and Iceland with a combined GDP of over US$1.6 trillion, combined population of around 27.3 million people, and one of the highest regional GDP per capita in the world at over US$62,000 – where they are a Winter War kind of country: innovation happens when things are tough, not when they’re easy and comfortable.

“You are expelled!” boomed Trump to Tencent in the download ban of the WeChat app in the U.S. app stores beginning Sunday, as U.S.-China relationship deteriorated into dangerous choppy waters. In addition, the Committee on Foreign Investment in the United States (CFIUS) is opening up a regulatory investigation into gaming companies that have dealings with Tencent and Chinese firms regarding their data security protocols, which could possibly unravel Tencent’s gaming empire and its myriad investments in the U.S. China vowed retaliatory moves, including releasing details on Saturday of its “unreliable entities list” more than 15 months after its announcement, in which firms and individuals on the blacklist will be banned from trading with and investing in China. Investment between the United States and China has tumbled to a nine-year low in the first half of 2020, hit by bilateral tensions that could see more Chinese companies come under pressure to divest U.S. operations. A recent Pew research Centre poll found that 73% of Americans have an “unfavourable attitude towards China”, up from 50% last year because of the pandemic and more than double what the same poll found in 2007. A quarter of Americans now describe China as an enemy of the US, almost double the share who said that in 2012. Anti-China sentiment has increased sharply in Congress, with the number of bills that negatively mention China by name at a record high. Many normal, routine bills now include anti-China provisions. On Wednesday the US Democrat presidential candidate, Joe Biden, proposed what amounts to an anti-China tax penalty – Biden will impose a 10% tax penalty on companies that move operations overseas, and give a 10% tax credit for those that create jobs in the United States, abandoning the pro-globalisation stance that has been a core Democrat position since the 1990s. This deterioration isn’t being driven entirely by the United States – a lot of it comes from the aggressive stance of Xi Jinping, including tensions with India and Australia.

Cyclicals & Value Trap optimists pinning their hopes on a V-shaped recovery were rammed by rising coronavirus cases and a dim economic outlook that weighed on sentiment. European countries announced new restrictions on Friday to curb surging coronavirus infections in some of their largest cities, while Britain was reported to be considering a new national lockdown as hospital admissions double every eight days. Equity markets have become hyper-leveraged to every snippet of good news on vaccines news and there appears to be growing desensitization and sensibility towards developers experimenting with the "quick-and-dirty" messenger RNA technology that provokes the immune system into a response. This gene-based biotech leapfrogs the normal laborious process and avoids the need for a costly production of the vaccine from hens' eggs. Yet mRNA is famously unstable and hard to manage. No such vaccines have ever been approved for human use. No one dare to really claim that they know how effective they will be, or how long any immunity will last. Markets were also frazzled by Fed’s balance sheet inertia and Powell’s comments that “Monetary policy should not be the first line of defense.” Markets have been imploring for more QE since the Fed’s balance sheet has ballooned from US$4tn since the pandemic panic in March to just over US$7tn, but were spooked after Powell’s reluctance during the FOMC meeting this week to promise more specific actions to adapt its balance sheet policy to generate that inflation and aid the US economic recovery. Meanwhile, HSBC shares slumped below level last seen in the 2008 financial crisis and markets braced for the first CMBS mega-casualty with US$700 million of Starwood portfolio on the verge of default.

Big Tech continue to tumble, led by Facebook which extended its correction to over 16% from its recent September high, after a report that the Federal Trade Commission is preparing to file an antitrust lawsuit against the social-media giant (prior FTC probe of FB’s privacy practices resulted in a record-breaking $5 billion settlement), and that Kim Kardashian, whose account is the 7th most followed account on Instagram with 188 million followers and with 30 million followers on Facebook, told her 66.7 million Twitter followers that she was "freezing" her Instagram and FB account and asked them the join her. Apple extended its correction to over 20% from its recent September high, after it disappointed investors by not announcing a US$100 billion buyback during its reportedly boring iWatch unveil and plans for its subscription bundle Apple One, its first iPhone-free event in 8 years.

Following the accounting fraud implosion of fintech darling Wirecard, the German regulatory and business community were rocked again by another scandal of a prominent financial darling. Grenke is attacked by short-seller Viceroy Research who claimed in a 64-page report that the asset leasing firm, whose main activity is offering finance leases to businesses, is "uninvestable due to blatant accounting fraud, including dozens of undisclosed related party transactions, and the complete lack of internal controls right down to individual due diligence on customers.”

The Sydney Morning Herald reported that Grenke was a financier for Australian television advertising company Viewble Media which trapped thousands of small businesses around the country in an alleged scam. Viewble's customers paid $430 a month to a finance company under three-year contracts with a total cost of up to $15,500 for a television with the potential to earn money from display advertising from neighbouring businesses. However, the advertising never eventuated, leaving the businesses paying a high price for basic equipment. Viceroy alleges Grenke uses the same model for financing printers and photocopiers and that Viewble was one of several ponzi schemes enabled by its lease financing: "Advertising revenues inevitably never came through and customers were left holding the bag. Grenke’s actions suggest it was party to a larger conspiracy to defraud, as it knocked back complaints, denied knowledge of the existence of the scheme (despite it being written into its contracts), and continued to allow these scammers to write new contracts to the tune of hundreds of millions of dollars." Viewble collapsed into liquidation last year, leaving more than 1,100 Australian small businesses out of pocket. Viceroy alleges Grenke has financed dozens of fraudulent schemes across the globe since its inception. Analyst Gabriel Bernarde said the firm had spent many months speaking with victims of frauds and class action groups which have been set up in their wake: "Given the vast number and enormous size of these reseller frauds, and Grenke's association with every one globally, it was hard to come to the conclusion that they were somehow innocent.”

We were reminded of Thailand’s collapsed Group Lease PCL, another stock market darling, which is loosely tied to the Tokyo-based J Trust financial empire, whose investors include US Commerce Secretary Wilbur Ross and the behemoth California Public Employees Retirement Fund. Group Lease, which provides loans for peasants to buy motorbikes and agricultural equipment in several Southeast Asian countries, was alleged and subsequently found to be involved in accounting fraud involving related entities who were round-tripping group money through Singapore borrowers, disguising group money as dubious interest income from circular loans between related parties in order to create the illusion of earnings and to inflate the value of Group Lease.

Such creative financial engineering to stretch the balance sheet capacity via unconsolidated related entities in an opaque business group structure to eke out complex transactional numbers stood in stark contrast to selected non-banking financial companies (NBFCs) who invest in data analytics technology capabilities to scale up sustainably. Cases include India’s HDFC Bank and Bajaj Finance/Finserv. For instance, CIBIL [Credit Information Bureau (India) Limited] is the quiet monopoly who maintains credit records of over 600 million Indians and 32 million businesses and is the go-to-place for HDFC and Bajaj Finance/Finserv who are big data analytical tech innovators in leveraging upon the CIBIL database to keep their NPA (non-performing asset) risk substantially lower than nearly all of their value-trap peers who are blowing up. We can still recall how after HDFC implemented the CIBIL Consumer Connect solution in Aug 2016 through which its customers can purchase their CIBIL Score and Report directly on its website within seconds, this innovation has enabled HDFC to climb over 70%, double the pace of the Indian index over the same period. Similarly, Sanjiv Bajaj transformed Bajaj Finserv by focusing on and serving customers with the best CIBIL score of 750 and above, sifting the good from the bad, identifying cross-selling opportunities, which allowed them to add new products from consumer electronics to furniture to mobile phones seamlessly. As CEO Sanjiv comments, “Our customer base is all mapped, data cleaned, segmented, put into analytics and credit stamped.” Still, in the complex NBFC value chain and ecosystem, tech-focused credit analytics providers from Experian plc to FICO (Fair Isaac Corporation) - both in our broader Watchlist - could have far lower risks.

In Asia, baijiu titan Kweichow Moutai, the biggest constituent member in MSCI China A-Share index, announced that it plans to issue 15 billion yuan ($2.2 billion) in bonds to help buy highway operator Guizhou Expressway from the struggling local government. Moutai also approved a decision this week for its finance subsidiary to invest in fixed-income securities, a sign that it may start helping fund Guizhou province’s gigantic debt pile. This dangerous incestuous corporate misgovernance dalliance erased US$10 billion of market capitalisation. It will be increasingly harder for ESG-focused funds and true value investors to justify having long-term investment holdings in the likes of Moutai and a China Inc held captive and possessed by the spirits of serious corporate misgovernance that cannot be exorcised.

The gap between the “haves” and “have-nots” of the global economy has been magnified by the coronavirus, with emerging markets the losers in the K-shaped recovery whose divergence looks set to continue, according to Rob Subbaraman, global head of macro research at Nomura: “In the EM world with rapidly rising debt and deep recessions, the cost of servicing debt is going to get more burdensome and we cannot rule out some financial crises or major debt restructuring.” Markets with higher GDP per capita have been better placed to rebound from the March sell-off due to more advanced technology and governance that have given them greater flexibility to respond to the pandemic. They have been able to limit the impact of lockdowns and social distancing, make larger fiscal responses, and are better equipped with the resources needed to curb the outbreak, such as hospitals, test centers and quarantine facilities. This K-shaped divergence, coupled with the ever worsening U.S.-China relationship, points towards the new world order in the post-pandemic future that marks the ascent of the quiet Nordic powerhouse region – comprising of Sweden, Denmark, Norway, Finland and Iceland with a combined GDP of over US$1.6 trillion, combined population of around 27.3 million people, and one of the highest regional GDP per capita in the world at over US$62,000 – where they are a Winter War kind of country: innovation happens when things are tough, not when they’re easy and comfortable.

As S&P 500/NASDAQ crumbled for the third consecutive week by -0.64%/-0.55% to suffer its longest losing streak in over a year, Nordic, Swiss and Japan quiet innovators were resilient winners and key contributors during the week, led by: (1) Nordic’s CRM SaaS Leader (+19.3%); (2) Global Leader in Analytical Equipment and Disposables in Automated Cell Counting & Analysis (+13.5%); (3) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+12.1%); (4) Pioneering Inventor & #1 Global Leader Specializing in Helmet Based Rotational Motion Safety and Brain Protection (+10.6%); (5) Global #1 Leader in Advanced Communication and Hearing Protection Systems to Enable Communication In Noisy & Mission Critical Environments (+8.8%); (6) Japan’s #1 SaaS Cloud Leader in Integrated Real Estate and Facilities Management Software (+8.6%).


INNOVATION STACK & YOU
Kindness - This is the most important quality for entrepreneurs, says How I Built This's Guy Raz
"Fundamentally, I don’t believe a company can stand the test of time if people will not stand for the company. And I find one of the most reliable ways the vast majority of entrepreneurs inspire people to do that is with kindness. I don’t know any other way to put it. So many of them are just kind! They treat their people well. They do the little things and the big things. They pay their success forward. And with rare exceptions, they are also highly ethical. They act with an integrity that seems to come from a place of deep morality."

"Kind founders don’t just make every customer feel valued; they make every employee feel valued as well. They do things that make their employees feel like part of a family. They make it a point to give their employees something to call their own, in recognition of this larger journey they are on together as a business, as a unit. That could mean giving them a piece of the company itself, offering opportunities that help them grow as people, or just doing something as simple as recognizing their basic human dignity by trusting them with the freedom to use their time the way they see fit."

Excerpted from How I Built This: The Unexpected Paths to Success from the World’s Most Inspiring Entrepreneurs by Guy Raz.

Warm regards,

KEE Koon Boon ("KB") | Email: kb@heroinnovator.com | WhatsApp: +65 9695 1860
www.heroinnovator.com

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