World Economic Forum 2016: Who will win in the Fourth Industrial Revolution?

The theme of 2016's World Economic Forum is the Fourth Industrial Revolution. What is it, and who will benefit?

Last week, the world watched keenly as the World Economic Forum took place in Davos, Switzerland. A veritable who’s who of the world as a whole, attendees ranged from giants of industry to government officials to globally renowned entertainers. One common thread sewn into the fabric of this year’s event was the way disruptive technologies have ushered in the Fourth Industrial Revolution.

For some background, the first revolution was the development of steam engines and creation of mechanical manufacturing, while the second expanded on the first with ubiquitous electricity, allowing for mass production to be achieved in factories the likes of which the world had never seen. The world has just emerged from the third, where the advent of information technology improved worker productivity to new heights. If the buzz at Davos is to be believed, the fourth industrial revolution is currently underway, being driven by concepts such as advanced Artificial Intelligence, Big Data, the Internet of Things, and their ilk.

Klaus Schwab, the founder of the WEF, wrote a report on what such an advancement means for humanity. His conclusions are that, as with the prior three industrial revolutions, the one we are entering into will be wildly disruptive. We are already seeing its effects in various areas of our lives, from transportation to entertainment to financial services. And, similar to its elder siblings, this massive force for change brings about major opportunities for people with the right ideas and skillsets.

Disruptive Startups

The first such opportunity belongs to startups, who have largely been the drivers of disruption so far. Massive amounts of processing power and equally daunting amounts of data are available to virtually everyone on the planet, thanks to the internet. Coding allows these resources to be manipulated by a relatively small group of people, whereas the large companies of former revolutions required large amounts of human capital – someone had to run the factories to build the widgets to be sold.

Today, anyone with an idea and the ability to code has the potential to build a company that upends an established industry, or create an entirely new one. Facebook was started by Mark Zuckerberg in his dorm room and Sean Parker started Napster at the age of 20, whereas Henry Ford required workers to man his assembly lines. All three were revolutionary in their own way, but the resources needed to start Ford in the early 20th century far outstripped those to start what is now the world’s largest social media company or to spark an upheaval of the entire music industry in the early 21st century. The potential for a nimble startup to exploit market niches faster than ever before means these companies can become major players at a mind-boggling speed.

Forward-thinking investors

Investors are the next group with a massive opportunity ahead of them. Obviously, not everyone has the required skills or vision to be the architect of a game-changing unicorn company, but a shrewd investor with the foresight to recognize the value of an idea and accurately identify future trends can provide the physical capital needed to bring these ideas from pie in the sky to dominant market forces. This can be fraught with danger: everyone remembers the dotcom bust of the early 2000s. A frothy market with sky-high valuations combined with the gnawing fear of missing out can turn a smart investor into a fool who has been parted from his money.

However, those that keep their cool, do the due diligence work, and using their expertise, contacts, and resources to enhance the original ideas seem to have found a formula for massive success. From Dr. David Cheriton’s prescient angel investments in Cisco, Sun Microsystems, and, perhaps most famously, Google (now Alphabet), dating as far back as Matthew Boulton’s partnership with James Watt in 18th century England to develop the steam engine, early venture capitalist investments in companies on the cusp of such revolutions have been some of the most successful in history.

The big dogs

Although it seems contradictory, larger companies also stand to benefit from these disruptive forces. Not all industrial stalwarts are lumbering dinosaurs of a previous age, waiting to be slain – many have a history of recognizing and reacting to changes in their industries. While these changes come faster and more often than ever before in history, they can be managed and taken advantage of by established companies. If management acts appropriately, they can greatly benefit both the startups and their shareholders. 2015 set a global record for M&A activity, and joint ventures between companies both big and small are becoming increasingly popular, both scenarios allowing the significant experience and resources of large cap companies to considerably speed the process for development and execution of a small company’s grand ideas.

Large businesses undergoing a transformation in response to market trends can be very effective – IBM spun off their hardware division to focus on software, while Google/Alphabet is notorious for acquiring small companies to improve their own product offerings. Perhaps the biggest transformational success story is Apple, whose move from personal computers to mobile computing, first with iPods and eventually with iPhones and iPads, has produced astronomical returns for shareholders. This, of course, was a direct result of them acquiring NeXT and, with it, Steve Jobs. These transformations require gutsy management and visionary executives to pull off, but the payoff can be well worth the risk if executed correctly.

The Fourth Industrial Revolution clearly brings many challenges to the table, but with them, a multitude of opportunities for a wide range of potential players. Those among us with the skills, tenacity, and drive have the chance not only to create enormous amounts of wealth, but to change the world for years to come.

Kevan Hartford

Kevan Hartford is a Toronto-based finance professional working in asset management.