The Gorilla Game: An Investor's Guide to Picking Winners in High Technology

The Gorilla Game: An Investor's Guide to Picking Winners in High Technology

by Geoffrey A. Moore, Tom Kippola, Paul Johnson
     
 

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The possibilities are staggering:

  • Had you invested $10,000 in Cisco Systems in early 1990, your investment would not be worth $1,285.000.
  • Similarly, a $10,000 investment made in Microsoft in 1986 would be valued at more than $1,800,000 today.

How do you get in on those deals — especially if you're not a Silicon Valley insider? How do

Overview

The possibilities are staggering:

  • Had you invested $10,000 in Cisco Systems in early 1990, your investment would not be worth $1,285.000.
  • Similarly, a $10,000 investment made in Microsoft in 1986 would be valued at more than $1,800,000 today.

How do you get in on those deals — especially if you're not a Silicon Valley insider? How do you buy the high-tech winners and avoid the losers? How do you find the Microsofts and Ciscos of tomorrow?

The answers are here, in The Gorilla Game. All you have to do is learn the rules. The Gorilla Gameÿ reveals the dynamics driving the market for high-tech stocks and outlines the forces that catapult a select number of companies to "gorilla" status — dominating the markets they serve in the way that Microsoft dominates software operating systems and Cisco dominates hardware for data networks.

Follow the rules of The Gorilla Gameÿ and you will learn how to identify and invest in the "gorilla candidates" early on — while they are fighting for dominance in their markets and while their stock is still cheap. When the dust clears and one company clearly attains leadership in its product category, you'll reap the enormous returns that foresighted investors in high-tech companies deserve.

The Gorilla Gameÿ is the latest from bestselling author Geoffrey A. Moore, one of the world's leading consultants in high-tech marketing strategy. Here you'll find the ground-breaking ideas about technology markets that made his previous books bestsellers, combined with the work of Paul Johnson, a top Wall Street technology analyst, and Tom Kippola, a high-tech consultant and highly successful private investor. Together they have discovered and played the gorilla game and now give their readers the real rules for winning in the world of high-tech investing.

Step by step you'll learn how to spot a high-tech market that is about to undergo rapid growth and development; how to identify and spread investments across the potential gorillas within the market; and how to narrow your investments to the single, emerging leader — the gorilla — as the market matures.

Editorial Reviews

Booknews
Two venture capitalists and a marketing consultant, all specializing in hi-tech companies, proffer a somewhat counter-intuitive approach to investing in hi-tech industries. After finding a market that is in transition into "hypergrowth" (such as consumer software in the mid 80's), and after buying a basket of stocks representing companies in that market, their advice is to wait...until one company starts to build a lead. Then sell all the monkey stocks in the basket and buy more of that gorilla, which should grow to dominate the market and increase in stock price by many fold. The authors say this strategy of consolidation (which opposes the well known investor maxim to "Diversify! Diversify!") actually reduces risk because hi-tech markets tend to be dominated by one Gorilla while competitors monkey around the margins.
Annotation c. by Book News, Inc., Portland, Oregon
Robert Cardwell
This new book is a must read for growth investors. Forget everything you know about investing -- at lease when it comes to technology. That's the lesson from an astute new book that shows what's behind the sometimes puzzling performance of the group. Most investors know that tech stocks offer the best growth available. But they also know that such stocks can be dangerous, and many have been burned. How do you know which companies are going to be the giant winners with multi-year growth trends? That's the subject of this book, The Gorilla Game, by Geoffrey Moore, Paul Johnson and Tom Kippola. These authors bring to the game an unusual combination of credentials -- practical and successful investing , academic experience and consulting work with some of the largest tech firms. So they have been able to summarize and explain the essence of technology investing better than any other attempt we have seen.
-- Smart Money Newsletter published by HirschOrganization.com

Product Details

ISBN-13:
9780887308871
Publisher:
HarperCollins Publishers
Publication date:
03/11/1998
Pages:
352
Product dimensions:
6.12(w) x 9.25(h) x 1.13(d)

Read an Excerpt

Why Is High Tech Different?


First of all, it is not the bits and bytes that make high tech so special, so you don't have to be technical to understand what is going on. Instead, as we will explain in detail in the next chapter, it is the discontinuous innovations that make the difference. Innovation is a concept we are all familiar with—new stuff makes us happy, we buy it, sellers sell it, it's called an economy. Discontinuity is the new idea. It means not compatible with the existing systems. Electric cars, video telephones, and Web TV, for example, all make exciting promises, but none of them can be used without much of the world changing the way they do business. Prospective customers are attracted to the compelling new benefits, but to get them, a whole lot of existing systems will have to change. That creates a battle in the marketplace whose outcome is uncertain.

Sometimes the battle is lost, and the proposed discontinuous innovation simply disappears. The technology lives on, to be sure, finding its way into other products in a later decade, but the products themselves go to that same burial ground wherein lie the eight-track tapes, laser disc stereos, videophones, and pen-based laptops of yesteryear. Other times the battle is won, but only inside a few niche markets. The established vendors retreat grudgingly, giving up to the new paradigm a defined space, but no more. This is how IBM dealt with Apple's Macintosh's innovations in graphics, how Sun treated Silicon Graphics' work in 3D imaging, and how Digital Equipment Corporation responded to Tandem's nonstop fault-tolerant computing. If these niche markets are as far as the innovations get,if the traditional technologies can hold the line, the establishment breathes a sigh of relief. No new market, no major shift in power, just more business as usual. For the establishment, this is good.

But at other times, the technology leaps out of its niche markets and into the mainstream. It becomes a mass market phenomenon the way PCs, local area networks, laser printers, relational databases, cell phones, voice mail, and electronic mail all have since 1985. When this occurs, a massive shift in spending accompanies it, with a whole new set of vendors coming out of nowhere to produce stunning economic returns. That is, it is not just a new market coming into existence but also a whole new system of commerce to support that market. Business schools call these systems value chains or supply chains—an interdependent collection of companies working together to assemble the various product and service offerings needed by the new market. It is a revolution, and typically it does not favor the establishment, which historically has tried to resist rather than coopt new technologies. Instead, it throws into prominence a whole raft of new companies that suddenly appear on investment analyst charts because they have begun dramatically outperforming the rest of the stock market.

So that is how a high-tech boom gets going. But why a boom? Why not just a modest growth gradually displacing the old with the new over time?

The answer has to do with the dynamics of change, specifically the dynamics of the Technology Adoption Life Cycle, and more generally the dynamics of evolution and the idea of punctuated equilibrium. In dynamic systems—a term that describes both ecologies and marketplaces—change does not happen linearly. Instead, systems plateau and resist change until enough stress builds up to break the old system and bring in the new. The actual changeover happens in very short order as the systems race to a new plateau where they can again stabilize and start the cycle all over again. This period of rapid change is called hypergrowth, and it happens only once in the history of any particular species or market.

From an economic point of view, when hypergrowth hits, the market simply explodes. Companies in hypergrowth markets experience revenue and earnings growth that goes through the roof—30% to 40% quarter-over-quarter growth is not untypical. Stock prices catapult as the market tries to catch up to what is a seemingly never-ending sequence of upside surprises. This catapult effect is the basic attraction of investing in high tech and the beginning of anyone's interest in the gorilla game.

Not Smooth Sailing

The problem for investors, of course, is that this period of change is chaotic—literally. Chaos, as it has come to be defined, is a property of dynamic systems. Its central principle is that essentially insignificant differences at the outset create hugely different consequences later on, and there is no way to rationally predict outcomes based on inputs. Why did IBM mainframes win and not Burroughs, or Univac, or NCR, or Control Data, or Honeywell? Why is Microsoft Windows on our desktops and not Unix or Macintosh or OS/2?

These are not academic questions. As the tables shown earlier in this chapter indicate, you can easily lose the bulk of your capital by investing in the losers in these competitions. Indeed, the volatility of high-tech stocks is so dramatic that, in the absence of a framework such as the one this book provides, private investors have typically, and we would argue rightly, shunned the sector. What else can you do in markets where, when a company misses its revenue projections by a few percentage points, it is routine for their stocks to lose 30% or 40% of their value in a single day? So, once again now, why is it Intel's microprocessors instead of Motorola's or National Semiconductor's or MIPS' or Sun's SPARC or HP's PA RISC? Why is it Oracle and not Ingres or Sybase or Informix?

At one level, there is no good answer to these questions. If there were, we could predict the winners from the outset, and instead of writing this book, the three of us might be sipping Chateau Margaux atop a penthouse on the Via Tornabuoni in Florence, contemplating which continent we should cruise to next. The fact that we are not shows that we have no way of knowing the winner at the outset. But just as the TV news networks covering national elections can declare the winners long before the last votes are in, so there are ways of predicting the outcome of hypergrowth market competitions early in the game. This we believe we do know how to do, and we will share this knowledge in detail in the chapters to come.

What People are saying about this

Donald T. Valentine
To understand the mystique of Silicon Valley, this is a must-read.
Alfred R. Berkeley
High-tech is a particularly treacherous area for investors. The Gorilla Game gives investors a powerful framework within which to develop investment strategies.
Sandy Robertson
800 pounds of good investment advice! I wish I had had this book and its investment philosophy twenty years ago.
John T. Chambers
Recommended reading for private investors hoping to understand the dynamics of high-tech markets and identify the winners.
Roger McNamee
This is the first great book written about technology investing in the 1990s. It is an absolute must-read for anyone who wants to invest in technology stocks -- portfolio managers, venture capitalists, investment bankers, and anyone else interested in the technology industry.
Bill Gurley
There are many high-quality books on technology markets and many on financial markets. However, The Gorilla Game is the first book to accurately bridge both disciplines. The combination is potent. Do not invest in tech stocks without reading The Gorilla Game.
William H. Davidow
I wish I had read this book sooner. I would have held on to the winning investments longer, gotten rid of the losers sooner, slept better at night, and made a lot more money as well.

Meet the Author

Geoffrey Moore is chairman emeritus of three consulting firms—The Chasm Group, Chasm Institute, and TCG Advisors—all of which provide marketing strategy and organizational advice to leading high-technology companies. Moore is also a venture partner with Mohr Davidow Ventures, a California-based venture capital firm specializing in specific technology markets, including e-commerce, Internet, enterprise software, networking, and semiconductors.

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