Dear Reader,
With the first quarter behind us, I thought we’d check back in on the dismal initial public offering (IPO) market that we experienced throughout last year.
I have to say, I was hoping for a little bit of good news considering that the NASDAQ has experienced a nice run year to date, up 16.8% in the first quarter. Sadly, it’s disappointing news.
The first quarter was a continuation of last year, which was the worst market for IPOs that we’ve seen in the last two decades.
In the U.S., there were only 29 IPOs that raised just $2.3 billion, only eight of which raised $100 million or more. And there was an insignificant level of activity with SPAC IPOs as well. Only eleven raised just $797 million in the quarter.
Even more telling about the rough market conditions is that there were only four venture capital-backed companies that went public, raising just $584 million.
What that tells us is that the venture capital firms simply don’t want to exit their portfolio companies in this kind of market because the valuations will be too compressed.
It’s not even worth bothering unless they believe the outcome would be worse if they held on and kept the company private longer. This explains the huge backlog of venture capital-backed companies that are lined up to go public.
A small bright spot was in private equity (PE)-backed IPOs. And I mean really small.
Last year was very remarkable for this category as not a single PE-backed company went public in 2022. Last quarter, we saw four go public, raising $1.2 billion. That is, admittedly, insignificant, but it’s better than no activity at all.
Telling was the fact that three out of the four took place in the energy sector, which was one of the only positive sectors in 2022.
I’m afraid that given the additional interest rate hikes by the Federal Reserve and the banking crisis that the Fed is trying to avert, conditions won’t be much better this quarter either.
For the IPO markets to come back to life, we’re really going to need to see the Federal Reserve ease, stimulate, and begin the process of bringing interest rates slowly back down. Until that happens, valuation multiples won’t expand. And that needs to happen for VCs and PE firms to take their portfolio companies public.
Last month, there was an interesting test flight that took place with a commercial airplane. It was a De Havilland Dash 8 aircraft shown below.
De Havilland Dash 8 Aircraft
Source: Aviationweek
I’m pretty sure that many of have ridden on a Dash 8 over the years. It is a fairly common single aisle regional turboprop aircraft. I’ve flown on one many times in the past.
But what makes the above Dash 8 unique is that it was retrofitted to run on a hydrogen-electric power source. The flight itself was a short fifteen minutes, simply to show that it could be done.
This particular test flight came on the back of an earlier hydrogen powered flight that happened in January that lasted just ten minutes on an even smaller aircraft, a Dornier 228.
Of course, the companies involved were happy to wave the “green” flag. After all, when hydrogen is used as a fuel, the only byproduct is water. There are no carbon emissions on the flight. Sounds great.
But there’s a major problem.
About 95% of all hydrogen production comes from fossil fuels, specifically coal and natural gas. That was true of these test flights. Globally, about 830 million tons of carbon dioxide are emitted every year just to produce 74 million tons of hydrogen. In other words, not “clean” at all.
Said another way, the production of pure hydrogen for the purposes of appearing to be “green” had a massive and very negative environmental impact. Sadly, this is something that is rarely discussed.
But aside from that, there are some other very interesting reasons why hydrogen is not a good source of energy for aircraft.
Pure hydrogen is very pernicious. As the molecules are so tiny, they can escape the vessels that they are contained within. Leaks are far more difficult to recognize and control. Hydrogen is invisible to the eye and has no smell, and its flammable.
This isn’t a good combination for a plane full of passengers.
But let’s assume that we can control all of those factors. Another major issue is the volumetric density of hydrogen. As an example, if we assumed the same amount of mechanical energy output (230 MWh) using various fuels, here’s the difference in the volume of the fuel required to achieve the same energy output.
Jet Fuel would require 23.86 m3
Liquid Hydrogen would require 97.47 m3
Compressed Hydrogen would require 162.34 m3
Needless to say, space is at a premium on an aircraft, so compressed hydrogen is the least desirable. But even liquid hydrogen takes up an incredible amount of space. And it comes with some problems.
To use liquid hydrogen, and aircraft would have to have a special tank capable of maintaining the temperature of the hydrogen at -253 degrees Celsius and this tank can only be stored in the fuselage – not in the wings. That means it would take up the most important space for passengers and/or cargo.
The reality is that hydrogen simply doesn’t make sense for aviation. It is neither economical nor ecological to use hydrogen for this purpose.
The key reason that I keep a close eye on scientific research is that it provides a fantastic lens on the future.
Major discoveries in a laboratory tend to get recognized quickly, especially those that have commercial applications. And for major breakthroughs that have the potential to transform an industry, the news tends to spread fast.
Which is why I got so excited a few weeks back when I noticed a wonky paper about a major materials science breakthrough our of Northeastern University. On the surface, it didn’t look like much, and it was hard reading; but it’s a very big deal.
And it came from an unexpected material, strontium titanate (SrRiO3).
Strontium Titanate
Source: geology.com
It is a man-made material that has been used in the past to produce fake diamonds. In the past, strontium titanate “diamonds” were marketed as Fabulite or Diagem and known for the bright colors that the material reflected.
It’s not exactly the kind of material that we might think would be on the bleeding edge of materials science, but it is now.
The discovery made at Northeastern has literally upended what the industry understands about how photoemission works. The researchers used the material as a photocathode. A photocathode is something that is used to generate high brightness electron beams.
The most common application is for the use in lasers, which are used for all sorts of applications that we benefit from day in and day out.
The discovery itself demonstrated scientific results that defied current theoretical understanding of quantum mechanics. The performance of the material, specifically the mean transverse energy (MTE) and quantum efficiency (QE) shattered the previous record by at least a magnitude.
The results were previously thought to be impossible to achieve.
This significance of this breakthrough is that future applications of photocathodes won’t require any tradeoff between QE and MTE when using strontium titanate. This is not the case with other materials. This will result in electron beams of unprecedented brightness.
To simplify the importance of this, it means that we will see a revolution in applications that employ lasers, especially those that require extreme levels of accuracy.
Obvious applications that will benefit from this breakthrough are photonics and fiber optic transmissions. This technology can be used to send more data over longer distances with the radically brighter electron beams.
The technology could also be used with industrial lasers, medical applications, as well as semiconductor manufacturing techniques.
What’s exciting about a materials science breakthrough like this is that the impact is wide-ranging across many different industries. We’ll be keeping an eye out for both private and publicly traded companies that start to employ this new materials breakthrough.
About two years ago to the day, Microsoft announced one of its largest ever acquisitions. It was a $19.7 billion deal for the largest player in the industry for speech recognition, Nuance Communications.
Nuance had been widely deployed across a variety of industries with its Dragon-branded speech recognition software. Insurance, legal, retail, hospitality, and utilities widely adopted the technology primarily for the use of speech to text applications.
But there was one industry in particular that was the key motivation for Microsoft…the healthcare industry.
The reason was obvious, the healthcare industry is one of the largest industries on the planet. And the electronic medical records (EMR) software business is tightly dominated by two major players, Cerner and Epic. Microsoft was looking for a foothold, and that’s what Nuance provided.
Nuance already serves about 550,000 users in the medical community with its natural language processing technology enabling physicians and nurses to dictate patient notes which can then be automatically uploaded into an EMR system.
And just a few days ago, Microsoft made a major announcement about an upgrade to the Nuance software called Dragon Ambient Express (DAX). What’s significant is that DAX incorporates the use of OpenAI’s GPT-4 for the purpose of clinical documentation.
It does this by listening to doctor-patient conversations, hence “ambient”. It records the conversation, synthesizes the key content of the discussion, and then generates drafts of clinical notes for the physician to review.
No more dictation is required on behalf of the doctor. It all happens automatically by listening in.
It’s easy to see that this will save time and improve productivity for doctors. It is also likely that it will result in more detailed and accurate clinical notes for each patient. The AI won’t get tired, and it will never look to take shortcuts on clinical notes to save time.
In this regard, this is an amazing application, and one that is highly strategic for Microsoft.
And it also means that our conversations with our doctors are technically no longer “private”. A third “party” will be in the room, an AI, and it will record and document our entire discussion. For any of us concerned about privacy, we’ll need to remember to be careful what we say and stick to the health problem at hand.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
