V.I Lenin Slept Here

Many technology vendors regularly laud the solution they propose to bring to the market: "We have this solution and that solution and you should see our solution that solves stuff using our solutions approach".

In early stage investing I think it is in error to believe that technology vendors are selling solutions. For there to be a solution, there must first be a problem. Many times a prospective customer does not even know he has a problem (and many times he actually doesn't). The point I am making here is that early stage companies generally must convince the market that there is, in fact, a problem. The attributes of the problem must include that its resolution is meaningfully beneficial and that resolution is possible. This process of "selling the problem" to the prospect is fraught with many points of potential failure. Let me explain.

As humans, we long for personal security. The process of automation generally depreciates human relevance and value around the process automated. The human is increasingly commoditized by automation and, as a result, and his wage rate is made to decrease. He becomes a form of appendage to the revised, automated process. Thusly his, "I feel secure barometer" reveals lower-than-normal pressure.

When the eager "solutions" vendor appears at the doorstep of the would-be affected labor pool, this labor pool perceives that something perilous is afoot. "We are about to be commoditized by the machines", they chant and they withdraw inward into problem avoidance. The labor pool is knowledgeable in this regard because it has its own history of dislocating some predecessor process and labor pool in some prior revolution where a now deceased labor pool put up its own fight.

Extrapolated to a larger scale this is the same type of "revolutionary" dynamic that has permeated history disguised as political change - the war between the old ways of making money vs. the new ways. Lenin knew all about this and would have likely been the all-time master of software sales.

Successful early-stage technology companies should many times be viewed NOT as technology companies per se but rather highly competent group psychologists. They are psychologists who can untangle problem avoidance and convert it into a purchase order. They can manage around the labor forces that might fearfully resist change. "Fire good, Trog like fire!" Once groups of people believe they have a problem and it is sucking income out of their wallets they generally will stampede to find a solution (sometimes they try and kill the solution and anything that may be a threat). The stampede runs fast and buying the solution happens in a hurry. On the other hand, selling the problem takes time. Studied through this lens my perception of what is in play at an early stage technology company is definitely altered.

I said "No Tomatoes Please"

It is very easy to get lost in the language of technology. It is easy to falsely believe that you understand the language of technology and its underlying subjects.
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Act I: Supply Chain for Dummies

Yesterday I was standing in line at one of my favorite sandwich shops - Subway. Subway runs an assembly line form of sandwich making using three individuals to produce and one more to manage financial settlement.

My custom sandwich order required ten different components to be assembled over a stretch of approximately six feet of assembly line. I was asked many different questions during the process such as what bread I want, toasted or not, do I want pickles, do I want mayonnaise, is it to-go? I noticed that during assembly of my custom order, there was one manufacturing error and twice I was required to repeat the names of different desired components (so as to avoid more errors).

This process of component requisition and assembly can fairly be described as "supply chain." It is my sandwich supply chain where I am interacting to obtain different components in a particular order to a desired construct at an agreed-upon price. This is easy...I understand it...I think most people can derive from this a working concept of supply chain. There are a lot of moving pieces here and any of us who have walked the Subway assembly line have endured mistakes: one sandwich, six-feet of travel, four persons involved - regular mistakes.

Act II: Applying the Metaphor

Now listen to a broad description of producing oil spoken in "sandwich metaphor". Sandwich design requires various scientists to agree on where and how to build a sandwich, the process of building a sandwich requires that all the ingredients be shipped to a place nobody has been to before, building a sandwich takes several months to years and requires hundreds of workers and tasks. Many times the workers have never worked together before. The chances of making a mistake here are very significant as are the costs.

What I am trying to do here is help the reader make the jump from an every-day supply chain encounter (Subway) to the complexities faced by those involved in the supply chain of the Energy Industry.

Act III (Dramatic Finish): "Big Deal...and So What?"

The big deal and so what is this....there are many ways to lower the cost of energy...(a) bring on more alternatives to fossil fuels., (b) improve the methods of locating and extracting fossil fuels lowering the overall cost to manufacture a unit of energy, (c) quit using error prone and inefficient methods for business and support processes around manufacturing a unit of energy.

The largest industry in the world still relies primarily on clipboards and isolated spreadsheets to complete one of the most complicated manufacturing processes in the world. This fascinates me. What we see is that the industry unnecessarily does things in ways that other industries ceased years ago. As a result, we see a lot of opportunity for process improvement (i.e. lowering costs). Simple things that the rest of the world did years ago - e.g. using telemedicine to take healthcare to the rigs instead of taking workers off the rig (pretty basic).

Fortunately for me (as a fund manager)...most people in the technology investing world believe the Energy Industry is a niche industry that happens somewhere in the Southwest United States to the east of El Paso, Texas. There are so many problems present in the Energy Industry's methods of getting work done that most experienced investors would view it as Sutter's Mill for investing in things that counter those problems.

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Epilogue:

It is easy for one to look at SMH Private Equity Group as a vehicle for "technology investing." It is not. It is actually a vehicle for investing in process improvement. We invest in things that modify conventional business practices making them less complicated and easier to understand. I used to think that the Energy Industry was this small thing. The amount of money it spends each year to keep the lights on is staggering. The amount of avoidable waste incurred in doing so is equally staggering.