What is 'Bleeding Edge'

Bleeding edge refers to product or service, usually involving technology, that very few customers use because it is very new. Bleeding edge is newer and more extreme than technologies on the leading edge or cutting edge. These new and untested offerings come with uncertainty and, in some cases, unreliability. As a result, a consumer might be "cut" by using such a new product if it fails to gain market acceptance.

For this very reason, some companies market their products as cutting edge as opposed to bleeding edge, to convey a sense of reliability and rigorous testing.

BREAKING DOWN 'Bleeding Edge'

The U.S. military uses bleeding-edge semiconductor technologies in its newest warplanes, battleships and missiles, as well as ones under development. The technologies tend to be very expensive to build, especially at first. However, the chips typically are more powerful and advanced than those used in consumer applications. Over time, the military works out the bugs. Eventually, these technologies tend to find their way into consumer applications.

Of note, the internet more or less developed this way; the U.S. Department of defense  funded a project called the ARPANET that sent the first message over an internet-like network in 1969, and related technologies such as packet switching came along in subsequent years. At the time, internet networking was a bleeding-edge technology.

Businesses that purchase bleeding-edge technologies that later become widely adopted get a first-mover advantage if the technology later becomes mainstream. However, they run the risk of sinking money into something that might not function properly. Moreover, there’s a risk that other customers never buy the same technology, causing the supplier to go out of business. Another risk is that a new and better technology comes along that becomes a far-bigger hit.

This presents businesses with difficult choices. Some choose to split the difference and instead spend on leading-edge technologies or fairly early mainstream technologies.

Investing in ‘Bleeding Edge Companies

Investing in bleeding-edge companies is difficult in some industries, because companies offer more-mature products by the time companies are ready to go public. Exceptions are very small-cap companies, many of which seek funding through the equity markets to develop untested products. Some of these investments carry extraordinary stock-specific risk, as it’s not clear their products will work. Also, the companies may have weak balance sheets.

For example, preclinical drug development, which involves collecting some of the earliest drug-safety data, is very much on the bleeding edge. At this point in the process, there’s typically some evidence to suggest a compound may work. However, drug companies don’t know much about side effects, or even the proper dosage for a prospective patient. Drugs companies need to test far more, often many more years, before they even think about applying for a new drug application.

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