Three Things We Like About Kneat.com
#1
Insane Value Proposition
Kneat.com provides software for manufacturing companies in highly regulated industries to test and validate their machines and document the results.
Regulators like the U.S. Food and Drug Administration require manufacturers of pharmaceuticals and packaged food products to verify that their machines produce product according to exacting standards and tolerances. The manufacturers must demonstrate, largely through highly prescriptive documentation and sign-offs, that they have meticulously followed the FDA’s detailed regulatory processes and procedures.
Until recently, the validation process involved physical documentation, which was inefficient, sloppy, and slow. Kneat’s software digitizes the entire process, completely obviating the need for physical documents.
Sixteen of the top twenty global pharmaceutical companies have signed up for Kneat’s software. The validation process is mission-critical for these companies: no validation, no business. The market acceptance of Kneat’s technology is proof-positive that the technology works. This alone speaks volumes about the value proposition and integrity of the Kneat technology.
Biogen was an early adopter; it reports a one hundred percent improvement in productivity, a fifty percent reduction in cycle time, and a fifty percent reduction in the number of steps necessary to validate a machine. Merck is a more recent adopter. It reports a fifty percent reduction in cycle time and a forty-six percent reduction in the number of validation steps.
The feedback we get from participants in the industry is the software isn’t cheap, but the ROI is enormous. Just the way we like it: expensive software with a massive proposition. Payouts are essentially immediate. Data integrity is infinitely better. Ease of use is high. The regulators, we have heard, love the dynamic searching capability of Kneat’s technology.
#2
Scalable Business Model
Kneat offers its customers a platform of digital products on a subscription basis. The cost of selling an incremental subscription is practically zero. The capital required to maintain the platform is low. The cost of growth, in other words, is extremely low.
With substantial growth on the horizon and very low cost of incremental growth, we believe Kneat will become increasingly profitable. Growth will come, in our view, from a combination of: 1) Kneat’s existing customers rolling out the Kneat technology across their organizations in the coming years, 2) Kneat bringing on new incremental customers on to its platform, and 3) Kneat adding functionality and new products to its platform.
At maturity, we believe Kneat could generate a fifteen to twenty-five percent free cash flow margin.
#3
High Switching Costs
We believe once Kneat’s customers implement Kneat technology, switching away from it will be costly and time consuming. That should give Kneat a durable competitive advantage, help protect it from inevitable competition as it arises, and could lead to pricing power over time.
As part of the implementation process, each customer integrates Kneat’s technology directly into its information technology infrastructure and redesigns processes around the technology. In that way, the technology becomes highly integrated and imbedded into the customer’s operations.
Also, the Kneat technology is quickly becoming a standard in the industry. Companies that manufacturer machinery for the industry, for instance, are beginning to implement and use the technology. So are the labs. Even the regulators are becoming familiar with it. The technology, in short, is slowly taking over the entire value chain. As it does, the interfaces among the various market participants (buying and selling machines, regulatory audits) become more efficient when all parties use the same technology. This adds a layer of cost and inefficiency for a company switching to a different validation technology.
Lastly, technologists in the industry are being trained on the Kneat technology. Kneat conducts training sessions through what it calls the Kneat Academy. As more of Kneat’s customers are trained on the technology, switching away from the technology will increasingly require the time and cost of retraining technologists.
Due to the highly integrated nature of Kneat’s product, the fact that the Kneat product is becoming the standard in the industry, and the growing number of technologists becoming trained on the product, we feel the stickiness of the Kneat e-validation solution is extremely high and getting higher. Customers will be very reluctant, in our view, to switch away from Kneat. This gives Kneat a massive first-mover advantage.