Technology continues to move forward and what was once leading edge often becomes ordinary.
For instance, technology advancements such as high-resolution portable screens and even websites were once leading edge and risky. Many made boatloads of money from investing in these technologies at the earliest stage, most of these investors did not.
That is why it is sometimes called ‘the bleeding edge” of investing.
Now, so-called “deep tech” involves reusable space rockets, cryptocurrency, next-gen solar cells, many biotech applications, artificial intelligence, and so on. Some of the efforts in these areas could be phenomenally successful, most will not. But the point is that current leading tech will eventually become ordinary too.
Attaching a deep tech label to a company is a great marketing tool to get attention. During the cryptocurrency craze, just saying you were involved in that technology often meant an immediate boost in share prices. Even if the company really was not working with and in the technology.
In other words, it was a fad. A craze. And everyone should beware of fad investing.
So what to look for in a company? Having an excellent business model with simple, proven already-developed technology is usually more sustainable in the long term.
Look at our current group of tech giants. These are massively valuable companies and include Apple, Amazon, Alphabet, Microsoft, Facebook, etc, These companies are now doing deep tech research and development, pushing the envelope. That is terrific.
But that is not how the tech giants started. They started using more ordinary, pedestrian technology and solved a customer problem. They provided a service or product that customers could use. Sometimes the tech was a little beyond what was being used currently (as in the case of Google), but not much. Facebook was built using PHP, a simple commonly used scripting language.
Deep tech, extreme leading technology investing contains what I call “technology risk”. Or “product risk”. This is the risk it will not work.
In the 1980s artificial intelligence was the thing. It was based on a concept that AI could work using a series of decision rules. This approach did not work at all. More recently the technology advanced using deep learning and other techniques. Will that solve the AI puzzle? We don’t know yet. Are you willing to take the risk that it will?
As advisors to investors in early-stage VC, my firm almost always engages at least one technology subject matter expert to analyze and render an opinion as to the viability of a technology. Sometimes we engage more than one. This person usually has a Ph.D. in the field, working experience, and good business savvy. Once we have their take on the viability of the technology we will then examine the business model. Both have to work for us to recommend to a client to invest.
When analyzing tech investments, and I’ve been doing this in one form or another most of my career, beware of leading-edge technologies that are unproven. Don’t just assume the technology will work as promised and a business model will somehow automatically emerge out of that. These problems need to be solved or at least understood before investing.
Tech giants, research institutions, VC funds, and government are spending on leading-edge technology. Some of it will work out. Some will not. That is appropriate for them and good for the rest of us. But do you, as a smaller investor (let’s just call most individual investors small) have the staying power and ability to ascertain what is real, what will succeed, and what will not?
That is the question you need to ask yourself.
