Written by Eleonore Jarry-Ferron, Investment Manager at Brightspark
Being a VC for 20 years has its benefits, including front row seats to seeing multiple technologies emerge, grow, dominate and die. One of the lessons we’ve learned as a result of this is the importance of timing. Today, it’s one of the factors we're the strictest on when evaluating new investment opportunities.
Timing in tech usually follows an S-curve, a theoretical model that describes how new technologies evolve from crazy ideas to success stories.
Without a doubt, one of the most critical tech S-curves in history (to date) is the mobile phone. Let’s look at where we are on the curve today, how we got there, and why we think there are still many opportunities for tech startup investors to cash in on the industry.
The technology S-curve: A primer
Stage 1: Crazy ideas and the valley of death
At the first stage of the S-Curve, technologists are figuring out if (and how) innovations can work.
This stage is extremely difficult to navigate for entrepreneurs and investors alike; specialized talent is scarce, intellectual property and confidentiality are hazardous, timelines are unpredictable, and research & development is capital intensive.
Many crazy ideas fail and die, falling into the “tech Valley of Death”. The companies that survive will get to further develop their technology, and many of them get acquired early-on by established tech giants.
Here are just a few examples:
- Google acquired Android for $50m in 2005, buying a position in smartphone.
- Facebook acquired Instagram for $1b in 2012, getting in mobile-first social media.
- Google acquired Deepmind for over $500m in 2014, grabbing significant AI talent.
- Facebook acquired Oculus for $2b in 2014, positioning itself in the VR market.
At the start of the S-curve, it’s almost impossible to predict when a commercializable product will be ready. It’s even more difficult to know when (if at all) the market will adopt it. Investors willing to place bets at this point of the S-curve must be exceptionally patient, have deep pockets, and be comfortable with extreme risk/reward.
Stage 2: Frenzy
When a crazy idea starts to positively change the lives of its early adopters, word spreads and creates a tangible market demand for more similar technology.
At this stage, it’s easier for companies to find specialized talent. Competitors emerge as startups decide to create and innovate on the original idea, improving it quickly. The result is explosive market adoption.
This stage can be a sweet spot for early-stage tech investors. While investments are still very risky and unpredictable, they offer a strong risk/reward profile, as well as tangible products and market validation.
Stage 3: Scaling
At this stage, the technology is being universally adopted, and continues to get optimized as more and more companies build on the original platform. This stage is less compelling in terms of incremental innovation and additional hardware features.
Investors should seek out opportunities in industries and business models that are developed as a result of the wide market adoption.
Savvy investors and entrepreneurs will try to figure out what will change as a result of this technology having billions of users. Just think of how many profitable businesses were created based off of the idea that nearly half of American households would have access to a PC and dial-up internet access in the early 2000s.
Stage 4: Maturity
Most technologies eventually plateau. Some stick around for many years without significant incremental growth (PCs), and others eventually get replaced by new technology and disappear entirely (VHS and CD-players).
Crazy idea: A computer in your pocket
In the early 2000s, when mobile phone handsets (not smart yet), iPods, and notebook computers started to become commonplace, visionary technologists started to think about the next innovation in mobile.
Apple Inc. purchased the domain iphone.org in 1999, and started working on the first iPhone in 2002, five years before its official release. Android Inc. launched in 2003, was acquired by Google in 2005, and released the first HTC smartphone in 2008.
When Apple released the iPhone in January 2007, it totally disrupted the mobile industry, which had been previously dominated by Blackberry and a few other players.
The market's initial reaction to the iPhone was pure astonishment. Many thought that the iPhone ads were faked. Just watch the crowd gasp as Steve Jobs introduces the “pinch to zoom” motion – a feature that is so standard on any touchscreen today, it's completely insignificant. Back then, it was light years ahead of the Blackberry’s trackball.
A few weeks into using the iPhone, early adopters witnessed how easily they could perform internet tasks such as web browsing, email, and banking on the iPhone. The device was so good, it acted as a mini computer. And as we know today, it was about to become much more.
A paradigm shift and the frenzy that followed
The explosive growth of smartphones started a few years after the iPhone’s initial release. From 2010 to 2015, the industry evolved at a faster rate than any other consumer product in history.
The booming market adoption inspired many companies (Samsung, Huawei , Oppo, Vivo, Xiaomi, to name a few) to release their own version of the smartphone at competitive prices.
The smartphone's drastic market penetration, combined with the launch of the Apple App Store in 2008, had a tidal wave effect on many industries. Organizations all around the world asked themselves: ‘’What does this mean for our business model? For our customers? What’s our mobile strategy?’’. Entrepreneurs asked themselves: ‘’How will this affect customer behaviours? How can we leverage this limitless device? What can we build on top of this exciting new platform?’’
An app bubble appeared. Brands saw an opportunity to have their content accessible on-the-go, and only one click away. Underperforming mobile browsers, and the “cool” factor of apps meant that every company had app FOMO (Fear of Missing Out). The Apple App Store launched with 500 apps, and had over 2.2m apps by January 2017.
These few years were exhilarating for venture capital. The emergence of smartphones pioneered the concept of the sharing economy, it redefined financial services, and fuelled the social media platforms that dominate today’s world.
Opportunities for investors in today’s scaling phase
It might feel like the market for smartphones has hit a plateau, but in fact, it is only halfway through the S-curve – in a new scaling phase.
At Brightspark, we’ve been following the mobile industry closely and it has shaped a significant portion of our investment thesis. Here are a few trends we’ve observed:
Trend 1: Growth isn’t slowing down, it’s shifting
Penetration growth has slowed down significantly in North America as it approaches 100%, but it is progressing faster than ever across the world
In 2017, the number of smartphones surpassed the number of humans. Over the next two years, it is predicted that 20 smartphones will be shipped for every human that is added to the world’s population. Smartphones shipments aren’t slowing down, and people around the world are spending more time and money on mobile than on any other device. As shown in the charts below, most content today is consumed via mobile apps – we’ve only seen the beginning of a hyperconnected world
Opportunities for investors:
Investors who want to ride on this trend should carefully study the mobile trends that are happening in Asia, Brazil and India, as they will impact tomorrow’s economy forever.
Trend 2: Mobile-first business models, and smartphones as a primary internet device
For many years, most mobile apps were web iframe apps, essentially mimicking a brand’s desktop browser offering with a few unnecessary features. Users had to download an app every time they needed information on their smartphone. Uninstall rates peaked, and many claimed that apps were about to die.
But apps didn’t die, they simply evolved. Mobile browsers improved to be fully responsive on mobile and offered practically the same native features as native apps. Many brands stopped holding on to their app and focused on having a responsive website/web platform instead.
A new breed of apps appeared as clever companies released native apps that truly leveraged the power of mobile: push notifications, high-resolution cameras, gyroscopes, accelerometers, etc. As a result, the first true mobile-first companies emerged.
Mobile-first describes business models that leverage mobile hardware as part of their core competitive edge and brand identity, and offer experiences that are simply not possible on computers or mobile browsers. In Asia, this trend is in the DNA of many tech companies – Chinese companies have done a much better job at delivering and adopting mobile-first platforms than any other part of the world. The gross consumer spend in the Asia-Pacific region is higher than anywhere else. We strongly believe that it is only a matter of time before similar behaviours reach North America.
Opportunities for Investors:
We are strong believers in mobile-first platforms because they do much more than digitize processes; they have the potential to alter behaviours, decentralize industries, and turn market powers upside down. Brightspark has made a few mobile-first investments and keeps actively looking for more. We first invested in Hopper more than 10 years ago. Fred Lalonde, the company’s CEO, caught on to the mobile-first trend early, and decided to kill his website in favour of a mobile-only strategy. What might have seemed insane at the time proved to be one of the company’s strongest strategic advantage. Today, Hopper has won almost every product award under the sun. And because it has mobile at its core, the app has been able to top the travel apps charts at a fraction of its competitors’ advertising spend. Not only does it have a flawless mobile UI, Hopper also reinvented travel planning by turning it into an ongoing conversation with customers using data-powered personalized push notifications. Unlike most aggregator websites in the industry, Hopper builds a long-term relationship with its users via the device they use the most.
We also invested in Nudge Rewards, a company that is reimagining how corporations engage with their frontline employees through the power of smartphones. The app’s UI is as intuitive as the familiar day-to-day apps that the new millennial workforce uses, and the results speak for themselves: One of Nudge Rewards’ customers achieved a 80% employee adoption rate within the first 24 hours of deployment. The key to adoption is to seamlessly integrate the use of the app into these employee’s “everyday tech ritual”. When this new generation has ten minutes to spare, it’s likely that they will look at Facebook, then Twitter, then Instagram — and repeat this ritual many times in a day. Now, they can effortlessly add apps like Nudge Rewards to the mix, and that’s a powerful habit to create.
Trend 3: A secondary market boom is on the horizon
Finally, we see a perfect storm brewing; one that will inevitably create a booming secondary market for smartphone devices.
A plateau in hardware innovation
Many criticize smartphone manufacturers for releasing new phones with insignificant feature improvements. At this point of the S-curve, devices have gone through multiple significant iterations and are near perfection. Users do not perceive incremental improvements and additional features as game-changing, which creates disappointment and frustration for customers.
Smartphone prices are rising
As penetration growth is slowing down and market adoption peaks in Western countries, smartphone manufacturers are pressured to keep their earning figures at the previous years’ high-water mark. The price tag of smartphones has been rising significantly over the past six quarters, bringing the average smartphone price to US$363, an all-time high.
Replacement cycles are longer
Consequently, consumers in Western countries are holding on to their smartphones longer: around 31 months in 2017, and expected to reach 33 months in 2018.
This trend is hurting smartphone sales, and manufacturers and wireless carriers want to offer consumers incentives to replace their device more often, resulting in the rise of takeback programs by carriers, manufacturers, and big box retailers.
Raised awareness about smartphone recycling and recovery
In the past, the common recycling practice for electronic products was to shred the devices and recycle the valuable metal parts. Companies now focus on giving electronic products and its components a second-life. Companies like Re-teck are specialized in reverse supply-chain management. This new market philosophy is driven by the economics (what if you can sell the same components or entire device twice instead of just once?), the increasing general world eco awareness, and upcoming law frameworks holding stakeholders accountable for the electronics’ lifecycle optimization. For example, the state of California recently introduced a new bill forcing tech corporations to make their devices easier to repair. This Act would offer more second-life alternatives for smartphones and similar devices.
Eastern populations want for affordable smartphones
At the same time, populations in emerging countries are starting to purchase smartphones as their first and only electronic device, and they are upgrading their devices quicker. Their buying power is growing as billions of people rise to the middle class. People want luxurious smartphones, but at affordable prices.
Opportunities for investors
The worldwide smartphone industry is faced with a fascinating challenge: it needs to extract more dollars out of a smartphone’s lifecycle and be responsible in the recycling process of the billions of devices it creates. We believe this paints an interesting picture for investors – the industry is prime for a secondary-market boom.
The refurbished market has become the fastest growing segment in 2017, rising 13% year over year compared to 3% for the overall smartphone market. The second-hand market is a significant market in its own right and is likely to grow over the coming years. Some predict a 8.9% compound annual growth rate by 2025.
Per Deloitte, 55m smartphone devices are forecasted to be traded-in in North America, and 223m worldwide by 2020, of which 50% will be traded-in in stores. Today, one out of ten devices sold is refurbished.
There is a huge opportunity for entrepreneurial companies to seize significant value in the smartphone second-hand market, especially by leveraging technology to manage the logistic puzzles this new industry faces.
That’s why we are investing in BuyBack Booth, a B2B company that is responding to the growing demand for an efficient solution to sell and trade-in used smartphones (coming from consumers as well as manufacturers/wireless carriers). BuyBack Booth is solving multiple problems found within existing trade-in programs: inventory and security management, logistics around the dispatching of devices, and inaccuracy in the quality assessment and pricing of phones.
The company has developed proprietary software and hardware that helps wireless carriers and retailers optimize their smartphone trade-in programs. BuyBack Booth offers consumers a reliable, streamlined way to trade-in their smartphones at a wireless carrier or retailers’ location using a kiosk and mobile app. The BuyBack Booth platform calculates the device’s value and offers consumers that amount in the form of a store credit. It’s a significant improvement from existing trade-in options, which are often costly, inconsistent, unsafe, and/or subject to human error.
The company is led by seasoned serial-entrepreneurs that have a unique advantage of understanding the kiosk industry inside and out. This insight helped them create a business model that offers incredible value to all stakeholders along the second-hand market logistic chain. We spent many months studying the industry and diligencing the company, and we believe that BuyBack Booth is perfectly positioned to leverage the smartphone refurbishing trend.
So, what comes next?
As any surfer would tell you, the only way to ride waves is to watch as they come from afar, and start paddling before they get to you.
Conversational commerce, artificial intelligence, blockchain and augmented reality (or frictionless computing) are lining-up to be the next game-changing technology S-curves. While we spent a significant amount of our time tracking these new technologies, we’re confident that there are still more opportunities for tech startup investors to ride the smartphone wave.