Three Phases of Exponential Technologies

FOUNDATIONAL PHASE

During the foundational phase, only hardcore enthusiasts invest time or money in the technology. These are the people who couldn’t stop talking about the internet in 1993, Facebook in 2006, Bitcoin in 2012, AI in 2017, and COVID-19 in January 2020.

The technology doesn’t work well in the foundational phase. Most companies get more immediate ROI from other investments. Improvement happens very slowly. Most people who learn anything about these young technologies are skeptical. Often the skeptics are correct about the details, if not about the technology’s overall growth capacity.

During the foundational phase, the course of exponential technologies is extremely difficult to predict. Many technologies never bear fruit, despite the hope and hype they sometimes engender. I was once an enthusiast for virtual worlds, nanotechnology, the semantic web, and personalized medicine. None of these ideas achieved exponential growth in the timeframe I expected, and my investments in them amounted to nothing.

But you and I don’t need to kick ourselves if we didn’t buy Amazon stock in 1997 or Bitcoin in 2013. Hindsight bias causes us to think, “I knew it all along!” But in reality identifying exponential technologies in the earliest phase is often a matter of luck.

Technologies in the foundational phase are the domain of venture capitalists, startup founders, and corporate innovation programs. It just isn’t practical (or necessary) for most companies to make significant bets on them.

TRANSFORMATIONAL PHASE

The battle for dominance and survival happens during the transformational phase. During this phase, the technology’s potential starts to take shape as companies report early, narrow success stories. Venture investment in the space accelerates even as new problems emerge. The technology precipitates conferences, new kinds of job descriptions, and news stories.

Leaders begin advocating for more investment in the technology. As early results roll in, they can foresee the opportunities—and the risks—that the technology creates. But skepticism still abounds. The technology doesn’t work well yet, and companies that aggressively invest too early produce high-profile failures.

The people who are most educated about the technology are often the most skeptical. They’re closest to the problems and see what appears to be only linear progress in the day-to-day struggle for improvement. This reaction is perfectly reasonable. Figure 1 shows that the initial shape of the exponential curve appears linear. The hype of the foundational phase subsides as reality hits home—the transformational phase is a battle against a host of formidable obstacles.

Companies begin taking divergent paths during the transformational phase. Some CEOs and boards accelerate their investment in the technology based on emerging opportunities or threats. Others make minor investments in pilots and marketing to create the perception of innovation. Most take a wait-and-see approach, mistakenly assuming that they can “fast follow” after the leaders pave the way.

Almost everyone expects continued linear progress. Very few recognize the moment when that growth line begins to veer so steeply upward that they risk losing their footing in the market.

ABUNDANCE PHASE

At some point the exponential technology suddenly and dramatically diverges from linear progress. The moment that everyone realizes what’s happening, the game is already over. The cost of entry spikes as the laggards try to catch up. New competitors appear seemingly out of nowhere. Stock prices fall. In some cases, entire industries collapse and society is rocked from the shock. CEOs are fired and the next Elon Musk or Steve Jobs is catapulted from the realm of evangelist to cultural icon.

Outsiders react to the abundance phase predictably: “It happened so fast!” But they’re wrong. They just didn’t realize that they were following an exponential curve with brains that evolved to predict only linear progress.

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