Disruption is here to stay. If you have ever watched a movie on Netflix or booked a condo unit through Airbnb, then you have experienced a disruption. Disruptive technology has now become so common that we could not tell if something is disrupting the business world or it is just a normal occurrence. One thing is for sure: disruptive technology will have a far-reaching impact on the future of our society.
What is it?
Have you ever had that moment when you stumbled upon an app on your mobile phone that so impressed you that you thought it would change how you will do things or had the solution that you or most people are looking for? Or thought why hasn’t anybody thought of creating that app before? A game-changer or to some even a life-changing discovery. From then on, it made doing things easy and more efficient. That, in essence, is what disruptive technology and innovation are all about.
The term Disruptive Technology was attributed to Clayton Christensen when he first introduced the concept in an article for Harvard Business Review in 1995 and later expanded on in 1997 in his book “The Innovator’s Dilemma.” It has since been a buzzword in the startup business and has been dubbed as the most influential business idea of recent years.
Disruptive technology or a dramatic innovation is one that replaces an older process, product, or habit. You would know technology is disruptive when you notice its superior attributes right away, and even more so if you’re an early adopter. Products that were considered disruptive may take years for consumers or businesses to adopt, or possibly not at all. An example would be the Segway electric vehicle which was what many once considered as disruptive technology until it began to fizzle out.
Innovations or technologies that are disruptive are most likely to be produced by entrepreneurs in startups or those who are considered outsiders. Compared to the conventional approach, the disruptive process may take longer to develop and the risk associated is higher than the other more evolutionary forms of innovations. Most importantly, once the disruptive technology has been deployed to the market, it penetrates faster and the impact is higher on the established markets.
Why and How to Invest?
Now that you have an idea of what Disruptive Technology is, you might automatically think that there are a lot of profit opportunities when it comes to investing. Before we look at the ways you can invest, it is probably best to set expectations; that just like in any investment, there are risks attached. They say that some entrepreneurs view disruptive technologies as a risk-free trump card that is bound to generate high returns. More practical investors, by contrast, frequently avoid disruptive businesses, as they regard them as extremely risky with uncertain profitability and return on investment.
Nevertheless, this unstoppable trend has plenty of potential for growth and profit. So, how do you detect a disruptor with a promising prospect for investment? Hackernoon provides the following questions you can answer to determine the “disruptiveness” level of a business, and in some ways, these may guide you in predicting the success of such technology or innovation:
- Does it offer solutions for the non-consumers of the product or service?
This pertains to the audience being targeted by the business. It provides solutions that have become easily accessible resulting in expansion of the service or product use among different social layers into a broad customer base.
- Is the innovation or technology simpler to use versus the ones on the market?
Convenience, as they say, is the new black for the IT market; disruptors are the catalysts to either replace the complexity of the status quo, or mitigate the costs, or a combination of both.
- Is the enterprise sustainable?
It is better if the greatness of the disruptive idea is aligned with the business model to support its development for a long time.
According to research done in 2013 by Mckinsey Global Institute, the disruptive technologies that will transform life, business, and the global economy by 2025 are Mobile Internet, Automation of Knowledge Work, Internet of Things, Cloud Technology, Advanced Robotics, Autonomous Vehicles, Next-generation Genomics, Energy Storage, 3D Printings, Advanced Materials, Advanced Oil and Gas Exploration and Recovery, and Renewal Energy. You might find it striking that it is not limited to the traditional tech sector, but more diversified in terms of industry. Therefore, an investment portfolio of disruptors can contain more companies of enough liquidity with effective risk and return management.
UBP, on the other hand, identified long-term trends that can provide investment opportunities that include climate change, changing consumption patterns, demographic developments, and disruptive innovation. Out of these four trends, disruptive innovation stands out because it impacts the other three: it can aid in addressing climate change by facilitating developments in clean energy, demographic change by improving healthcare for aging societies and changing consumption patterns by a digital transformation of the retail sector.
One way of investing in disruptive technology or innovation is by investing in exchange-traded funds or ETFs, which are types of securities that track an index, underlying securities, or other financial instruments. ETFs allow you to invest in a basket of securities that span trends and innovations. ALPS Disruptive Technologies ETF (DTEC) is an ETF that invests in a variety of innovative areas like the internet of things, fintech, cloud computing, robotics, and artificial intelligence.
Other examples of ETFs with underlying “disruptive technology” securities are:
ARKK – Ark Innovation ETF
The goal of this ETF is to invest in companies that are poised to profit from disruptive innovation or technology like artificial intelligence, DNA technologies, energy innovation, automation, fintech, and cloud computing.
KOMP - SPDR S&P Kensho New Economies Composite ETF
This ETF looks for companies that are transforming the economy through advancements and innovation in ‘new economy’ technologies. The fund’s index is a composite of 16 sub-indexes, each formed around a theme such as 3D printing, autonomous vehicles, genetic engineering, or nanotechnology, etc.
LOUP - Innovator Loup Frontier Tech
It holds stocks that are involved in new technologies, including artificial intelligence, consumer perception, artificial intelligence, robotics, virtual reality, mixed/augmented reality, and autonomous vehicles.
Disruptive Stock Picks
We have listed some stocks that you should watch to be disruptors in the coming years. Note that a few of them are established companies that are introducing new products, but most are younger companies that are just starting to be a thorn in other big companies’ sides. A word of caution though, few are profitable yet, so you might want to consider the risks and consider how aggressive you want to be in the allocation of your portfolio.
- Tesla (TSLA)
Some say that this company is known to be as volatile as Elon Musk, the person who runs it. Nevertheless, many are looking forward to his Starlink Venture, a 30,000 satellite constellation that will enable the global internet and address the approaching limits of fiber optic cables.
- Square (SQ)
The company that disrupted the payment industry 3 years ago has recently sold Caviar, an all-in-one ordering platform, and is now focusing on expanding Cash App, which has grown to $135 Million in 2019 since it was launched in 2016. It will continue to disrupt with its mobile payment solutions, point-of-sale software, and financial and marketing services.
- Invitae (NVTA)
Specializing in providing information for genetic diagnostics, miscarriage analysis, hereditary cancer, and carrier screening for inherited disorders, it is now launching a telemedicine campaign. This is a virtual health service that is especially relevant now that we’re living with lockdowns and social distancing due to the COVID-19 pandemic.
- 2U (TWOU)
This company provides online educational services worldwide; both graduate and undergraduate degree programs in data science, healthcare, social work, industrial relations, and law. Again, this is hyper-relevant in today’s landscape of social distancing.
- Protolabs (PRLB)
One of the largest suppliers of custom 3D printing services globally with 100,000 printed components produced every month spanning six different additive manufacturing technologies. The company has now evolved into on-demand manufacturing, combining subtractive and additive manufacturing.
Finally, disruptive technology and innovation is here to stay and will continue to boom in the years ahead. But, as in any investment opportunity, careful company or securities research is imperative to be successful. Research which involves checking the company’s competitive advantage, model overview, debt-to-equity ratio, and price-to-earnings, should be studied. Because it is often difficult to identify which disruptors will be widely accepted and adopted, investment in disruptive technology is not easy or without risk, but it can pay handsomely to be on the lookout for the next big thing.