The Garage Innovators: Why In-House R&D Beats Buying Innovation

• Prioritizing internal R&D builds sustainable, long-term value over growth by acquisition.
• In-house innovation creates strong competitive moats through proprietary technology and intellectual property.
• Leading sectors include technology and biotech, where internal R&D drives breakthrough products.
• This strategy involves higher risk but offers potential for exceptional, market-leading returns.

Why Tinkering in the Garage Could Outpace the Shopping Spree

There are two ways to get a shiny new toy. You can pop down to the shops, slap your credit card on the counter, and walk out with a box. Or, you can lock yourself in the garage for months, surrounded by blueprints and half-eaten biscuits, and build the thing yourself. In the corporate world, most bosses prefer the shopping trip. It’s quick, it makes for a great press release, and it gives the illusion of immediate progress.

I, however, have always been a bit more interested in the tinkerers. The companies that favour the slow, methodical, and often frustrating process of internal research and development. It’s less glamorous, certainly. You don’t get the same sugar rush as you do from a multi-billion dollar acquisition. But I think it’s where real, defensible value is often created.

The Problem with Buying Your Way to the Top

Let’s be honest, acquisitions are messy. You’re essentially bolting one company’s culture, technology, and staff onto your own. It’s like trying to combine a Land Rover and a Ferrari. You might end up with something that moves, but it’s unlikely to be elegant or efficient. More often than not, the promised "synergies" fail to materialise, and the buyer is left with an expensive headache and a lot of duplicated roles.

Companies that grow by buying innovation are perpetually on the hunt for their next meal. They aren’t building a core competency, they are just renting one. It’s a strategy that can work for a while, but it leaves a business vulnerable and, to my mind, a little hollow at its core.

The Quiet Virtue of Building It Yourself

Now, consider the alternative. Take a company like Lam Research. Instead of buying up smaller rivals, it ploughs a hefty chunk of its revenue straight back into its own labs. The result? It develops its own unique technologies for making computer chips, things that competitors can’t just go out and buy. This creates what the finance types love to call a "moat", a defensive wall around the business built brick by brick with patents and trade secrets.

This principle isn’t unique to chipmakers. Look at a firm like Roper Technologies, which has built a portfolio of highly specialised software and products. By developing these in-house, they understand them inside and out. They own the intellectual property, control the development cycle, and can respond to market needs without waiting for an acquisition target to appear. It’s a slower, more deliberate path, but it might just lead to a more durable business.

The High-Stakes World of Biotech

Nowhere is this philosophy more apparent, or more risky, than in biotechnology. Here, companies are quite literally inventing the future in a petri dish. They are using mind-bending technologies like CRISPR gene editing to tackle diseases that were once a death sentence. The risks are, of course, enormous. A promising therapy can fail in late-stage trials, wiping out years of work and hundreds of millions in investment.

But the potential rewards are equally staggering. A single successful drug can transform a company and, more importantly, the lives of millions. Investing here isn’t for the nervous. It’s a bet on the scientific process itself. It’s this very principle of patient, internal growth that underpins a collection of companies I was looking at recently, aptly named The Garage Innovators.

Of course, this approach isn’t a magic bullet. The road of innovation is littered with failed experiments and ideas that were simply ahead of their time. For every breakthrough, there are a dozen costly dead ends. This is not a strategy for impatient capital. But for investors willing to play the long game, focusing on the builders rather than the buyers could be a very interesting way to think about constructing a portfolio. After all, anyone can buy a trophy, but it takes real skill to build one from scratch.

Deep Dive

Key Companies

• PTC Inc. (PTC): Core technology is computer-aided design (CAD) software and product lifecycle management tools, which are used by manufacturers to innovate.
• Lam Research Corporation (LRCX): Develops proprietary wafer fabrication technologies essential for producing advanced computer chips. The company consistently invests over 15% of its revenue into research and development.
• Roper Technologies Inc. (ROP): Creates a diverse portfolio of highly engineered products and software solutions for niche markets with high barriers to entry, allowing it to maintain premium pricing and strong profit margins.

Primary Risk Factors

• Research and development projects can fail after significant financial investment.
• Promising technologies may not be commercially viable.
• Competitors could develop superior alternative technologies.
• The timeline for returns from internal innovation is typically longer compared to growth through acquisitions.

Growth Catalysts

• Developing technology in-house creates strong intellectual property protection, forming a competitive moat.
• A deep understanding of self-developed technology allows for faster iteration and better product integration.
• Successful innovations can often be applied to markets beyond their original intended purpose.
• Market leadership from successful R&D can generate cash flow to fund more ambitious research projects, creating a virtuous cycle.
• Companies with breakthrough technologies can experience periods of rapid growth and high profitability.