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Howard Gold's No-Nonsense Investing Archives | Email alerts
April 13, 2012, 12:02 a.m. EDT
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By Howard Gold
NEW YORK (MarketWatch) "” This week the news broke that electronics giant Sony /quotes/zigman/197524/quotes/nls/sne SNE -7.15% planned to lay off 10,000 people, 6% of its work force.
Last week, Internet portal Yahoo /quotes/zigman/59898/quotes/nls/yhoo YHOO -0.30% started letting 2,000 people go in another of its endless restructurings.
The week before, Research in Motion /quotes/zigman/18534/quotes/nls/rimm RIMM -3.26% , the Canadian smartphone pioneer, said sales of its flagship BlackBerry phone would continue to drop until at least late this year.
And in January, Eastman Kodak, once a symbol of U.S. technological prowess, filed for Chapter 11 bankruptcy protection.
All these companies were once top dogs.
Sony was the most cutting-edge brand in consumer electronics.
Yahoo had a vast audience which used its email, checked stock quotes and read free news articles.
RIM's BlackBerry was a status symbol in corporate offices and almost an appendage of multitasking soccer moms.
And for decades, Kodak was the brand name in photography and home movies.
But then new players changed the game. So, these once-great franchises are now in deep trouble.
"In every one of those cases, there's been a dramatic disrupter whose actions at the front of the life cycle pushed somebody off at the back of the life cycle," said Geoffrey Moore, a leading consultant and strategist who has written several books about the life cycle of technology companies.
It's called creative destruction, the very engine of capitalism, and nowhere does it operate with more ruthless efficiency than in technology.
It's also what makes tech such a pitfall for investors who want to make big money on huge winners like Apple /quotes/zigman/68270/quotes/nls/aapl AAPL -2.41% , Google /quotes/zigman/93888/quotes/nls/goog GOOG -3.73% or Amazon.com /quotes/zigman/63011/quotes/nls/amzn AMZN -1.20% but often hang on to losers far too long.
So, how do you separate the wheat from the chaff in tech? I contacted Moore, a venture capitalist and chairman and founder of TCG Advisors, for some answers.
In the 1990s he wrote two books"”"Crossing the Chasm" and "Inside the Tornado""”that became the bibles of wannabe Internet moguls and venture capitalists seeking to profit from rapidly growing markets.
Even though the Internet boom and bust are long gone, Moore's principles still hold. He just wrote another book called "Escape Velocity" about how established enterprises can generate growth.
Moore says disruptive technologies "” like the personal computer, the Internet or the cellular telephone "” don't happen overnight; they first go through a long gestation period.
Read Howard Gold's piece on how the new JOBS Act throws investors under the bus at the Independent Agenda.
But if the product takes off, the company enters the hypergrowth phase "” the tornado. That's when firms that are in the right place at the right time can grow like crazy and become the market leader for years to come.
That's a recipe for huge revenue and earnings growth and fat profit margins, especially if a firm has pricing power. Think Microsoft /quotes/zigman/20493/quotes/nls/msft MSFT +0.19% back in the day, or Apple now.
When companies like Google go public at the sweet spot in their growth cycle, they become "gorillas," in Moore's phrase, or "ten baggers," as legendary money manager Peter Lynch called them.
Other top gorillas of the past: Intel /quotes/zigman/20392/quotes/nls/intc INTC -0.42% , Qualcomm /quotes/zigman/77257/quotes/nls/qcom QCOM -2.22% , Oracle /quotes/zigman/76584/quotes/nls/orcl ORCL -0.59% and Cisco Systems /quotes/zigman/20039/quotes/nls/csco CSCO -0.94% .
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