When I was little my dad used to sing the Dooley Wilson song As Time Goes By. It starts:
You must remember this
A kiss is just a kiss
A sigh is just a sigh
The fundamental things apply
As time goes by
I am not an overwhelmingly sophisticated financial investor, nor am I an expert market prognosticator. I like things that are simple and easy to understand. The past decade of technology investing and valuations has not been simple or easy to understand. But it looks like that is changing now.
As software began to eat the world, many companies made the proclamation that they were software companies. Companies sell things. The type of company you are largely comes down to what you sell and provide to customers. For instance, software companies sell software. As technology became more pervasive, companies and the market largely confused other types of companies for software businesses. But software eating the world means that many industries will be inexorably transformed by technology – they will create more efficiency, move faster, have better margins, etc. – not that they themselves will become the software industry itself.
One of the things that confused me over the recent bull run was companies and investors valuing things that were not software companies like software. Insurtech is one example. Insurance companies sell insurance policies. The promise of insurtech is that companies can use technology to generate better underwriting and risk systems that create more efficiency and better user experiences in the delivery and management of the policies they sell. But at the end of the day, the core thing insurtech does is sell insurance. And at the end of the day they should and likely will be valued like their insurance counterparts in the public markets. And if they don’t have better margins and a superior customer experience, then the promise is unfulfilled.
You can extend this to many other industries that have been inflated by the illusion of being tech companies. In a segment of fintech, online lenders sell money. They’re in the business of providing people loans. They will be valued like other companies whose core business is selling money. Same goes for companies that sell physical things. If your core business is selling shoes or mattresses, you will be valued like other companies that sell shoes and mattresses. You are likely not a software company (unless they are digital shoes and mattresses!), but hopefully you use technology to deliver a superior product and service to customers, and have a significantly better margin profile. If you do not, the narrative is fiction.
I think what we are seeing and will continue to see is the market come to this realization. Not everything is a tech company, and if tech is the thing that differentiates your business from competitors in your industry, then it better actually manifest in the business. This is not to say that exceptional companies and businesses won’t be built and aren’t already built in tech-enabled industries. They are and will continue to be. But it is to say that it’s important to internalize the new market dynamics which are finally becoming more simple and easy to understand.
At the end of the day, a kiss is but a kiss, a sigh is but a sigh, and the fundamental things apply as time goes by.