You Don’t Have to Be a Tech Company to Be a Tech Company (Part 2)


British Airways is investigating offering ‘digital pills’ that wirelessly beam diagnostic health information from inside a customer’s body. The ‘ingestible sensors’ could work alongside in-cabin sleep monitors and data from wearables and smartphones to personalise each passenger’s ‘travel environment’ .”- The Telegraph, 28 November 2016

Huh?

“Digital pills?”

25 years ago we couldn’t even conceive of something like “digital pills”.

Back then, somehow, we were living with:

No cellphones

No digital music players

No Google

No digital cameras

No YouTube

No iPhone

No tablets

No Facebook

No texting

No Siri

No Instagram

No Google Maps

No LinkedIn

No fun!

How. Things. Have. Changed.

25 years ago the “Internet” and “email” themselves were still in their infancy.

A kid in Africa with a cellphone today has more access to accurate information than the President of the United States did 15 years ago.

Within the last 5 years we’ve learned how to reprogram stem cells to rebuild the hearts of heart attack victims. The stem cells are harvested from skin cells, not human embryos.

Even investing has changed – dramatically.

Back in 1992, mutual funds charged about 8% sale commissions – even on dividends reinvested in the fund – and annual expenses of at least 1% of assets.

If you put $10,000 into a mutual fund then, only $9,200 would go to work for you, and you would pay at least $100 a year in expenses on that.

Today, you can buy exchange-traded funds, commission free, with annual expenses as low as 0.03%. Invest $10,000 and $9,997 stays in your own pocket. For small investors, the costs of buying and selling individual stocks also have shrunk towards zero

[1].

What about the next 10 years?

In the next 10 years, everything we know – and do – will change. The ways in which we shop, work, sleep, eat, travel, communicate, bank, entertain ourselves, conduct warfare, manufacture, design, distribute, create, transact, and maintain our own health – will all change. It will all be different[2].

For example, if we can turn off genes, then why not turn off the ones in cancer cells that enable them to pursue unlimited reproduction, until they kill its host? That development would cure all cancers, and is probably only a decade off[3].

Compared to the next 10 years, the advances we’ve seen in the last 25 years are just incremental improvements; just a foundation for the revolution of exponential technology-based metamorphosis we are about to experience.

It’s Not Linear, Stupid. It’s Exponential.

I alluded to the power of exponential change in “Part 1” of “You Don’t Have to Be a Tech Company”. But now I’d like to expand a bit further on this theme.

Most of us are familiar with Sir Isaac Newton’s comment about progress to scientist Robert Hooke in 1675: “If I have seen further it is by standing on ye shoulders of Giants.”

Let’s add to this perspective of progress.

Humans evolved to become linear thinking animals (eg we saw gazelles running right to left and that’s where we threw the spear). We tend to project and forecast growth and change at a linear rate.

But science / technology / innovation grows at an exponential rate.

The difference between linear and exponential is the difference between night and day.

Exponential growth is just like compound interest.

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

The problem with identifying an exponential change is that in the early stages it looks the same as ordinary linear change.

As shown in the graphic below, exponential changes grow slowly in the early stages. But when they reach a certain tipping point they take off like a rocket.

Growth over Time

Think about Apple. It enjoyed huge returns during the early years of the computer revolution, and then held steady for several years.

Then, after the introduction of the iPhone in 2007, the share price began to rise exponentially (see chart below).

Apple Split-Adjusted Stock Price

The iPhone itself is several thousand times smaller, a million times cheaper and a billion times more powerful than the computers of 40 years ago. Price per performance has increased by trillions.

As I noted in “Part 1” of this “You Don’t Have to Be a Tech Company” series, I believe this trend is speeding up; progress is accelerating.

In 1998, Google reached a $1 billion in market cap in only eight years, which was considered fast back then. By 2004, Facebook had done it in five years. By 2009, Uber had done it in less than three years. In 2012, virtual-reality firm Oculus did it in just over a year. And as recently as 2014, a workplace productivity company called Slack pulled it off in eight months. (See chart below)[4].

Time to $1billion Valuation

Yes, market conditions and market cycles and hyped valuations can muddy the “facts”. But the point remains clear – things are speeding up. Really speeding up.

Paradigm shifts occurred every 10 years in the past century, every five years in the last decade, and will occur every few years in the 2020s. Get ready for quantum computing. Get ready for DNA-based computing.

As Mark Raskino and Graham Waller of Gartner point out in their book, Digital to the Core:

“Leaders from traditional industries should not underestimate how fast the art of what is technically possible can tip, nor its disruptive power. Sometimes the change just ahead of you feels like science fiction.”

By 2020 super-computer capability (which surpasses human brain computational ability) will be available on a low end laptop. By 2050, this single laptop will have the same computing power of the entire human race, about 9 billion individuals. It will also be small enough to implant in our brains.

Stock analysts, investors and many corporate senior executive decision makers make a fatal flaw in estimating future company earnings based on linear trends of the past, instead of on the exceptional exponential growth that will occur in the future.

Based on the growth of stock market indices of the last century (eg the Dow rose from 100 to 10,000, an increase of 100x), the current stock indices are actually currently lagging the historical trend – the Dow is only up 3.2% a year in the last 16 years into the new century.

After the next major market crash/correction, which I expect will happen anytime in the next 2 to 3 years (for further views on the coming crash click here), the stock indices will play catch-up in a major way during the 2020s, when economic growth begins to accelerate (could be from 2% to 4-5% a year in the US), thanks to the effects of massively accelerating technological change.

As an example, just consider solar energy use, which is on an exponential path. It’s now only 1% of the world’s energy supply, but is also only 7 doublings away from becoming 100%. Then we’ll consume only one 10,000th of the sunlight hitting the earth. Geothermal offers similar opportunities.

Food is another example of disruption from exponential innovation.

In 1790, farm jobs accounted for 90% of all US jobs, compared to < 2% today.

Still, in 2016, it took 63 billion land animals to feed 7 billion humans. Land animals occupy one-third of the non-ice landmass, use 8% of our water supply and generate 18% of all greenhouse gases.

In the near future, bio-printing of meat (beef, chicken, pork) would allow us to feed the world with 99% less land, 96% less water and 96% fewer greenhouse gases and 45% less energy.

Cloned muscle tissue of cows will be produced in factories, disease-free, at a fraction of the present cost.

In addition, 70% of a food’s final retail price comes from transportation, storage and handling. Vertical farming, already a $1 billion industry in 2015, will help eliminate this cost. One acre of a vertical farm can produce 10-20x that of a traditional farm. Food delivery will be disrupted by food on demand and drone delivery.

Food preparation is another massive opportunity. The US consumes nearly 1 billion meals per day and spends an average of 11 million minutes per day on food prep and clean up. Food preparation and clean-up will be disrupted by 3D printed food, personalized nutrition and AI-designed recipes[5].

The ultimate upshot is that these technologies will relatively rapidly eliminate poverty around the world.

Exponential Change Means You and Your Product(s) Need to Change

The rapidly increasing, exponential path of change that we are on means every industry will need to continually re-invent its business model, or disappear.

Raskino and Waller of Gartner again:

“…the technology tipping point conundrum, which has previously been restricted to ‘tech’ companies, now extends to all companies because the next generation of everyday products will likely include digital capability…

…Over the past twenty years of IT advancement, most businesses have changed everything but the product. Even if they now possess advanced, Internet-enabled business models, they are actually making and selling pretty much the same kind of products they were making in 1994…

…Changing the product is the final step, and the biggest shock of all. Internet-connected and embedded digital functions will become a key part of your product and the value your customer buys. This value may represent 20%, 40% or 60% of what the customer acknowledges and pays for.”

Automobiles are a good example of “changing the product” (from new digital capability and technology capability).

Already, an increasing amount of customer-perceived value of a car today is digital (eg Bluetooth integration or voice recognition).

Tomorrow’s car ads will promote the self-driving feature or the heads-up display with built-in driving scene hazard recognition and analysis[6].

Use of nano materials to build ultra-light but ultra-strong cars will fuel consumption dramatically. Battery efficiencies will improve by 10 to 100 times. Advances in nanotube construction will mean the weight of the vehicle will drop from the current 3 tons to just 100 pounds, and will be much safer[7].

How Do We Get There?

With all these changes ahead of us, how can each industry, and the companies within an industry, “continuously reinvent” their business model?

An increasing number of corporate executives see M&A as the most efficient way to get there.

According to a recent EY survey[8], 67% of corporate executives believe acquiring a technology company, ie acquiring digital capabilities, assets and technologies, can “bridge gaps and accelerate growth”. A similar number see “rapid response” as essential.

Of course, acquiring a technology company has significant challenges.

The deal environment for “digital” companies or “tech” companies is becoming so much more competitive – not only from tech companies themselves as acquirers but also from traditional “non-tech” strategic buyers in all industries who want tech.

More and more traditional companies that are growth-focused are now thinking “how can we be a disruptor ourselves rather than a disruptee?”

And these companies are taking action. They are acquiring tech companies, among many other organic initiatives. (For evidence of this trend click here).

If you’re a growth-focused company that wants to create more value and guard against disruption, and you’re considering acquiring a tech company, stay tuned for “Part 3” of “You Don’t Have to Be a Tech Company to Be a Tech Company”, coming soon….

To Your Success in our Exciting, Brave New World,

–        Paul Cuatrecasas, Founder and CEO

Aquaa Partners

“We enable growth-focused companies to create more value and guard against disruption by acquiring the right tech companies.”

paulc@aquaapartners.com

www.aquaapartners.com

[1] “Some of the Wisest Words Even Spoken About Investing”, Jason Zweig, The Wall Street Journal, 25 Nov 2016

[2] “Over the Next 10 Years Fortunes Will Be Made”, Bonner & Partners, 26 Nov 2016

[3] Stocks to Buy for the Coming Roaring Twenties, John Thomas

[4] “Over the Next 10 Years Fortunes Will Be Made”, Bonner & Partners, 26 Nov 2016

[5] “Reinventing Food”, Nov 2016, Peter Diamandis

[6] Digital to the Core, Mark Raskino and Graham Waller

[7] Stocks to Buy for the Coming Roaring Twenties, John Thomas

[8] “Dealing in a Digital World”, EY, June 2016

By |2017-08-28T09:27:13+00:00December 5th, 2016|Acquisitions, Financial|0 Comments