What’s next for the tech industry’s goldmine after the AI ​​boom delivered exceptional returns to Nvidia investors in 2024?

Which bets pay off

The Large technology companies Companies are currently the most valuable companies in the world. Amazon is now worth $1.75 trillion, but its total value on the private markets before its IPO was only $8 million.

At that time, Amazon was valued at just $60 million. Even taking inflation into account, this corresponds to a return of over one million percent.

So there is a lot of money to be made by choosing the next Amazon or the next Google!

That is why venture capital firms make money. And even if you are just an individual investor who bought Google or Facebook at the IPO and held on to your shares, They made quite a bit of money.

What options?

So the question for the future of the technology industry is whether this kind of return is still possible. Not just for a few lucky individuals, but for the general public.

In reality, it seems as if it more difficult in the future.

Because basically The technology boom was linked to the development of the Internet. And now that the Internet is practically finished,It is not certain whether another technological breakthrough (AI, deep tech, etc.) can offer the same enormous rewards with little capital investment.

The structure of the Internet

The global Internet is not yet fully developed, but this development is approaching, especially in wealthy countries.

There is still a lot of work to be done to connect countries that do not have widespread broadband networks, but local telecom operators and Starlink or Huawei will likely do most of that work.

There are There is no longer much growth possible in the physical structure of the Internet.

The centuries-long quest to provide everyone on the planet with access to high-speed, electrically powered text and voice communications services is coming to an end.

A mature technology industry

There are still many new clothing companies that are successful (Shein, Uniqlo…) but since everyone already has clothes, the success of these companies usually comes at the expense of existing brands and manufacturers.

Sure, clothes get a little better over time and manufacturing processes become more efficient, but The pace of improvement is much more moderate than in the past, when new materials were constantly being invented and fashion for the general public was a growing industry.

This will be the same for most internet industries.

New social networks, new video apps, and new SaaS solutions will emerge, and some people will get rich by investing in these products.

But this pace will slow down because to be successful, the new software companies must cannibalize the old ones.

In fact, this is a big part of the reason for the collapse of the technology sector in 2022.

Of course, it was rising interest rates that triggered the price collapse, and there were concerns that the new antitrust movement would target big technology companies.

But it was also partly due to Markets for technology products were generally smaller than expected.

What has changed in technology?

Take Shopify, for example. Shopify is one of the mid-sized technology companies that was hit hard by the 2022 crisis and has not recovered since then.

The company is still worth $90 billion, but ultimately competes with Amazon for a limited amount in online commerce.

The pandemic created the illusion that online commerce was much bigger than it really was, so pYou might think that two online retailers the size of Amazon could coexist.

In any case, The stock market crash was perceived as a correction of false optimism that was specifically attributed to the technology industry.

The NASDAQ has recovered, but is up only 4.5% since its late 2021 peak, while the S&P 500 is up over 13%. Technology companies experienced a huge wave of layoffs, although the economy as a whole reached a record employment rate.

The end of the pandemic and the rise in interest rates were the trigger This woke investors up and made them realize something that should have been clear to them some time ago: The Internet is now a mature industry.

In terms of expected returns, this poses a problem for both large technology companies and the venture capital and startup sectors, as they have to determine where the next source of growth will come from.

Where do the returns from the technology industry come from?

Aside from internet-related software and hardware, big technology companies and venture capital firms can invest their money in a number of other areas.

However, from an investment perspective, the Internet has key advantages that are not necessarily easy to replicate elsewhere.

The Internet is by nature a network. It’s about connecting people, be it physically or through software.

The value of a network increases with the square of the number of nodes in the network and represents a source of increasing returns to scale.

Increasing returns to scale often lead to market power because they enable large firms to defeat small, newly established competitors.

And market power means benefit. Software companies generally have Very high margins and network effects (which also exist in other types of software, such as Windows) are a major reason for this.

However, since Internet companies are not very capital intensive, They do not require enormous fixed costs All you need to do today is Hire some engineers and pay some cloud bills.

Even in the days when startups had to own their own hardware, it wasn’t that expensive. Thanks to network effects, the low startup costs allowed software investors to make a very large number of bets. Many of them had the potential to generate enormous profits.

AI, deep tech and crypto: the next tech bubbles?

The new industries of interest to the technology sector generally do not offer both of these characteristics simultaneously.

Cryptocurrencies do that, but so far haven’t really found many big use cases. Bitcoin is still struggling to establish itself as an authentic store of value or inflation-free alternative to the dollar.

Deep technology Technologies are obviously incredibly useful: The world needs new semiconductors, sophisticated drones, better batteries, new cancer drugs, etc.

In the 1970s and early 1980s, venture capital was essentially about financing hardware companies. High fixed costs for hardware are a source of increasing returns and thus a source of market power, which means that Hardware startups offer the potential for exceptional returns.

The problem is that hardware, unlike software, incredibly high start-up costs. To build a manufacturing company, you need to build large factories, like Tesla. And that’s very expensive!

Biotech companies face enormous fixed costs for research, testing and drug approval.

Invest in Deep technology?

Deep technology Technologies are always in demand among venture capital funds, but they are more difficult to manage than software Company.

To mitigate these problems, investors try to invest their money in Deep technology Pursue who only take care of the design but not the actual production (Apple, Nvidia).

But given the decoupling between the US and China and the associated difficulty of maintaining a design lead without controlling the factories, There may not be so many purely design-oriented Deep technology Company.

Invest in AI?

Goldman Sachs reports that FAANG companies plan to 1 trillion dollars for AI in the coming years.

Many people believe that AI will bring about a completely new change, and that is entirely possible. However, it cannot be denied that this involves considerable start-up costs.

Companies today spend billions of dollars training cutting-edge AI models, and as researchers improve AI through exponential scaling, The costs could soon reach tens of billions.

That’s much more expensive than a few computer geeks in a garage. And young companies that want to apply AI to business problems or consumer products also have to bear their share of these enormous costs. In contrast to Internet software, AI is simply very capital intensive.

Nobody yet knows anything about the returns available to winners in the AI ​​sector. However, doubts are increasingly emerging as to whether the list of use cases justifies the level of investment in the near future.

If AI does not deliver on its promises and companies find few use cases, then the AI ​​industry could experience a major collapse, as the railways and telecommunications did in their time.

The future of technology

There may be no technology in sight that can replace the unexpected gains investors have made through the Internet. From now on, the technology might simply be slower and more difficult.

What does it mean when the technology industry matures?

First, it’s about growth versus efficiency. Fast-growing companies can afford to be sloppy, over-employ, and ignore government policies unless they’re particularly drastic.

Slower-growing companies cannot afford this luxury: they have to satisfy their shareholders by extracting every last bit of efficiency from their operations.

This means that in the future The technology sector may be a less inviting place to look for a job. In the 2010s, educated people believed that if their professional endeavors failed, they could still find a well-paying job in technology. This may no longer be true: the recent wave of layoffs could be the new normal.

The creation of the Internet was a very special and unique time in the history of technology and business. Generations of investors were able to make huge profits and become rich. But it seems that opportunities will become scarcer in the future given the maturity of the industry. Deep technology (semiconductors, biotechnology, batteries, etc.) and the AI ​​industry seem to be best positioned to generate money in the coming years.

Satosh

On this day, I tried to enrich my knowledge of this revolution to advance humanity through the conquest of freedom.