I have recently been noodling on the nature of technology adoption. I am sure everyone that reads this blog has experienced frustration with the pace of adoption and importantly, the pace of revenue growth in young technology companies that populate our portfolios.
Often investors focus their frustrations on the management teams. Its easy to cuss a CEO who has apparently “over promised and under delivered”. But is that always a fair accusation? I have often said that “Early” has the same number of letters as “Wrong”.
We hear about a promising technology. We intuit that the addressable market is huge. We think the company bringing the technology to market is dirt cheap and undiscovered. We start buying the stock. And then . . . we wait, and wait, and wait some more. The stock goes up because some big company customer begins to pilot the product. The stock goes down because some big company customer delays its full commercial use of the product. UGH! Patience is just not a manly thing – eh?
But perhaps its just a maturation process that cannot be skipped. There are perhaps ways to accelerate the process but the steps are always the same. It has occurred to me that a core element of the adoption cycle is a subtle but crucial transformation. That transformation is when the product market condition evolves from “solutions in search of needs” into “needs in search of solutions”. The following graphic displays the transformation in the context of the traditional technology adoption cycle.
Technology companies have to educate the players in the target markets why they NEED their cool SOLUTIONS. Often that includes getting patents issued, regulatory approval, clinical studies published, industry standards board acceptance, upstream or downstream market developments that force customers to change methods and behaviors. Having a compelling price and great set of features is often just not that important when customers don’t have any prior experience to anchor their analysis of the value proposition. Until the NEED becomes developed and understood, no purchasing manager is going to get criticized. Therefore the anticipated ramp in revenue can’t start until that magic moment when the market condition flips and the customers recognize they NEED SOLUTIONS, are willing to pay for them and have a certain time frame for adoption. (Of course this process can get compressed if you have for example a smartphone app that goes direct to consumers and goes viral – sweet!)
So – the message seems clear. We have to try to hold off on much of our investment until we can see the boxes getting checked off. We have to judge management teams on their deeds within the context of the maturation of the target market. We have to see sales and marketing teams growing faster than product development teams. We have to see the approvals in hand, the standards published and the market conditions matured so the “early majority adopters” that drive the steep ramp of the “S” curve can do their thing.
Aberdeen concentrates the majority of its investments in companies passing through the transformation from solutions to needs – I am sure you are shocked -to read that-eh? Aberdeen does invest in some “pre-revenue” companies where the price is low enough to compensate for the loooooooong wait till maturation. Jeb B. Terry, Sr. Nov. 2, 2013