What it means
The name is the opposite of a sunset industry, which is a mature or declining sector. In a sunrise industry, demand is rising quickly, new firms are appearing and no one is certain which business models or technologies will win.
Customers are often still learning why they need the product, and regulators may not yet have decided how to treat it. For investors and business leaders, the attraction is the chance of rapid growth.
A company that gains a strong position early may grow revenue at rates far above the wider economy for many years. The cost of that opportunity is that many early entrants fail, and profits are often small or negative while firms spend heavily to grow.
Governments sometimes use the term when they choose sectors to support through grants, tax breaks or training. Banks and venture capital firms use it informally when deciding where to lend or invest.
Because the label is subjective, there is no official list of sunrise industries. Analysts judge such a sector with different tools from those used for mature industries.
Revenue growth, market size, the cost of winning customers and the cash runway (how long the money lasts before more funding is needed) matter more than current profit. Valuations often rest on forecasts, so they can change sharply when expectations change.
The nuance is that sunrise industries do not always turn into big, profitable ones. Hype can push valuations far ahead of reality, and a sector can grow in volume while profit remains weak because competition drives prices down.
The sensible approach is to look for evidence of real customer demand and a plausible path to profit.
In practice
Real-world examples.
Example
A venture capital firm backs a company making charging equipment for electric vehicles. The sector is small, but the firm expects demand to grow quickly as more drivers switch, so it accepts losses in the early years.
Example
A regional bank sets up a specialist lending team for drone delivery start-ups. The team assesses each borrower on its customer growth and cash runway rather than on current profit, because the sector is still young. The loan terms include regular reviews, so the bank can adjust its exposure as the borrowers either mature or fall short of their plans.
Example
A government agency offers training grants and tax relief to firms in the vertical farming sector. It considers the industry a sunrise industry that could create skilled jobs, but it asks for yearly progress reports. Firms that miss their hiring and investment targets can lose the support, which keeps public money tied to results.
Formula
Calculation
Compound annual growth rate (CAGR) = (ending value / starting value)^(1 / number of years) - 1
Suppose the market for a new type of home battery was $2 billion four years ago and is now $8 billion. The ratio of ending to starting value is 8 / 2 = 4. Raising 4 to the power of one quarter gives 1.414, because the fourth root of 4 is the square root of 2. CAGR = 1.414 - 1 = 0.414, or about 41.4% a year, which is typical of the rapid growth seen in a sunrise industry.Case study
Seen in the real world.
Lumen Harbour Capital is an illustrative, fictional investment firm that was asked to value a company making devices for remote health monitoring. The sector was young, with sales of $300 million across the industry, and growing at about 35% a year.
The target company had sales of only $12 million and was losing $5 million annually. The analysts compared it with others in the sector on revenue growth and customer retention, and tested what would happen if growth slowed to 20%.
They concluded that the company deserved a premium to a mature business, but not the very high price asked by the sellers. In this illustrative story, the firm made a lower offer with extra payments tied to hitting sales targets, which protected it if the sector grew more slowly than the hopeful forecasts.
Watch out
Common mistakes.
- Assuming a sunrise industry will automatically produce profitable companies, when many firms in a young sector fail.
- Valuing early-stage firms with measures designed for mature businesses, such as a price to current earnings ratio.
- Believing the label is official, when it is a subjective description that different people apply differently.
Questions
People also ask.
What is the opposite of a sunrise industry?
A sunset industry, which is mature or in decline, with falling demand or a shrinking share of the economy.
Why do investors accept losses in a sunrise industry?
They expect that early market share can turn into large profits later, though this is uncertain and some firms never get there.
How long does a sector remain a sunrise industry?
There is no set time, but it typically stops being described as one when growth slows, the market consolidates and the products become routine.
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