Your big payoff may not come from a scientific breakthrough. It may come from a cup of coffee
If you want to make money off innovative companies, don’t look for robots and rocket ships. Instead, look for novel business methods. That advice comes from William Martindale Jr and Robert Mitchell, money managers who started the Conestoga Small Cap fund in 2002. They hunt for imaginative companies that are too small to make the Innovators 100 list but have the growth that might put them on the list someday.
Conestoga’s portfolio includes a company that has a way to expedite the delivery of tiny parts, a company that owns an indispensable database of commercial real estate and a vendor of algorithms that tell hotels how much to gouge. You could call this low technology—the place where inventiveness meets mundane product lines.
The mundane has paid off rather well for Conestoga. Over the past decade the $500 million fund has delivered an 11.4 percent annual return, 3.5 percentage points ahead of the S&P 500 index. That return is net of a 1.1 percent expense drag.
It’s possible, of course, to make a killing in high tech—if, say, the gene scientists you are betting on land a blockbuster drug. But you won’t find pharma startups among the 50 companies in which Conestoga has staked money. Per Mitchell: “It’s a binary risk”, a polite way of saying the fund is not going to put money on the FDA’s roulette wheel.
Nor will Martindale and Mitchell bet on a venture that has yet to turn a profit. They gave a brush-off to loss- making Tesla Motors, Martindale notes wistfully, missing out on the spectacular run-up in Tesla’s share price. They’d rather own a business that finances its innovation out of the profits from existing products.
(This story appears in the 20 September, 2013 issue of Forbes India. To visit our Archives, click here.)