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The long view: using unorthodox signals to spot the next big thing

Dave Bujnowski, Investment Manager

Key Points

    • It can be challenging to distinguish early-stage large growth opportunities from passing fads
    • Keeping watch for anomalies, early signs of cultural change and other underappreciated indicators can be advantageous
    • Inspire Medical Systems, Rivian, YETI and Tesla are examples of relevant investments

Your capital is at risk.

At a lunch I attended about 15 years ago, the New York University professor and new media expert Clay Shirky spoke about the up-and-coming social networks of the time. This was when MySpace and Facebook were making noise in media circles. But both, frankly, were still tiny, with under 100 million active users.

The conversation was about the future of social networks, and Shirky posed a question that has remained engrained in my head ever since: Is this category elite or vanguard?”

The question alluded to the size of the customer set that had so far joined the movement. In both cases – elite and vanguard – the customer set is small. In the elite’s case, it remains small. However, in the vanguard’s, it represents the beginning of a larger movement: the early adopters give way to the majority.

This distinction has been on my mind lately. It has me thinking about niches. They get a bad rap in investor circles. Their total addressable markets are considered small, so their stocks are typically granted low earnings multiples.

But it begs the question: what great growth businesses started as a ‘niche’? The best answer I can come up with is all of them. 

Their life typically begins with success among early adopters, and there is usually a chasm to cross to get to the mainstream. In fact, not only have all great growth businesses started as niches, but for the vast bulk of them, there has been, at one point or another, an epic underappreciation of what was to come:

“I’m guessing there is a world market for maybe five computers.”
Thomas Watson, president of IBM, 1943

“There is no reason anyone would want a computer in their home.”
Ken Olsen, founder of Digital Equipment Corp, 1977

The list goes on. 

Mobile phones were niche for a while. I vividly remember watching ‘the mainstream’ roll their eyes when a handset belonging to a member of the ‘elite’ rang in public. Sneakers were once niche. So were yoga pants. And video games were just for kids, right?

The point: dismissing markets on the grounds of their niche appearance risks overlooking untapped growth potential.

 

Attuned to anomalies

Another way to define a niche’s ‘breakout’ is when a market’s S-curve takes off.

The S-curve growth model

Here, I’m reminded of Paul Saffo’s work. If you don’t know Paul, he’s a renowned tech forecaster who makes a good case for the value of anomalies. 

“The entire portion of the S-curve to the left of the inflection point is paved with indicators – subtle pointers that when aggregated become powerful hints of things to come,” he wrote in Harvard Business Review. “The best way for forecasters to spot an emerging S-curve is to become attuned to things that don’t fit, things people can’t classify or will even reject. Because we dislike uncertainty and are preoccupied with the present, we tend to ignore indicators that don’t fit into familiar boxes.”  

As investors, should we take immediate action when we see an anomaly? No. Importantly, even Saffo acknowledges that the left-hand part of the S-curve (prior to takeoff) is typically much longer than most people imagine.

But, particularly given our time horizon, we should make room for them as we hunt for ideas. There is value in collecting anomalies and assessing whether there is something that ties them all together. Perhaps something bigger is going on or about to go on.

 

Watching out for cultural changes

So, where can we look for anomalies, niches and other changes whose implications are underappreciated? Technology is one arena that has deservedly grabbed our attention. As Watson and Olsen’s quotes above and countless others have demonstrated, the ultimate power of digital tools is hard for us humans to fully grasp.

Looking ahead, we’ll continue to assess the ongoing disruptions that stem from big technical disruptions like the internet and the cloud. My colleague Tom Slater discusses some of these in his article The long view: why the AI paradigm shift matters to growth investors. However, there are other powerful sources of disruption. One that I’ve been exploring alongside friend and cultural anthropologist Grant McCracken is the changes taking place inside American culture.

It’s a fun study. And it’s highly relevant to any conversation about niches. Culture is complex and nuanced. It’s hard to pin down. Often, investors mistake emerging cultural changes for being anomalies, niches or just fads when in fact, something big is brewing.

The yoga and athletic apparel company Lululemon is an example. If you were watching its ascent in the early 2000s, you would be forgiven for quickly dismissing it as a fad or a niche. Twenty years and $60bn in market cap later, we see that much more was afoot.

To many, Lululemon’s rise might seem tied to simple things like world-class brand management and superior products. But as an anthropologist, Grant sees things differently. Through his lens, Lululemon’s success results from three trends that were emerging in the US in the later part of the 20th century:

  1. the fitness craze that started in the 1970s
  2. the de-formalisation of fashion that can be traced back to hippies in the late 1960s
  3. the rise of Eastern spirituality that The Beatles helped kick off in America in 1966

These are multi-decade developments, not fleeting fads. Yes, Lululemon still needed high-quality products and strong brand management. But without these transformative changes, it would likely be relegated to a niche.

If we were attuned to these cultural shifts in, say, 2003, might we have been in a better position to see what Lululemon’s long-term potential might really be? Maybe. So, in our work with Grant, what sorts of emerging cultural changes have our attention today?

Here are three (of many):

  • Sleep – or lack thereof – as an emerging health problem
    We have started a position in Inspire Medical Systems, a company with an innovative treatment for sleep apnea. This is a potentially risky condition in which a person’s breathing stops and starts as they rest. Inspire’s solution delivers mild stimulation to key airway muscles. This has benefits above and beyond what mask- and hose-based continuous positive airway pressure (CPAP) devices offer. To the extent quality of sleep rises on society’s collective agenda, awareness will grow, and Inspire’s potential patient pool may grow dramatically.

  • A return to the great outdoors
    No, it wasn’t just a Covid thing. One of the themes from my work, The new engines of growth, was scarcity versus abundance and the growing value of scarce resources. This can range from semiconductors to raw materials to capital. It also pertains to nature: as nature becomes less a wilderness and more a place variously domesticated, mined, stripped and diminished, Americans are coming to treasure it more. This is a potential long-term tailwind for brands such as the electric sports utility vehicle maker Rivian and the durable outdoor goods specialist YETI.

  • Turbulence and preparedness
    Increasing numbers of institutions that were previously considered dependable are going wrong in ways we would have thought impossible 30 years ago. For example, bodies responsible for supply chains, education, power grids and food supplies. Such uncertainty will trigger an increased desire for more control and resilience in our lives. We will start with our homes, which will evolve from merely ‘a place to live’ to a citadel, of sorts: the resource that’s closest to us, that we have the most control over and that will help us build resilience for an uncertain future. One area to watch involves energy and grid independence. In 10 years, might Tesla be seen as far more than just a leading electric vehicle maker? Its solar and energy storage business could ride this trend nicely.

There is much more cultural change to consider, but the broader point is that if we’re hunting for tomorrow’s great growth businesses, maybe we ought to search in areas that others consider niche today. Surely, there must be some mistakenly viewed as niche when, in fact, a breakout lies ahead.

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Author

Dave Bujnowski

Investment Manager

Dave is an investment manager in the US Equities team. He joined Baillie Gifford in 2018 and became a partner in the firm in 2021. Dave’s investment interest is focused on markets and businesses in which a highly dynamic societal change or business model shift affects potential future cash flow in a monumental and underappreciated manner. Prior to joining Baillie Gifford, he co-founded Coburn Ventures in 2005, a consulting and investment company that studies monumental change in business, markets and society to better understand the powerful forces that shape investment opportunities. In his 13 years at Coburn Ventures, Dave was a partner, primary client-facing consultant, research analyst and portfolio manager of a long-short, market neutral hedge fund. He started his career in 1996, joining Warburg Dillon Read’s equity research group as an associate semiconductor analyst before joining UBS’s Global Tech Strategy team. Dave graduated from Boston College in 1993, where he majored in Finance and Philosophy.

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