Disrupters, Adapters and Victims

Bill Gates states that we tend to overestimate what we can do in a year and underestimate what we can do in a decade. The migration from the private to the public cloud, e-commerce and the AI revolution are examples of genuinely revolutionary technology. These creations will produce significant gains in efficiency and richness in society over the coming decade. It’s more likely than not that we are underestimating them. When you look at these innovations through an investor lens, it’s hard to compare the current intangible economy with the tangible goods business models that were successful in the past. Let’s take a closer look at the next stage of disrupters, adapters and victims as it relates to investing today.

Compound innovation

One framework that I find useful in looking at post-COVID companies is to label companies as disrupters, adapters and victims. ‘Old economy’ and ‘new economy’ is not nuanced enough, because the age of the business has very little to do with what it can accomplish going forward.

Today’s disrupters are using AI and the public cloud to create new and unique contributions to society. If you only look at the latest up and coming disrupters, you will miss the adapters. Adapters are the existing companies that are skilled at pivoting towards new technology when the opportunity presents itself. Disney is an excellent example of an adapter as they’ve reduced their focus on theme parks and invested heavily in their Disney+ streaming service. 

The victims are firmly rooted in their old ways and have resisted or have been sluggish to venture into new areas like AI in meaningful ways. It’s difficult for banks, energy companies and publicly traded real estate, for example, to leverage new technological innovation. Those sectors face unfair competition in my view. Square, Paypal, Mastercard and Visa are far ahead of the banks when it comes to scaled digital financial services. That gap will probably widen as innovations compound regularly, especially since the innovation curve has been exponential rather than linear.

For companies that have been leaning into innovation for many years, each new line of code, or new GPU, or new algorithm has created a compounding competitive advantage. Most SaaS companies today could not exist without the last ten year’s progress in bandwidth and cloud computing. Compounding innovation can help explain why the gap has grown so large between growth and value, and why it will likely continue to grow larger. In a lower-for-longer environment, low rates, low inflation and low GDP help these innovative companies stand apart from the competition.

The share prices over the next decade should reflect who is best at disrupting and adapting and who will be the victims left behind. It’s not simple or easy to implement AI in your business model. Technical expertise and savvy leadership are crucial for success in a rapidly changing world. Let’s take a look at new leadership styles/features for 2020 companies:

VUCA, complex systems, and the role of strong leadership
(Volatility, Uncertainty, Complexity and Ambiguity)

Team of Teams by General Stanley McChrystal promotes adaptability rather than efficiency as a leadership philosophy. General McChrystal coaches the private sector in complex systems theory and leadership skills and wrote this book after his experience fighting Al Qaeda in Iraq. Al Qaeda operated as a decentralized, flexible network with lean operations while the US military was large, efficient, well resourced and slow. VUCA stands for Volatile, Uncertain, Complex and Ambiguous. McChrystal says while efficiency produced incredible results in the industrial age, we need different skills today if we are going to successfully compete in the volatile, uncertain, complex and ambiguous environment that we find ourselves in today.

McChrystal says that adaptability over efficiency is critical to success because the world does not stay static long enough today to reap the benefits that we used to gain from efficiency. It’s not possible in the 21st century for a single top-down leader to control all critical decisions. Leaders today are not able to will their way through the competitive landscape the way they could in the ’90s. Now, he states, the role of the leader is to promote effective communication, open data sharing throughout the organization, and hyper-local decision-making. According to McChrystal, effective leaders today are empathetic crafters of culture. When done correctly, this creates a shared consciousness where effective decision making happens where and when it is needed most.  

Savvy investors tend to prefer founder-led businesses. Companies with diluted ownership structures are more likely to fall into the future “victim” category. Short-term profit-minded shareholders are less likely to encourage significant reinvestment into the business for the benefit of long term opportunity. This risk is particularly high today as companies reinvent themselves on the fly. 

Wealth inequality

As I’ve said many times in these articles, technology is both a problem and a solution. When the economy was based more on tangible goods, the impact on GDP was more of a rising tide that lifted all boats. In the age of the internet economy, or the intangibles economy, there are more monopolistic structures in place and the founders gain considerably more wealth than ever before. Instead of a tide lifting all boats, the last ten years of technological progress have lifted mostly a few yachts. The demographics in San Francisco from billionaires to gig economy workers are a prime example. 

A straightforward solution to this problem, for people reading this, is to be an owner in these founder-led innovative technology companies. E-commerce has a roughly 24% market share in the US. Many tech companies can borrow money for almost nothing, and most of them have very little debt as it stands today. It’s important to note that there are limits to valuations. Last week we wrote about how 2020 is not like 2000. Please let us know if you would like to discuss how these trends interact with your investment strategy.