Why technology is the big advantage for small companies

Technology once presented a major barrier to entry and often stifled competition. So what changed? We see the explosion in the cloud as a catalyst for why we believe small companies represent an attractive area of investor opportunity.

I was working as a Technology Consultant around 20 years ago and the issue of the day was the lead up to the millennium date change, or Y2K and it was a big deal in the technology world.

Companies, stricken by fear that the technology lights would go off, were spending up big on the latest corporate computing infrastructure of the day. The stock market darlings, IBM, SAP and Oracle were the solution of choice to the Y2K problem. Back then it was a corporate badge of honour to have a multi-million-dollar tech project underway.

The cost of these platforms meant it was difficult for a small company, even if it had a revolutionary idea or a better way, to take on entrenched deep-pocketed incumbent competitors.

Technology once presented a major barrier to entry. The price of market access was just too high. Instead of enabling competition, technology had a way of stifling it.

Now the tables have turned, and it’s why today small companies, we believe, represent an attractive area of investor opportunity.

So what’s changed?

In two words – the cloud. It’s the availability of key technology building blocks, as a service, in the cloud.

What’s the cloud? The very short answer is the technology advantage of the multi-million dollar IT project is available today, utility fashion, just like electricity. That’s right, you switch it on when you want it, it’s available everywhere – where there’s a (telecom) network – you can consume as much you want, whenever you want it, and switch it off when you don’t. Paying only for what you use.

Today’s electricity companies are Microsoft and Amazon, amongst others, they are the technology power stations of a small company today. And that’s a game changer.

What’s the advantage for smaller companies?

Small companies can get their ideas to market today like never before, but they are also unencumbered by legacy technology created for a time that has passed. They are much nimbler.

Creating products and services, launching them fast, learning from their failures in real-time, adapting and going again, happens in a way that big companies can only dream of. Elephants rarely dance.

It’s not just about taking on the incumbent for market share in existing markets. The ready availability of low unit cost of technology is giving rise to new opportunity too, we call them micro-vertical opportunities.

The past technology economics rendered some opportunities as un-viable as the markets were just too small to justify the high capital and ongoing cost required for access. The technology economics of today however mean these present interesting opportunities. These are occurring domestically, specific to Australia, and some are maturing fast enough to justify a go at taking their idea overseas. Just think about AfterPay.

We see this happening regularly in our small-cap investment universe, and not just tech companies, but many small industrials taking advantage of a technology environment available to them in a way that big competitors can’t.

Our process at Montgomery is built to look for small-cap sustainable growth companies, poised to take advantage of this shift in the technology landscape, at an early or emerging stage of their lifecycle.

Sustainable growth companies require vision to see what the future may hold – but before we invest – we apply our process and experience to look for firm foundations of a company’s competitive advantage, its strategy and management team’s capability to deliver. We need to be satisfied they can harness the potential of the value creation journey which will benefit our investors.