“Never invest in a business you cannot understand.” Those pearls of wisdom come from Margaritaville Wall Street icon Jimmy Warren Buffett, who rarely invests in tech companies and has still done OK for himself. As retail investors in emerging and disruptive technologies, it’s impossible for us to understand everything from gene editing to generative AI. That’s why we focus on the business model – things like recurring revenues and software-as-a–service (SaaS) – and the value proposition. The former boils down to how are you going to make money in a way that is sustainable and scalable. The latter is about why anyone would want to buy your product/service/platform in the first place.
Take the example of Snowflake (SNOW), a company that won over Buffett when it IPO’d in 2020. Did he understand the technical aspects of developing and maintaining digital warehouses where customers store and analyze data. Nope, but the concept was clear enough: Data is the oil that makes the digital world run including generative AI. Snowflake makes it easy to pump that data in and out of the cloud, as well as refining it for an almost infinite number of use cases – just like we take black gold and turn it into everything from diesel to drinking cups. Snowflake offers a unique business model that charges clients based on how much data they use. In turn, customers that value the service validate that business model by driving triple-digit revenue growth and a net retention rate of 151%. Cha-ching
