Many investors, particularly those in the “value” camp (an oxymoron – why give up purchasing power today if you aren’t fully expecting to gain more purchasing power in the future?), avoid the technology sector, particularly consumer technology, because it’s fast changing and extremely difficult to predict. Although it makes complete sense to avoid certain parts of the tech sector, where winners are difficult to choose, it’s critical to be abreast of developments in technology. I thought one of the most important takeaways from Alice Schroeder’s Reddit AMA is the importance of staying on top of technology trends. Gordon Moore’s prediction that we’d experience an exponential outcome in the ratio of computing power / price has certainly come true and has had a dramatic impact throughout the economy. Computer science has been one of the great singularities of mankind.
When Netscape was started in the early 1990s, it cost $20-30 million to get a startup off the ground. Heavy investments were required in computing power, servers, networking equipment, software, and development resources. Serious software companies could not get started without significant venture capital financing. Today, a small team armed with cheap laptops, Amazon Web Services, and a few hundred thousand dollars can build and ship a fully functioning product and quickly scale users. The extreme lowering of entry barriers and sheer number of users available to developers thanks to the mobile revolution and sophisticated distribution platforms, has led to an explosion of disruptive ideas and new applications in software. Software has changed the way we communicate, produce and consume information, procure goods and services, learn, earn a living, and more. Software is embedded in most everything we do in life. In the future, it will surely be a part of everything we do.
We’re not only seeing innovative ideas in the world of bits, but also, as Peter Thiel calls it, the world of atoms. Many industries which were thought to be impenetrable are now showing cracks. The automobile industry is being disrupted by a battery company, Tesla. The utility business is under threat from distributed power including solar (pioneered by SolarCity) and solid oxide fuel cells (Bloom Energy). Even the food industry is being targeted. A company called Unreal Candy has launched healthy, but tasty, candy products in a direct attack on Mars, Inc. Soylent is trying to change the way we consume food. Udacity, Coursera, and Khan Academy have challenged traditional methods of education.
As investors in businesses, we need to continuously evaluate the strength of a company’s competitive position and to understand potential threats. It’s worthwhile to read publications such as PandoDaily, Techcrunch, and ReCode to see which types of companies are being funded and what the big four technology companies (Amazon, Apple, Google, and Facebook) are doing. These businesses are led by visionary management teams and are increasingly venturing into areas outside their core competency.
It’s only a matter of time before heavily regulated sectors of the economy (energy, healthcare, education), which are widely thought of as having formidable entry barriers, are disrupted by better solutions.