Future Returns: Seeking Out Tech Trendsetters

While many investors are focused on Facebook, Alphabet’sGoogle, Netflix, and other large tech companies that seem to change society daily, there are hundreds of smaller, under-the-radar companies that are transforming even mundane businesses such as mortgage applications into software companies.

Eaton Vance WaterOak Advisors, a US$14.3 billion registered investment advisor for wealthy individuals, foundations, and institutions, seeks out these smaller “analog-to-digital” companies across all of its investment strategies, says Duke Laflamme, chief investment officer of the firm, an arm of Boston-based asset manager Eaton Vance.

“We think there are a lot of companies out there that are smaller, less followed, and very similar in a lot of regards to some of the larger players that are getting all the attention,” Laflamme says.

Eaton Vance WaterOak owns larger, growth tech companies, too, including Netflix and Facebook, but says they will always be asking, “Is there something that has a clear path to a higher growth rate with great management?”

Penta recently spoke with Laflamme about the investment firm’s approach and the kind of companies it chooses.

Streamlining in Any Sector

Eaton Vance WaterOak’s premise is that “most companies are becoming software companies to a certain degree,” Laflamme says.

They are doing so to be more efficient—and therefore more profitable—and to improve the experience of their customers. These impulses are altering the trajectory of consumer-facing companies and industrial firms that can employ technology to streamline processes.

“We’re looking at it from the perspective of, ‘let’s find great companies that are already great companies, and see what they are doing in terms of some sort of transformation to make them even better,’” Laflamme says.

Take the unwieldy process of applying for a mortgage, which can involve lengthy sittings in legal offices signing documents “that no one really reads,” Laflamme says. “If you can digitize some of that, it’s a great way to improve the efficiency of that process.”

Black Night, a Jacksonville, Fla., company has capitalized on providing that efficiency with mortgage and consumer loans, from the point of origination to loan servicing and processing. The firm also provides mortgage lenders with insight on potential problem loans, Laflamme says. “It’s an end-to-end solution.”

A Pandemic Push

A theme during the height of the pandemic was how lockdowns to contain the spread of the virus speeded the digital transformation of many sectors of the economy. Zoom and Google Meet conferencing became the norm, art fairs and museums went digital, and more restaurants went online.

These dynamics benefited companies that already had been shifting to digital services, and helped others that were able to quickly adjust when the lockdowns went into effect.

Domino’s Pizza is an example of the latter, LaFlamme says. In the midst of the pandemic, “They really transformed the efficiency of their technology through [their] app, website, etcetera,” he says. “They now have a consumer base that is likely to stick with them through post-pandemic.”

Digital Stickiness

The investment firm likes companies that are nimble, and can create a moat around their business with that kind of customer “stickiness” through the use of technology, essentially making themselves the go-to provider in their sector, Laflamme says.

An example is Intuitive Surgical, a Sunnyvale, Calif.-based company that is a leader in providing robotic surgical equipment. If a doctor is trained by Intuitive Surgical on its machinery, he or she is unlikely to switch to another company that comes along with the same type of product, he says.

While competitors to Intuitive are coming out, they are “behind pace on adoption,” Laflamme says. “If Intuitive is the gold standard and you are a doctor and you get trained on the gold standard, if an equal [company] comes along, there’s no reason to get that training as well.”

Other companies the firm likes include Watsco, an air conditioning, heating, and refrigeration equipment distributor based in Miami, that has created a just-in-time inventory system allowing plumbing and heating providers to get what they need when they need it.

“It’s one of these smaller, sleepy companies that you wouldn’t think of as a tech company that is transforming themselves and getting to be even better companies through that technology,” he says.

Another is Ritchie Bros. Auctioneers in Burnaby, Canada, which sells heavy equipment via auctions. “They’ve done a good job of taking one of the oldest-school processes out there and bringing it into this century,” Laflamme says.

An advantage of the improved efficiencies and lower costs generated by the tech transformation is the deflationary effects it has on the economy. By reducing the amount of time and labour it takes to process a mortgage, for instance, many more mortgages can be processed. “There’s a lot that can be wrung out of the system,” he says.

As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.

In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.

The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.

Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.

Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.

“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.

Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.

Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.

“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”

At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.

An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.

Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.

The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.

The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.

“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.

Future Returns: Seeking Out Tech Trendsetters

Where to look for the next big tech trend.

The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021