For fun and edification, I keep a list of those tech innovators and products that have had the biggest impact on my life. Near the top of the list is Dan Bricklin and Visicalc. As a graduate student in finance in the 1970s, I had to do discounted cash analyses of the type presented in this blog – but I had to do by hand on paper. Every time a number was changed, I had to recalculate everything. The work was so boring and cumbersome that I generally resorted to approximations and rules of thumb as did most other analysts.
Then in November 1979, everything changed. Dan Bricklin’s new software program, Visicalc, went on sale for the Apple II. The software turned the screen into an electronic ledger that we now call a spreadsheet. Suddenly recalculating an entire discounted cash flow model amounted to nothing more than hitting the return key.
Initially, Visicalc, which was sold by Visicorp, was an immense financial success and it helped drive the sales of the Apple II. But when the IBM PC was released in August of 1981, Visicalc missed the boat. It was not ready to port its software to the PC and a new, more complete program, 1-2-3, developed under the direction of Mitch Kapor was waiting in the wings. In short order, 1-2-3 became the best-selling personal computer software in the world. It was so successful that Bill Gates allegedly contacted Mitch Kapor and offered to merge Microsoft with Kapor’s company, Lotus development, on an equal basis. Kapor rejected the offer. In response, Gates terminated work on the existing Microsoft spreadsheet, Multiplan, and threw his development efforts behind a new spreadsheet called Excel to be introduced on the Macintosh computer and to have a graphical user interface. As the world moved to graphical operating systems, 1-2-3 fell behind Excel and was eventually discontinued. Excel entrenched itself as the dominant spreadsheet and, as part of Microsoft Office, has maintained that position for more than thirty years. The question of how Microsoft was able to maintain that dominant position, I leave to management strategy experts, but I know what it was not. It was not being first, it was not being the most innovative, and it was not being most disruptive.
The Visicalc story highlights something every investor should bear in mind. The breakthrough innovation was Visicalc and the major disrupter was Visicorp. Next in line were 1-2-3 and Lotus Development. Microsoft and Excel were Johnny come latelies that basically built off the previous innovations. But it was Microsoft that somehow produced the barriers to entry that allowed it to become an entrenched product. And it was Microsoft that created most of the investor wealth associated with the production of spreadsheet software.
The Visicalc story illustrates the grave dangers of investing in current tech innovators on the grounds that as first movers and disrupters they will eventually have commanding market shares that will allow them to produce enormous free cash flows for equity investors. And the Visicalc story is by no means unique. Most of the initial disrupters that were part of the original 1990s dot.com boom were gone by 2002. The ones that became massive, market dominating successes like Amazon, were few and far between. The simple fact is that initial disrupters are as susceptible to being disrupted as the staid older firms they are disrupting. But the initial disrupters trade at much richer prices.
That brings us to some current examples that make the Cornell Capital Group list of bubble stocks. The example that we have discussed most frequently in this blog is Tesla. There is no question that Tesla was an innovator and a disrupter in showing that electric cars could be produced and sold on what has approached a profitable basis. I have owned three Teslas since the company began selling electric cars and agree with Mr. Musk that they are an important innovation, though not on the level of Visicalc in my personal experience. But there a lot of potential Microsofts in the automobile industry that are beginning to respond. For this reason, it is Cornell Capital’s opinion that from an investment standpoint Tesla stock does not deserve to command the premium price at which it trades relative to other automobile manufacturers. Another example is Beyond Meat. There is little doubt that meat substitutes have a big future due both to health considerations and to the high resource costs of producing meat. That does not mean that Beyond Meat justifies a sky-high valuation. The food production business is highly competitive and Beyond Meat’s innovation is not in the same zip code as Visicalc. If meat substitutes become a hot product, it is highly likely that another Microsoft is lurking out there.
The fundamental message of the Visicalc story is that the impact of and the value of a new technology should not be confused with the value of the company that first introduces that technology. The stories used to rationalize sky high valuations of companies like Tesla and Beyond Meat often revolve around the product – electric cars are the wave of the future, we will all be eating meat substitutes – not around the reasons why the first movers, Tesla and Beyond Meat, will become dominant and profitable producers of those products. As a finance professor, there is no question that the electronic spreadsheet has changed my life and the life of every student that I teach, but virtually none of my current students have ever heard of Dan Bricklin or Visicalc.
Bradford Cornell, Cornell Capital Group
Anderson Graduate School of Management, UCLA