Activant's Greene Street Observer No.18

Founders, Partners, and Friends,

During the dot-com boom and bust, the “leapfrog” risk was real and often discussed. It then disappeared from the tech world’s lexicon for almost 20 years. Yes, there were jumps forward in technology such as cloud or mobile, but companies had time to advance slowly with the technology. Think about Facebook’s slow and painful move to mobile, or SAP’s move to the cloud. Both were key decisions that allowed the companies to survive, but neither had to rush it. 

In 2025, and likely for the rest of this decade, the second derivative on pace of change is positive, and being technologically leapfrogged is a real risk again. 

How could this play out in the real world - two examples. First, let’s take a CRM company that essentially provides a screen and ability to export data into excel. There is no connection to the analog world outside of sales people responding to what the screen says. Using AI, a start-up could likely build a better way to manage the CRM data versus old relational databases, and essentially copy the screens. Software is largely not patentable, so its only defense (moat) is having to re-train employees to use the new software. If the AI company can copy the screens and the output, then there is no need to retrain employees. Boom, this old-line CRM company should be done in a couple years and will not have time to evolve as AI will drive the cost of software and operating data down. There is nowhere for this CRM company to hide.

A second example is a specialty manufacturer that works with OEMs to do runs of very specific and even regulated parts (think aviation and defense). This requires cooperation between product teams and dev teams and working in CAD files together. Along comes an AI company that can integrate with the OEM’s PLM (product lifecycle management) systems and CAD systems to automate parts production with approved contract manufacturers. In this case, the vertically integrated specialty manufacturer can be run over if it doesn’t move quickly. 

This is just a taste of what is to come, and creative destruction will be harsh on those that both don’t embrace AI and don’t figure out how to connect their business to the analog world to create moats. Those moats can be in the form of payments, logistics (moving goods), production of goods, regulation, or automated decisioning of any type.

Not just old-line companies, but AI companies will be affected by this leapfrog risk as well. Take what happened with DeepSeek as a wake up call. For instance, chip and energy consumption by AI may not develop at the pace talking heads suspect. Humans have an incredible knack for optimizing. Let’s take a look at power consumption.

According to the US Energy Information Administration, from 1950 until 2023, primary Energy production in the US has increased about 1.4% per year, and consumption has increased about 1.3% over the same period. In fact, consumption has been basically flat since 2005. If we go back further in time, these low growth rates apply almost throughout history - humans find ways to get more efficient. 

Electricity is the base input for the AI industry. I have heard the leaders of the largest AI companies in the world say, “there isn’t enough electric production in the world to satisfy what is coming from AI.” But let’s posit the most likely outcome, that long-term energy consumption rates hold between 1-2%. Therefore, every extrapolation of the amount of chips, data centers, hydropower, etc. is wrong. If that is the case, then we will have a massively overbuilt infrastructure in the US, and the cost of data centers, electricity, and chips will plummet. Talk about some massive leapfrog risk with its crosshairs squarely focused at AI production (software and hardware). 

A version of this happened in 2001. In 2000, over half the cost of building a start-up was for servers and hardware, and by 2012 it fell to less than 10%. Cisco peaked at $555B in market cap in 2000 which would put it at about $2T real inflation adjusted today. We have seen this movie before, and it is exciting. 

For allocators of capital, which includes not just investors, but start-ups and corporations, the stakes have gone up for all of us. There is at the same time more downside for missing the boat, but enormous upside if calculated bets pay off. 

Let’s go! 🚀

Steve Sarracino

Founder & Partner

A huge thank you to the incredible speakers and the 300+ attendees who joined us at our inaugural Genesis Summit hosted on September 26, 2024! 🎤✨

This Summit was all about bridging our European and US ecosystems, bringing together diverse perspectives to spark innovation and collaboration. From thought-provoking discussions on emerging trends to meaningful connections, we witnessed the power of cross-border ideas in action. 🌍🤝

We are deeply grateful to everyone who contributed to the success of this summit—from our speakers sharing their expert insights to our attendees, whose enthusiasm and engagement reached new heights. Your energy and contributions were truly the cornerstone of this event's success.

We are excited to continue building on the momentum this year!

• Platform Science, an IoT-enabled operating system for enterprise fleets, joins forces with Trimble (NASDAQ: TRMB) to revolutionize the transportation industry by acquiring Trimble’s global transportation telematics business. [BusinessWire]

• Cardless, the next-gen platform for co-brand credit cards, secures $30M in funding led by Activant, joined by Industry Ventures, Mischief Ventures, Amex Ventures, and others [Techcrunch]

• Activant is excited to team up with David Singleton, ex-CTO of Stripe, as he launches his new company, /dev/agents [Bloomberg]

Activant is a research-focused global investment firm that partners with high-growth companies, transforming the way the world makes, moves, and sells.

Founded in 2015, Activant has invested in category-defining companies like Deliverr (acq. by Shopify), Hybris (acq. by SAP), Celonis, Sardine, and many more.

The firm has $1.5B assets under management and is headquartered in Greenwich, Connecticut, with offices in New York City, Berlin, and Cape Town.

The Greene Street Observer is published monthly from Activant’s office on Greene Street in New York City.