established business vs. innovation

Jeff Bone
Fri, 11 Jan 2002 13:36:37 -0600

Jeff Bone wrote:

> Then (a) you're not a particularly smart investor, or (b) you're only looking
> at this in a coarse, macroeconomic sense.  You've got to risk-adjust your
> expected returns.  Once you do this, it's clear that a dollar of revenue from
> the established player is preferable to a dollar of revenue from a newbie.
> (Assuming you can even invest in the newbie, not a safe assumption.)

That's a bit unclear, let me clarify.  (Actually talking returns here, not
revenue, sorry for the misstatement.)  Q / R have MUCH higher expected ROI than
P;  a dollar investment in Q / R at an early "innovative" stage might be expected
to return 7x or more in a 4-6 year timeframe.  (Expected returns on and
timeframes for liquidity of a private placement, particularly in the tech sector,
have jumped all over the map over the last decade.)  A dollar investment in P
might be expected to appreciate in value at 8-20% per year.  BUT (a) once you
risk adjust those numbers, the gamble in Q / R becomes much more obvious, and (b)
because not everyone can invest in Q / R, the majority of people wanting to
invest in the opportunity created by some innovation will put their money in P on
the assumption that it can COPY or BUY it, preserve / grow revenue streams by
doing so, and continue to return at or better its historical performance.  This
investment into P by itself also serves to increase the risk to Q / R investors.