Are We Nearing the End of an Innovation Cycle?
How do we know if we are approaching the end of an innovation cycle? And more importantly how do we know when the next cycle is about to take off? Great investors often speak about how one of the most difficult aspects of investing in tech is getting the timing right. It’s not just about knowing what to invest in, but about knowing when the perfect time to invest is so that you can catch the wave of momentum just as its building and ride it through explosive growth.
A few weeks ago we featured an article from Ezra Galston discussing the increasing cost required to build consumer startups and the slowdown in great “lean startup” opportunities. This article focused primarily on how much of the low-hanging fruit consumer businesses have already been disrupted by technology, and now consumer startups are starting to approach larger, more capital-intensive industries rooted in the physical world. Ezra does not seem to be alone in this sentiment that much of the low-hanging fruit is gone (at least in the consumer space). This week we have highlighted an article by Elad Gil who cites VCs’ recent focus on software-aware companies (those using software, but not as their core value) rather than software-driven companies as evidence that we are nearing the end of the current innovation cycle in traditional software.
While I do generally agree with Gil’s premise, I also think it is worth pointing out that some of the increasing investment in startups tackling physical world businesses (food delivery, dog walking, lawn care, etc…) is due to the success of a few rare companies like Uber, rather than just a lack of other opportunities. However, what many people overlook is that Uber is a software-driven company, not a software-aware company, as Gil would put it. While Uber is very much doing business in the physical world, their on-demand driver/rider matching software and dynamic pricing mechanisms are central to the success of their business. Whereas other similar Uber for X companies are simply using software to make their businesses marginally more efficient, but not to fundamentally change the dynamics of their industry.
Gil points to the cleantech and nanotech investment booms of the mid-2000’s as a similar period, where investors were looking for the next big thing, but the explosion of mobile and social businesses had yet to fully materialize. As a result, VCs turned to industries they did not fully understand, but approached them with the same valuations and exit timeframe expectations as they would have for software businesses.
Today we can all see generally where the future is going, there is little doubt among tech visionaries that the AI, VR/AR, voice interfaces and autonomous vehicles will play a huge part in the next cycle of innovation. And although there have already been substantial investments made in many of these sectors, we will not know for a few years whether 2016 was too early for these technologies, or was just the right time to catch the wave.
It may be true that the previous cycle, defined by social, mobile, enterprise SaaS, and on-demand everything is nearing an end. The question for investors today is what is the best thing to do with the capital they’re managing? If you really think the cycle is over are you better off just sitting on the sidelines waiting for the next wave to arrive? Or do you firmly believe that an emerging wave has already taken off in which case it’s time to jump in with two feet.
-Mike Droesch, Founding Editor
