Are Disruptors worth the Investment?

Lots is made out of the term “disruptors”. If you want to have your company valued at high multiples above the norm, then the playbook is to slap this term on your product or service.

There are ETFs like ARK invest that claim to actively track and invest your money in “tech disruptors”. There are giant venture capital funds scouring Silicon Valley and various tech centers throughout the world for the next big thing.

WeWork had a peak valuation in 2019 and was set to go public in an IPO at 47 billion dollars before it all fell apart, collapsing to about 3 billion in market cap today. Investors were duped into thinking this was a tech company instead of a slower growth real estate management company because technology was sited continuously in their pitch. They did utilize technology, but ultimately, they did not have the margins, lower overhead and freedom from the limitations of physical world challenges that things like software have. By nature, it was more of a linear business dressed up to resemble a high growth tech company.

This tactic has also been used in companies ranging from mattress d2c companies to glasses retailers. I want to use a notable list that is compiled each year; CNBC’s “Disruptor 50” to look at how fads and wishful thinking in regard to the business growth of pseudo disruptors is incorporated into the way people think of who is and isn’t a true disruptor.

Many of these companies’ stories are far from over so we cannot truly know if they will disrupt the areas that they do business, but I would like to try to make some analysis of their performance years later from their IPOs and see if their hypothesis is playing out and which sectors really seem to actually outperform and be better investments in the long term.

While CNBC has released a list of companies for 2022, it is early to draw any conclusions, and none of these companies have filed to go public yet. We will start with 2021 companies and go back to the beginning of CNBC beginning this list. They have made changes to the way they compile their list over time but the selection each year seems to be an interesting snapshot of the market at that time and what businesses are grabbing public attention and imaginations.

The percentages up and down are from the company becoming publicly traded as a stock. Some have done well, and many have done poorly. As we are currently in a recession some have been penalized much more than others for others based off their growth multiple, lack of profitability, risk and debt.

How to use the “Disruptor Performance since IPO” quadrants chart

2021

Robinhood markets: -75%

SentinelOne: -40%

Marqeta: -78%

Clear Secure: -37%

Nu Bank: -56%

Too Early to tell, Sentinel with Cybersecurity and Clear could rise from the recession

2020

Coupang: -71%

Coursera: -70%

SoFi: -44%

Doordash: -66%

Grab: -74%

Lemonade: -55%

Root: -97%

GoodRX: -81%

Affirm: -50%

Dave: -95%

Butterfly: -42%

C3.ai: -81%

Snowflake: -20%

AirBnB: +65%

Duolingo: -34%

Ginkgo Bioworks:-74%

UI Path: -74%

Out of many, one. I guess AirBnB is the Marine. Snow with potential

2019

WeWork: -58%

Rent the Runway: -77%

Peloton: -62%

Progyny: +208%

Skillz: -86%

Palantir: -20%

OpenDoor: -57%

23andMe: -65%

Progyny looking pretty “fertile” compared to the others

2018

Uber: -32%

Coinbase: -73%

Oscar health: -80%

Payoneer: -35%

Adyen: +150%

RealReal: -89%

Crowdstrike: +471%

Pinterest: +21%

Luminar: -12%

Crowdstrike and Adyen dominate and Pinterest outperforming many other social platforms

2017

Moderna: +522%

Bloom: +39%

MongoDB: +971%

Qualtrics: -71%

Domo: -13%

Spotify: -34%

Dropbox: -23%

Docusign: +53%

Blue Apron: -93%

Warby Parker: -76%

MongoDB and Moderna crushing it, Docusign holding up and Bloom looking interesting

2016

Snapchat: -26%

Cloudflare: +256%

Lyft: -79%

Okta: +277%

Twilio: +142%

Okta, Cloudflare and Twilio to the moon!

2015

Pure Storage: +143%

Block (formerly Square): +175%

Nutanix: -17%

Draft Kings: 0%

Nextdoor: -68%

Block (formerly Square) and Pure Store have held up

2014

Etsy: +565%

Zuora: -59%

Chargepoint: +58%

Yext: -66%

Lending Club: -54%

Redfin: -67%

Bill.com: +350%

Major winners have been Etsy and Bill.com

2013

Atlassian: +611%

Box: +45%

Buzzfeed: -84%

Shopify: +240%

Twitter: +152%

Atlassian and Shopify have been the major winners so far from this class

Some inferences from examining these performances.

“My Do’s”

• “Best in class”, broad-based enterprise software seems to hold up well. Is the software solving a major problem, have high switching cost, and high margin? Are there many competitors and is it really that much better than what is already out there?
• Social does not seem to be a highflyer performer, stay away from 3rd party advertising social and look more at direct intent social like Pinterest where your intent is shown by the products you are directly browsing. Pinterest also is less political and apt to have free speech and bot/fake news issues which are costly.
• Ecommerce Marketplaces (multivendor)platforms can make great investments but stay away from direct-to-consumer products disguised as disruptors.
• In hindsight it is great to invest in a successful vaccine maker before a pandemic!
• Cyber security, renewable energy and a platform that offers affordable travel experiences make good investing themes for our era.
• Products and services that back up long term trends and demographics.
• The greater the problem, the better the investment potential!

“My Don’ts”

• Investing in traditional, linear media (not a disruptor!)
• Capital heavy companies, heavy real-world cost in materials and labor
• Companies claiming to reinvent something that is going away anyway
• Businesses heavily tied to an economic cycle
• Invest in most social media
• “Number 2 or 3” companies in their industry (winners keep winning, losers usually keep losing, ride your winners!)
• Food delivery and rideshare
• Industries I don’t understand (for me- medical)
• Unproven business models (market fit) and science (unless just speculative)
• Products and services you wouldn't use.
• Investing in concepts too early.

Some companies just don’t work as a standalone business. Some owners’ plan from the start is to sell to roll up in another business. You can still make good money in these businesses when they sell. Maybe they will go on to help another business “disrupt” their industry.

Aquired “Disruptors”:

Whats App- by Meta/Facebook in 2014

Slack- by Salesforce in 2020

Waze- by Google in 2013

Tumblr- by Yahoo in 2013

Skybox imaging- by Google in 2014

SimpiVity- by HPE in 2017

OUYA- by Razor in 2015

Nexmo- by Vonage in 2016

Nest Labs- by Google in 2014

Makerbot- by Stratasys in 2013

Kabam- by Netmarble in 2017

Genband- by Sonus in 2017

Fullscreen- by ATT in 2014

Dollar Shave Club- by Unilever in 2016

Brightroll- by Yahoo in 2014

Birchbox- by Viking Global in 2018

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Written by: Mike Satoshi

Audax Health- by United Health Care in 2014