Thread by @wintonARK

June of this year marked an important milestone:

Capital raised to fund the decentralized web (now ~$20 billion)

Finally surpassed the capital raised during the bowling bubble of the late 1950s (~$16 billion in 2018 dollars)

Brunswick Corp rallied ~1,600% to the top of the bubble.

Analysts were projecting 12 billion bowling games per year; no problem so long as every man women and child bowled 3 times a week.

🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳 🎳

As is often the case, the mania was catalyzed by a legitimately interesting technological innovation:
The automatic pinsetter.

The automatic pinsetter dramatically reduced time- and cost- to-bowl.
Prior to the invention a pinboy would run (or walk) back and forth between lanes to reset the setup and return the ball manually; sometimes bowlers would be required to do it themselves.

The improved experience resulted in a predictable demand-surge.
50 lane alleys in NYC were past capacity at 1am.

A whole subculture developed:
"Action bowlers" were betting $10,000+ (2018 USD) on single games;
League players more than doubled to 7 million.

In hindsight (as always) the entire speculative bubble obviously didn't merit the attention paid or the capital there-thrown.

The stocks fell 80% from their peak.

But hindsight is (always always always) so easy.

One of the critical operative questions when investing in innovation:

How to separate the iPods from the Automatic Pinsetters?

How to distinguish the thing that might up-end the world from that which will simply reset a narrow (gloss wood, 3.5' by 60') slice of the play space.

We have three qualifying criteria that we look for in (candidate) transformative technologies:
1) Dramatic cost decline/unit performance improvements
2) Cross-sector/cross-geography
3) Innovation spawning

Why cost declines are interesting:
Crossing certain cost/performance thresholds can dramatically widen and diversify end-use addressable markets.

As a nice byproduct (from an investor's perspective) many don't do the work to understand these unit-economic thresholds and so misunderstand the ultimate potential scope of a candidate transformative technology.

Misunderstanding = mispricing = alpha.

Why sectoral and geographic breadth is interesting:
An innovation that can proliferate across multiple industries and countries can enjoy dramatic addressable market increases as applications are "discovered" by different business sectors.

This staggering across sectors also provides more probabilistic shots at product-market fit, insulates the innovation (to some degree) against business cycle risk, and garners attention from multiple technical disciplines, accelerating the innovation's mutation rate.

In an increasingly siloed Wall Street, with specialists for every subsector with relationships to protect and access to maintain, a cross-sector innovation is exceedingly difficult to get in front of.

The CEOs, the IR, the sellside analysts:
all will be motivated to downplay the potential impact and to poo-poo prospective timelines;
and their duration-incentive mismatch (judged by the quarter if not by the month) improperly motivates them to take the time to learn otherwise.

It can be hard for the "experts" to hear through the subsectoral echo-chamber, so the technology cutting across (clean through the bow, the ship capsized) will only be heard after it has passed--the sonic boom trailing disaster behind.

Misunderstanding = mispricing = alpha

Why innovation-spawning is important:
A platform upon which other innovations can themselves be built expands the potential use-case-set in ways that are almost impossible to prefigure

The innovations and business models and attendant cultures that develop atop these innovation platforms help to weave them into society's fabric such that they can become very difficult to displace.

And because a successful forecast of ultimate scope and scale requires that an analyst or consultant literally pre-anticipate the panoply of things that will be built atop, innovation spawning platforms are typically underestimated over interesting time horizons.

💸
👐🏻

So what does all this mean for our automatic pinsetter?

Cost-decline: ✅
(technological unemployment for pin-boys!)

BUT

Cross-sector: ❌
(narrower than a 3.5 foot maple lane)
Innovation spawning: ❌
(More pins? Fewer pins!? Chess/bowling hybrids?!?)

Using these criteria, you too could have avoided the bowling bubble (or so I'd like to hope.)

(And yes, the hallucinated experience of Lebowski in that video roughly approximates the emotion-set of an investor who leans into a mania.)