What to consider when investing in tech
Greg Morris
When investing in technology, there are multiple factors to consider – the two major ones being scalability and intellectual property (IP). But what do these factors entail, how should you address them, and why?
The issue of scalability
Scalability is a product’s ability to easily increase in size, scale, and functionality. It’s a key consideration because scalability is usually relative to profitability.
When it comes to technology, however, scalability is possibly the most important investment determinant. As more people adopt a technology, stress on the system increases ten-fold, which can kill an up-and-coming technology. Facebook, for instance, connects with the world. If it couldn’t add millions of users, it would never have succeeded.
Scalability must be integrated into the system from the start. Most scalability can be built into a technology at initial coding stage, giving it the capacity and flexibility to respond to consumer requirements as it grows.
Owning technological IP
When investing in technology, owning the IP isn’t simply beneficial – it’s critical. This is because the IP usually is the company. It’s the differentiating factor that sets firms apart in their markets and determines their success.
For instance, a company might have a robust capital base to scale effectively in the short term, but if its IP isn’t competitive, it will soon be taken over by competitors.
The exception to the rule
There are some exceptions to the rule of owning tech IP. Samsung’s use of Android OS in its phones, for instance, contrasts with Apple, which uses its own OS. Samsung, and many other phone companies, has shown it can still be successful without owning the major tech behind its products. But cases like these are rare – and have inherent risk.
Developing your own proprietary technology is costly, so some firms opt for the agency investment model, where a company acts as an agent for the IP owner, reselling the product as a licence to others, who pay to use the IP.
There are multiple other considerations for investing in tech. According to John Mackey, CEO of Whole Foods Market:
“A mature technology company is valued partly by traditional methods, including profit, revenue growth, and overall sales… Developing brands like Tesla face a different challenge. Tesla, for example, has a huge backlog of Model 3 orders to fill, but it has yet to show it can operate profitably.
Greg Morris is CEO of MICROmega Holdings.