Unsustainable investment patterns: learning from the last two decades
Putting resource technology change in context
There are strong parallels between the development of technologies that address resource limitations (the “Resource Revolution”) and other technologies that have gone through similar phases of entrepreneurial growth (e.g., the IT Revolution, the Communications Technology Revolution, and the Biotechnology Revolution). Each of them followed a path of entrepreneurial activity and investor funding that included phases of:
In the first phase of a new technology market, a new invention captures the imagination of a significant number of entrepreneurs, each of whom now believes they can perfect their embodiment of that idea and successfully take it to market, typically convincing groups of investors to back them in doing so. This is the hardest of all of the stages because it involves the purest form of invention – intentionally solving a hard problem by attacking it directly.
In the second phase occurs when the inventors and investors realize perfecting the idea was more difficult, more expensive, and/or simply took longer than expected and the hoped for market adoption has not materialized as quickly as hoped. The realization fosters rampant competition for what little market acceptance there is. This competition kills off of the weaker competitors and rapidly lowers prices, even as progress in perfecting the idea continues. Often, by the time this stage is completed only a handful of meaningful competitors remain, but pricing is now very attractive to the market.
In the third phases prices have come down so far that customers begin to eagerly adopt the new technology. Particularly with “hardware” inventions, once the new technology is owned by a couple of points of market share of its addressible market, it tends to grow at exponential rates (i.e. CAGR’s of 50% plus) until itreaches almost three quarters of that addressable market. Cars, radios,refrigerators, telephones, televisions, microwaves, VCRs, mobile phones andthe Internet – all followed this pattern.
In the fourth phase a new group of entrepreneurs emerges who use insightfulness rather than inventiveness to look more closely at the range of ideas that resulted from the “inventive creativity” phase, realizing some of these concepts can be recombined both with each other and with technological advances in adjacent fields to more rapidly move another technology forward. This is the financially most powerful of the stages because these recombinatory insights, once demonstrated, are obvious to everyone, even if they were anything but obvious before one entrepreneur had that critical insight – and the insight, however brilliant it may have been, took a lot less time, money and work than the initial inventions.
Applications and network effects:
The fifth and final phase represents the overlay of software, services and business models on top of the underlying hardware technology: Microsoft to the PC, iTunes to the iPhone, Netflix to the VCR, Social Networking to the Internet, etc. These both leverage the difficult work put into the underlying hardware technology and tend to spur further recombinative insights, thereby allowing for far more rapid growth trajectories than the underlying inventions they could not have existed without. Network effects can add the final turbocharging, by strengthening the business proposition of an application exponentially, based upon how many users or endpoints it connects.
The following White Paper analyzes those trends and highlights the implications for investing in the sectors that comprise the "Resource Revolution." Understanding these timelines, and the challenges and opportunities they present to the companies involved, is fundamental to successful “resourcient” investing.