Tech and Telecom Disruption: The Devil’s In The Details.
Everybody loves to talk about “The Big Idea” in disruption, but if you’re investing in Tech and Telecom, the devil – and maybe the potential for disaster – is in the details. Smart investors get down to the nitty gritty.
Three Big Takeaways:
1. Due Diligence: Beware The MacGyver Surprise
Hooray! You’ve found exactly the right technology to acquire to take you to the next level. But… don’t sign on the dotted line and pop the champagne just yet, warns Vipul Shah of Arrowpoint Partners. Skimp on tech due diligence, and you might buy a slapped-together jumble of code. It’s something that can happen through past acquisitions: “The core code is built in Java and you buy a business that’s on .Net”, said Shah. “Rather than dealing with the problems head on and in the moment (the engineers will) find sort of a MacGyver way to get around it.”
2. Do You Have The Right Ops and Tech To Endure?
“Disruption is going to come, (so you need) a company that can build the operations and the processing around it,” said Scott Simpson of Brightwood Capital Advisors. Everyone understands that they should have defensible intellectual property and protective technology moats around the business, but actually getting that right is easier said than done. “When we invested in GoGo, which is WiFi on planes, (they had) spent a lot of money on their own unique air to ground network. They got a really strong advantage.”
Pro tip: if nobody has invested in building unique technologies and processes, they probably don’t exist. As an investor you have to really know what it is you’re buying into.
3. Disruption Is Only Fun When It Happens To Someone Else
“We’re majorly invested in the music industry, which has been disrupted several times,” said Gregg Walker of Sony. “First by piracy from the early days of (digital), then from the un-bundling of the album as digital took over for analog music. Then more recently with streaming taking over for downloads. (…) Our goal (is) to get ahead of the curve, see what’s coming next.”
Disruption has body-slammed the profitability of ad sales, as well. In 2008, NBC Universal’s Jeff Zucker famously warned that the media advertising sales industry had to work to avoid “trading analog dollars for digital pennies.”
But the warning was about as useful as standing on the railroad tracks shouting at an oncoming freight train that it had better stop, or else. No matter how loud you shout, the train just comes at you faster.
As Dan Black of the Wicks Group put it, “Disruption is going to come whether you do it to yourself or someone does it to you.”
The lesson from smart investors is pretty simple. Don’t just fall in love with an idea, or a technology, or even a disruption. Have the discipline to dig deep into the details to understand what you’re buying.
If you don’t, you’ll have a long time to regret it.
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