1. Rapid take-off

    Mark Urquhart, Investment Manager. April 2016
  2. One of the things we think about a lot in the LTGG team is innovation. We try to understand what factors allow innovation to flourish and to keep an open mind as to what might change in the future. A few months ago I read David McCullough’s excellent biography of the Wright Brothers – a book which I thoroughly recommend – and it caused me to reflect on the nature of innovation and the contrast between the early 20th century and the early 21st century.
  3. ​The early days of innovators often remain lonely as they swim against the currents of established consensus.
  4. What I found most interesting about the book was the use of many primary sources which really transported the reader back to the pioneering days of aviation. Put simply, the Wright Brothers were not meant to succeed – they were two sons of a preacher and they ran a bicycle shop in Ohio. They were not the flamboyant metropolitan types with large financial backers whose much-heralded flying contraptions most often ended up in rivers or not even leaving terra firma. Rather, they lived modestly and experimented in their bicycle workshop and then travelled every summer to the exposed beaches of North Carolina at Kitty Hawk and innovated relentlessly.

    Many contemporary commentators had already decreed that man simply could not fly as the Wright Brothers tirelessly tinkered and improved their machines. They had countless setbacks, some of them life-threatening, but over time by making adjustments to wingspan and width, adding rudders and flaps and more aerial controls, they mastered the art of flying. They had to sail to Europe to display their magnificent flying machines and, with flights of over an hour and the brothers having complete control of the aircraft on take-off and landing, suddenly they were transported to the status of international superstardom and the aviation industry, with all its positive and negative consequences, was born.

  5. Elon Musk attends The Dinner For Equality co-hosted by Patricia Arquette and Marc Benioff on 25 February 2016 in Beverly Hills, California. © Chelsea Lauren/Variety/REX/Shutterstock.
  6. Fast forward 100 or so years and there are both striking similarities and differences. Some of the great pioneers of our time share the single-mindedness displayed by Orville and Wilbur Wright in pursuing ideas which many deem impossible – think of Elon Musk and the scepticism surrounding battery range issues on electric cars, or indeed whether consumers would ever want to buy vehicles with no engines. Likewise the early days of innovators often remain lonely as they swim against the currents of established consensus – Marc Benioff left a secure executive role at Oracle to pursue something called ‘cloud computing’ which most people told him would never take off because of capacity and security issues. At times it takes a real moment of Wright-like genius to change the world irrevocably, such as when, in the mid-1970s, Steve Wozniak thought of a computer where what you typed appeared on a screen, unlocking the path to the smartphone revolution which we are currently experiencing.

    I am struck, however, by the differences which innovators now enjoy compared to their inventing forefathers. Where the Wright Brothers had to pack trunks full of parts to travel by train to Carolina or steamboat to Europe and then assiduously assemble their machines, modern innovators can disseminate their ideas and products almost instantaneously across the globe. Take one digital entertainment company that has been doing very well in gaining new subscribers to its streamed content in North America and Europe and wanted to press the accelerator on international expansion. In January of this year it announced that it was simultaneously launching in 130 new countries around the world. This is more than half the nations on earth and represents a pace of expansion unimaginable until the past few years. Whereas previous international expansion would take many years of building fixed assets and entering new markets one by one, because the goods it is selling are digital, there is no physical barrier to rapid expansion and exploiting first mover advantage.

    This dramatic change in the nature of the innovation has potentially profound implications for how we understand economics and how we analyse companies. As an undergraduate in Politics, Philosophy & Economics at Oxford in the late 1980s it was drilled into me how immutable the economic factors of production were. Every undergraduate textbook had chapters on the importance of land, labour and capital which when mixed correctly with entrepreneurship provided the elixir of profits which then would attract new capital and so on.

    I think many of these economic shibboleths are under challenge when we look at the world in 2016. As highlighted above, many companies do not require the traditional factor of land to expand because they are selling digital and not physical goods. There are large question marks over how much labour will be required in the future, with lots of potential robotic replacements for menial and repetitive tasks. Moreover, the amount of capital needed by businesses is also under challenge which leaves entrepreneurship as perhaps the defining characteristic of our age.

    Those visionaries who can see new opportunities now have the chance to exploit these at an unparalleled speed on an unprecedented global scale. Over the last 20 years, online retailers have grown their global markets exponentially with more and more customers ordering goods on their mobile device – no bricks and mortar retailer has ever been able to expand so fast. Economic theory does not have a good record of adjusting to change and I think many market participants are still adhering to theories which no longer match the economic reality of our times.

  7. These changes are creating companies which have potentially very different structures to those which have traditionally dominated global stock markets.

    As we look forward over the next ten years and prospect for companies on your behalf, I think we have a lot to learn from the Wright Brothers. They refused to believe in limits to human ingenuity and pursued a dream which many thought was an impossible folly. If one thinks back to any major technology change, the desire to decry and say it will never catch on, appears almost overwhelming. There are myriad examples which one could cite here from the invention of railroads, electricity, and television to current dismissals of drones, intelligent robots or driverless cars. The one thing I am certain about today is that there will be devices, services and capabilities, which have not even been invented yet by geniuses whom we haven’t heard of…we will continue to try to keep our minds open to the possibilities of such innovation on your behalf.

  8. Risk Factors

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  9. Mark Urquhart

    Investment Manager
    Mark graduated BA in Philosophy, Politics and Economics from Oxford University in 1992. He spent a year at Harvard as a Kennedy Scholar in 1993 before completing a PhD in Politics at the University of Edinburgh in 1996. Mark joined Baillie Gifford in 1996 and was an Investment Manager in the Japanese Equities Team, until he co-founded the Long Term Global Growth strategy in 2003. Mark became a Partner in 2004.