There is a framework I’ve/we’ve used over the years to think about where to invest and where not to invest that I call “atoms vs bits.”
I am not sure where I got it from but the concept is simple. Is the software being built and taken to market dealing with just bits or are atoms also involved?
The idea being that it is going to be easier to make something work if there are just bits involved. Atoms make things more complicated and more expensive.
In the 90s, when I first came across this framework, it led us/me to focus on areas like media and financial services where the product was end to end digital. And the first industries to be truly disrupted by the Internet were the ones, like media and financial services, that are end to end digital (or can be).
I’ve held on to this framework over the years and while we’ve veered from it from time to time, often unfortunately, it still holds up.
If you look at machine learning, possibly the most impactful technology right now (and I mean right now), you can see this at work.
Machine learning algorithms have massively transformed online advertising (just bits), online commerce (just bits on the UI), trading of financial assets (just bits), and our attention (just bits and neurons).
But in areas where atoms are involved, not so much. There appears to be a growing acknowledgement in the tech sector that the timeline to fully autonomous vehicles is going to be longer than some had thought. It is not that surprising. There are lots of atoms and lives involved.
I’ve been waiting patiently for the day that I don’t have to do the dishes after yet another amazing meal by The Gotham Gal. I will likely wait longer. Atoms are involved.
I am not saying that we should not work on these harder problems. We should. But we should also understand that the timelines will be longer and the road to adoption will be more challenging. That means these efforts will be more capital intensive and should ideally be investable at more attractive valuations. Sadly the latter has not been the case.
When you are investing other people’s money, you need to be mindful of where the timelines are shortest and the path easiest. And that has been bits for the totality of my investing career.
