Do You Have a Quiet H.E.R.O. In Your Portfolio Protecting & Fighting For You? [Nordic Global #1 Leader Specializing in Helmet-Based Rotational Motion Safety & Brain Protection]
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 in the Fund, a Nordic-listed global leader specializing in helmet-based rotational motion safety & brain protection, which is up 6% since the inception of the Fund 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."
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.
I. Strategic Focus on Quiet Innovators & The H.E.R.O. Investment Framework
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 Fund 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.