Innovation may adversely impact investment decisions

All investments are based upon a forecast that the business or the asset will last for a period of time. With advances in technology, these forecasts may be proven wrong. A solid looking business today may find itself without customers because they’ve jumped to a competitor with a better product or service.  Business may find itself with an asset that can now be purchased for half the price or less.

This uncertainty about how long a business will last or whether equipment may become obsolete causes a hesitation in deciding to invest or buy a major asset.

There have been an increasing number of stories on the increasing speed of technical innovation.  A recent article in Equities.com on The Changing Landscape of Business Risk (https://www.equities.com/news/the-changing-landscape-of-business-risk) commented that “both entrepreneurs and investors need to be on top of the potential factors that could disrupt their chances of success.”

SPONSORED CONTENT

Empowering communities

Rocky Mountain Health Plans (RMHP), part of the UnitedHealthcare family, has pledged its commitment to uplift these communities through substantial investments in organizations addressing the distinct needs of our communities.

Hesitancy by investors will impact businesses seeking investment long before the technical innovation goes mainstream. Since investors are basing their investments upon a point in the future where they can attain a cash exit, decisions to invest are being made today about exits tomorrow.

An example may be the purchase of a new car.  A consumer or a business may be considering purchasing a new car with a sticker price of $30,000.  However, both are aware of media stories about the autonomous car. One futurist predicted that autonomous cars will result in 80 percent fewer cars in use. Consider the impact of this reduction on the resale price of the car. If the shift to autonomous cars happens after the car becomes used and is traded in, then there is no economic impact. If the shift to autonomous cars happens before three years of use, a person would be better off to buy a used car instead of a new car. It is expected that the shift to autonomous cars will begin influencing purchasing decisions within the next few years.

However, an investor is already thinking of tomorrow. If the business that makes the car could see an 80 percent drop in sales, the investor may decide to place their money in a business that is not in the transportation industry. The investor will not wait for the shift to occur, but may implement their new thinking today.

As a result, if a business within the transportation industry is seeking capital today, it may realize greater and greater difficulty in obtaining funding. This will also be true for a large number of businesses in different industries that are also feeling the impact of major technological and/or social change.

A recent article in Green Tech Media forecasts that the price of power will fall by 25 percent at such time that solar and wind power generation rises to the point of 30 percent of all energy production.  (https://www.greentechmedia.com/articles/read/energy-prices-if-wind-and-solar-hit-50-percent-of-generation?utm_source=GridEdge&utm_medium=email&utm_campaign=GTMGridEdge#gs.NyjkiLE ) Who wants to invest in a power business that may see its prices experience a downward plunge? Investors who have already invested may find their money trapped with no way to get it out.

Raising money is always hard.  However, for some businesses it may be getting harder as investor confidence in longer term investments falls.

This creates an interesting situation where investors refuse to invest out of fear of technological obsolescence, but without funding technological obsolescence cannot be achieved. Businesses may find themselves in a situation where they can’t move forward, but they can’t stand still.

Karl Dakin is principal with Dakin Capital Services LLC. Reach him at kdakin@dakincapital.com.