Disruptive technological innovation often follows the cadence described by futurologist Roy Amara: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
Technology investors spend a great deal of time analysing the potential effects of new technologies – who will use them, what pricing will be and whom they are likely to disrupt.
This can be a fiendishly difficult task as many technologies are as unpredictable as the humans who must adopt them.
Working out whether a technology will be adopted is hard enough; attempting to ‘time’ our investments so we see a return on our money in a defined period of time is practically impossible.
We use basic models such as the ‘S-curve’ to assess likely penetration rates, and there have been well-researched attempts to discern empirically exactly how technology diffuses through the economy, but ultimately technology investors can bear the scars of numerous ‘great’ technology investments that were ‘just too early’.
Performance of Neptune Global Technology vs sector & benchmark since launch
Source: FE Analytics
Nowhere has this been clearer than in the rise of e-commerce. ‘Cybercommerce’ – as Time magazine called it when naming Amazon CEO Jeff Bezos as Person of the Year in 1999 - promised mass personalisation, price-transparency and virtually limitless choice for consumers.
Poor connection speeds, malfunctioning websites, perceived fraud risk and limited delivery infrastructure meant that the dream was deferred for a few years.
The bursting of the public market tech bubble in 2000 showed that many investors had ‘got out over their skis’, and panic bought into a vision of the future that was still a decade (at least) away.
Offline retail continued to thrive post-2001, even as ecommerce grew from $34.1bn in 2001 to $112.9bn in 2006, and analysts spoke of ‘multichannel’ retail as the dominant model.
The longer-term impact of ecommerce was, however, underestimated.
Since 2006, Amazon’s market value has increased by nearly 2,000 per cent versus precipitous declines among many offline retail peers.
Revenue among big box US retailers has declined by more than a third in the last ten years, and somewhere around half of US households now subscribe to Amazon Prime.
Major retailers have announced a slew of store closures: Wal-Mart are closing 154, Sears 142, Macy's 126 and Abercrombie & Fitch 180.6
So given timing is so hard, how do we approach investing in a space that promises fantastic long-run returns, but can require heroic levels of patience and sangfroid?
Howard Marks has written thoughtfully on ‘timing’ the investment cycle, and one of his core tenets is also highly relevant to long-term technology investing.
We have applied this principle as a core part of our technology investment process in seeking to identify technology companies ahead of time. We cannot know exactly what will happen, still less when it might.
We can, however, identify companies with potentially meaningful differentiation in exciting areas of technology, and assess the degree to which they have been augmented with scalable business models and (crucially) capable management teams. We can perceive meaningful macro themes that will provide sizeable markets in the long run, such as the transformation of business models from physical to digital, the growing need for cybersecurity and the rise of online commerce. We are looking for those companies that can best exploit these inexorable trends.
Ali Unwin is manager of the Neptune Global Technology Fund. All views are his own and should not be taken as investment advice.