Every once in a while you come across an opportunity that seems like a “sure thing...”
An opportunity where it feels like you’re looking into a crystal ball – where you can see the future playing out before your eyes.
I felt that way back in the winter of 2005.
At the time, my “sure thing” was the yet-to-be-announced launch of the Apple iPhone. My crystal ball told me this was going to be Apple’s next big thing and would revolutionize the world of mobile phones.
The way to play this could simply have been to take a position in Apple. But generally, the upside potential of large cap stocks is limited; you typically won’t see big price movements – of, say, 50% or more – based on the launch of a new product.
So instead, I tried to find a small-cap stock that stood to explode if Apple launched an iPhone.
After months of research, I found the perfect opportunity.
I’ll tell you more about it in a moment, and about how it changed my fortunes...
But first I want to share my latest vision – my latest look into a crystal ball…
Smells Like… Money?
The vision I’m talking about relates to a privately-held business...
It’s called Aromyx.
Aromyx produces a technology that’s nothing short of revolutionary.
It's created a microchip that can detect, interpret and identify smells and tastes just like a human brain. For example, let’s say a team of chemists is attempting to create a fancy new perfume for a company like Chanel.
They would put a drop of the new perfume onto an Aromyx chip, and almost magically, an image would appear on their computer screen – an “aromagraph” – representing the reaction of the human brain.
Based on the aromagraph, the chemists would see how the brain’s reaction to the scent was similar to, or different from, existing scents on the market, and then make adjustments as needed.
The real-world applications of a technology like this – not just for fragrances, but for consumer packaged goods, foods, beverages, and flavors – are enormous.
Currently, in order to test and create new products, companies spend roughly $37.5 billion every year on “human panels.” Basically, they recruit thousands and thousands of people to participate in focus groups in order to predict how the world will respond to a new product.
That’s a time-intensive process, and costly!
Aromyx not only provides a faster and more accurate tool – but at $300 per chip, it creates both a cost-effective solution for its clients, and a money-maker for itself.
This type of technology is the future of consumer packaged goods development – at least, that’s what my crystal ball says.
If the company can capture just 3% of the market, it’s a $1 billion business.
Pull The Trigger?
So to sum up the opportunity: an amazing technology, a multi-billion dollar market, and a company that is currently accepting investments. Should we write a check?
Not so fast! We know first-hand how easy it is to get excited about opportunities like this and make emotional decisions. That’s why we wrote The 10 Crowd Commandments, a free, easy-to-digest framework that helps you evaluate early-stage investment opportunity »
Let’s take a quick look at how Aromyx stacks up on the positive side of the Crowd Commandment ledger:
- Market demand from paying customers: Although Aromyx’s product hasn’t yet launched, the Senior Vice President for Chemical Procurements from Proctor & Gamble (owner of dozens of brands including Tide detergent, Secret deodorant, and Crest toothpaste) said he’d “buy thousands of these right now” if the chips were available.
- Straightforward business model: it costs $100 to make a chip and they sell it for $300. After subtracting the normal costs to run the business, what remains is profit.
- Competition: While competition exists, Aromyx has over 29 legal patents – that will help them build defensibility.
- Strong management team: They’ve started and sold companies before.
However, our “Commandments” also give us reasons to be concerned:
- While Aromyx has already received millions of dollars in government grants and funding, there aren’t any notable private investors involved – i.e., venture capitalists or angel investors who invest to earn a profit. As we like to say here at Crowdability, it’s always good to “be a follower” in deals like this. Following professional investors ensures that someone has negotiated competitive terms and done some serious due diligence.
- Another concern is that they’re raising $2 million, but they don’t say exactly what they’ll do with the funds. For example, will they build their team, sign up 10 new major customers, reach positive cash flow? If we invest today, what financial results should we expect? They don’t say! There isn’t a clear explanation in any of their materials.
So what should we do here?
My Crystal Ball
Maybe my experience with the “Apple Crystal Ball” can be of some assistance…
As it turns out, I was right about Apple launching their mobile device. The iPhone has generated billions of dollars in value for Apple and its shareholders, and changed the entire mobile landscape.
But the stock I was so bullish on – one of Apple’s suppliers – didn’t fare so well.
The company was called Portal Player. I say “was” for a simple reason: the company is no longer publicly traded. Shortly before the iPhone was released, Apple announced that they would be switching to a new supplier.
It was “game over” for Portal Player, and “game over” for my investment, too.
Other than the fact that my “crystal ball” seems to have been momentarily broken, what lessons can we learn from my failed investment?
Well, for one thing, even though I was extremely excited about Portal Player, I followed my playbook for early-stage investing – an early set of rules similar to the 10 Crowd Commandments.
The most important rule I followed was this: don’t commit too much of your capital to any one stock! Yes, despite my enthusiasm for Portal Player, I made only a small commitment to it. I was diversified.
You see, when it comes to investing in startups and early-stage technology companies, there’s no such thing as a “sure thing.” To protect yourself, you need to diversify, committing only small amounts of capital to speculative ideas like Portal Player – or to companies like Aromyx.
If you ultimately decide to invest in Aromyx, commit only a small amount of your available capital – and make sure to build a diversified startup portfolio by making many other early-stage investments, too!