Many technologies undergoing rapid development can be considered “cutting-edge” technologies, meaning they are either the most advanced in a particular field, or they are pushing the boundaries of knowledge and information. Sometimes, the excitement and fervor over cutting-edge technologies can cause technology bubbles, which refers to the distinct and unsustainable market rise due to increased speculation in technology stocks. Rapid share price growth and high valuations are typical of a technology bubble.
Bubbles aren’t exclusive to technology, of course. In fact, entire industries can be in their own bubbles, like we’ve seen in the stock market or housing market, for example. In a bubble, time is uncertain, and it is almost always a shock when a bubble ends. This has less of an impact when things are going well, economically, but in uncertain economic times like the present, most investors are concerned about being over-leveraged, overpaying, or simply understanding value.
Specifically, in a technology bubble, it can take years, or even decades, plus a ton of investment to find the right applications to fully commercialize cutting-edge technologies. Valuations are sky high, but revenue is very low. However, while in the bubble, there is opportunity for money to be made and investments to turn positive – even before a technology is fully commercialized – through mergers and acquisitions, loans, and other avenues. Fuel cell technology, for example, has been under development for decades, and in many ways, preceded the efforts at electrification through batteries for many applications from portable electronics to automobiles. Despite billions of dollars in government and corporate efforts and funding, it became obvious that the technology has major commercialization hurdles, and has succeeded in very few applications.
From AI to machine learning, self-driving cars to quantum computing, many cutting-edge technologies are currently being developed, from many different angles and to many different ends, without a clear pathway to success. Some will succeed by solving a problem and do well commercially. Some will be absorbed into other applications, while others will simply fall by the wayside. It is incredibly difficult to know at the cutting-edge stage which will win out.
When we assess technologies at PIUS, the biggest risk we come up against is that a bubble will pop and the intellectual property (IP) will lose substantial value, since IP makes up a significant portion of collateral for the financing secured. While you may be aware you’re in a tech bubble, there’s no way to know where you are in that bubble and whether there are still several years of runway to attract new investments, or it’s about to pop and the investment will no longer warrant the return.
When evaluating a technology in a tech bubble, how can investors and other stakeholders hedge the risks of getting swept up into technology trends that may or may not come to fruition for long periods of time? While the outcome may always be impossible to predict, consider these five guidelines to evaluate the potential profitability and pitfalls of a cutting-edge technology.
1. Perform a deep analysis of the technology and its applications, focusing on what problems the technology can solve.
Because people can become enamored with the idea that cutting-edge tech simply exists, it can be easy to lose sight of how it will be applied and whether there is current technology to supplant. The cutting-edge technology must be better, faster, or cheaper, and it’s imperative that it is solving a problem already recognized by potential customers. It’s important to confirm that cutting-edge technology improves upon a current technology, product, or service.
2. Complete an evaluation of the intellectual property position of the company.
Assuming a technology passes hurdle one, then there should be a solid strategy for patenting or trademarking. The IP could still have potential value even if the initial effort at commercialization doesn’t succeed, based on development, potential acquisition, or incorporation of the technology into other applications, products, or services. In case things do go sideways, this ensures that some value can be maintained.
3. Consider whether the business model is solid and appropriate to the product or service.
The technology should be consistent with the company’s overall business model. Will the technology generate reliable, recurring revenue as demonstrated by the razor/razorblade model, or will it equate to a one-off purchase? Look at all the variables to understand how the product or service can make money to determine what will derive the most revenue, the most quickly.
4. Examine whether there is evidence of strategic relationships and investment with indication that the partners/investors understand the obstacles and time horizon involved with commercializing cutting-edge technology.
Strategic partners and investors in cutting-edge technology development must understand the unique hurdles and have a vested interest in the entire industry succeeding. Likewise, these relationships are key to overcoming obstacles to commercialization and customer adoption. With emerging technologies, it’s even more important to be surrounded by strategic partners, rather than developing in a vacuum.
5. Evaluate any evidence of market demand that will accelerate commercialization.
Is there evidence of advanced commercialization, such as customer contracts with minimum purchases? If a technology clears all the above hurdles, this is a bonus, giving strong indication that the technology is closer to success as it advances from cutting edge to mainstream usage.
A healthy dose of skepticism is not only natural but should be encouraged while in a tech bubble. Before getting caught up in the hype, ensure you’ve checked all the boxes to maximize success and profitability.