Investing in world-changing companies often means you’ll be dealing with many unknowns. The technology and business model are both unproven. So, a clear path to success isn’t paved out for the company. Depending on when you invest, there will be a massive difference between the upside and risk.
Although there is no exact formula with 100% certainty, understanding the adoption curve can limit your downside while giving a huge upside. In this post, I’ll be sharing what is an adoption curve and how it can help you take your investment to another level.
Disclaimer: None of what I’m talking about should be considered as financial advice. It is only for entertainment and educational purpose only.
What Is an Adoption Curve
An adoption curve describes the adoption or acceptance of a new product or innovation. It is broken down into five phases: innovators, early adopters, early majority, late majority, and laggards. It is typically called an S-curve adoption because of how it looks like.
The innovators phase is when an innovation is out and it is full of experiments in what problems it can solve.
The early adopter phase is when the innovation is applied to solve a real-world problem, but the execution is often not the best. There would be many hoops to jump through to make a product work. At this stage, only those who are enthusiasts would make use of the innovation for the most part.
The early majority phase is when the innovation has matured enough to start going into prime time. At this point, there are standards and structures. The product is usable without much understanding of how things work. Those that adopt an innovation at this point usually find enough value in the problem it solves to put up with issues from time to time.
The late majority phase is when the product is at the point where it is plug-and-play. The product works out of the box and doesn’t require much setup. Adopters in this phase are the ones who tend to wait until products are further developed and designed for the mass market.
The laggards phase is when a product becomes so pervasive that it becomes the norm. The remaining adopters in this phase are those that are reluctant to changes. The only reason they adopt an innovation is that the cost and value become far superior to what it replaced.
How to Use Adoption Curve for Investing
When it comes to investing, you want to pay attention to innovations and companies that are in the early adopter, early majority, and late majority phase. The earlier you invest, the bigger the return but also the risk. So, depending on your ability to cope with volatility you would take an investment position at the right phase for you. A company in the early majority phase provides a nice balance between risk and reward. The reward would still be outsize compare to the risk and the company has proven their product(s) and the ability to scale.
Key Components That Drive Adoption
The factors that drive adoption is often the value and price. When an innovation first surfaces it is usually costly but can provide great value. Over time the cost curve comes down rapidly and provides the same or more value. As a result, the masses start to adopt the innovation since it is better and cheaper than an existing matured product.
When it comes to investing, this means you should keep an eye on a company’s ability to reach price-parity. The ability to scale and price-parity are two signs that the company is moving out of the early adopter phase into the early majority phase.
To conclude, when you’re looking to invest in innovative companies understanding the adoption curve and where the company is at in that adoption curve is important. The level of risk and reward varies depending on which phase the company is in. The closer to mass adoption the lower the risk, but so is the reward. Remember there are two key components that drive mass adoption, which are price and value.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
If you’re new to investing and need a guideline to help you start your investment journey you can check out my post on setting yourself up for financial success. I also have a post about beginner mistakes to avoid in the stock market.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.