28 Jul Moving at the Right Speed of Technology

By Michael McAdams, President, Pasadena Private Lending

At Pasadena Private lending, we are at our roots credit people. That means we are practical and a bit on the skeptical side. To quote a former U.S. President, we “are trusting but prefer to verify.” It also means we are slow to jump on bandwagons for the newest and best… lest it be a too good to be true. Likewise, we are slower to abandon proven approaches until a better, cheaper, safer, faster alternative has proven its worth. Essentially, we are debt investors who seek consistency because the best that debt investing has to offer is getting your money back plus interest (in contrast to equity investing where an occasional mistake can be compensated for by a periodic gain).

One of my oldest business associates and the CEO of a firm that is an investor in Pasadena Private Lending, Thomas Majewski of Eagle Point Capital in Greenwich, Connecticut, recently posted a whitepaper on LinkedIn on a topic I have been rolling around in my head for some time.

It’s a fascinating and well-researched piece that addresses the view that, as powerful as AI is, it will take time to unseat all the existing technology and ways people are comfortable doing things (with the implication that the investment community might just be a little “over bought” on the AI revolution?). The article’s thesis is that not every business will be redesigned, not every programmer will become unemployed, not every job will be replaced by robots, and not every surgery will be automated in the next 2-3 years! And, even as we see the amazing benefits of AI and a whole suite of truly next-way-of-thinking tech, it may not happen as quickly and as uniformly as predicted.

Tom and his co-author elegantly point out examples of prior far-reaching technologies whose adoptions were far less transformative in the short term than originally expected. The reasons for the foot dragging may be unclear: human reluctance, slower catch-up of the mechanical technology to deploy AI hardware or traditional tech “upgrading” (either through natural progression or in response to AI’s competitive threats).

What this means for small to medium sized businesses, our core readership and client base, is hopefully a little less panic in the need to drop everything and go “all in” on AI when you had considered buying new CNC machines or trucks, expanding your plant, or buying your competitor as your No. 1 priority in the next year.

With the Eagle Point article as inspiration, another story I had also been thinking through was a bit broader and was based on two other different observations.

First is our personal theory of “roll ups” of businesses in developing industries. What should be sure things for efficiency and higher profitability sometimes aren’t. Having financed many such niche industry serial acquisitions of small firms across diverse locations, the compelling math of reducing common overhead functions, gaining operating efficiencies from larger scale, better customer awareness and service across wider target markets are all rational and tangible.

But we often see that “1+1” winds up equaling just “1.8.” This is because practical realities get in the way. People who have not run larger businesses now have hundreds of employees to manage. Accounting systems from multiple firms need to merge and report accurate data for decision making. Small-company policies that kept good long-time customers change over time, and those core clients leave. And often the acquisitions are debt financed and now the firm has a new fixed cost in debt service that adds risk to the equation.

Another way of looking at the pace of inevitable progress is the reexamination of a quintessential predictor of tech progress, Moore’s Law. Moore’s Law has accurately predicted the time needed for the doubling of transistors on a chip as approximately every two years (and therefore the speed, size and functionality of chips and tech gear of all types as well as computing power).

However, the relationships behind the law are increasingly being viewed as reaching their limits in the short run due to physical and economic constraints in semiconductor manufacturing. While the principles still influence the industry, many experts argue that it is no longer a reliable predictor of technological advancement. While not an engineer to confirm this view, I have read that possible unifying factors here might be the magic words, “within a range.” That is, subject to known and available technologies, once breakthroughs on currently un-breachable technical barriers are achieved, one day we may see Moore’s Law again be completely applicable. However, in the short run, drawing a straight line from the past through the present and into the future would seem to violate many rules of practicality… as well as even some of physics?

Pulling these three points of reference together, we all live in a tech-focused, even tech-frenzied world. A large part of this transformation is changing our lives for the better. Such improvements are a pleasure, or at least they need to be welcomed into our lives and businesses.

But especially for small and medium sized businesses, the apparent large company way of achieving scale, efficiency and competitiveness with your peers, let alone your larger competitors, may not warrant rushing into the newest best thing when you are still dealing with building the basics.

Another point to consider is that sometimes the “second serving” (that is “version 2”) of a product or software or newest AI release may be better, cheaper, safer and more user friendly. That is not to dissuade readers from “staying alert to industry trends and technology that can take your business into a new bigger league.” But be careful of missing a change that can knock you out of the game.

We invite you to view the Eagle Point piece “Echoes of Disruption: What History Teaches Us About the Much-Feared SaaSpocalypse” by clicking here and to share your thoughts with us.