3 Keys to Investing in Emerging Industries

In my relatively short time at The Motley Fool, I've covered the boom and bust of a few emerging markets that had investors excited for one reason or another. Electric vehicles were hot for a while, solar has gone from boom to bust, and now 3-D printing seems to be the coolest thing since sliced bread.

Sometimes new technologies and industries are great investments, but I've found that the majority of companies that have been hot at one time or another eventually crash back to earth. Here are three key points to consider when looking at emerging industries.

The best technology doesn't always win
One thing that is clear throughout history is that the best technology doesn't always win.

In the '70s and '80s, there was a battle for the future of home video between Sony and JVC. Sony's Betamax was a superior product to JVC's VHS, but the lower cost of VHS machines and a longer playtime helped VHS eventually take the market.

In recent years, A123 Systems thought it had a superior technology to Ener1, Valence Technology, and even Tesla Motors (Nasdaq: TSLA) in the battery market. But sometimes it's more than technology that determines success. In solar, we've seen CIGS, amorphous silicon, and countless other "superior" technologies fall by the wayside, while the standard old crystalline silicon continues to dominate the market.

There are always other factors to consider beyond technology, such as cost and the partners a company is working with. Just because a technology is amazing doesn't mean that it will be a success, as many investors have found out.

Wait for profits
One of the biggest challenges may be waiting until an emerging industry is sustainably profitable.

Companies like Pacific Biosciences, MAKO Surgical (Nasdaq: MAKO) , EnerNOC, and Zipcar were all incredibly cool concepts, but the companies never had consistent profits. Over the long term, red ink on the bottom line leads to red ink in your portfolio. MAKO in particular seemed to be on a profitable path in a growing industry but has been tripped up on its way to profitability. For a further look into the company's challenges, check out our premium report on the stock.

We can even look back to the Internet/tech bubble of the late '90s as a classic example of a time when investors needed to wait for profits. Very few of the companies that came public during that time were profitable, and even fewer are still around today. A few that did survive, including Yahoo!, AOL, and Cisco, were profitable at the time.

Partnerships matter
Not many companies can build success all on their own. Most rely on a partner or a group of partners for success.

This was illustrated in the VHS vs. Betamax battle, and again when Blu-ray was battling with HD DVD a few years ago. Suppliers and customers ended up playing major roles in who won these battles -- not just technology.

In video games, it's the game developers that hold the key to success. Remember the Atari Jaguar or Sega CD? These consoles were dominated by Nintendo and Sony and eventually forgotten.

Early in Google's existence, itpartnered with AOL to provide search and paid results to AOL properties. Without this partnership, who knows if Overture -- the previous supplier -- or Inktomi may have become bigger players in search, while Google became an entirely different company.

Powerful partners, either on the supplier or customer side, can be the difference between success and failure for emerging companies.

Emerging industries today
The companies we're hoping to emerge today face the same challenges, and we should keep the same lessons in mind.

In electric-vehicle manufacturing, partnerships matter more than anything, but even that doesn't ensure success. A123 Systems and Ener1 had great partners and high hopes but never made a profit -- one of the keys I pointed out above. Even industry leader Tesla Motors falls short on this account. Tesla has solid technology and customers like Toyota to give it a lift, but until it reaches profitability, investors are still taking a big risk.

In 3-D printing, 3-D Systems (NYSE: DDD) is profitable and has great technology, but customers can move from one technology to another with ease. This poses a challenge, and there aren't any clear partners that would mitigate the company's risk going forward.

In solar, it's becoming clear that SunPower's superior efficiency is important, and it is majority-owned by Total, a crucial partner. But the company isn't sustainably profitable yet, so investors without a high risk tolerance (like me) would be wise to wait. First Solar (Nasdaq: FSLR) , on the other hand, is profitable and has many great customers, but its technology is lacking -- a major obstacle in this industry and a reason its stock has fallen. But the former solar leader may still have a future, which I dive deep into in our premium report on the company.

Foolish bottom line
Emerging industries provide incredible growth opportunities but also big risks for investors. Looking for companies with strong partners and profitable operations will mitigate the risks for patient investors. It's also important not to fall in love with a technology. This is the death trap for many highflying companies.