The business of custom software development is, at its core, an asset business. Software development is the business of converting cash to intangible assets by way of human effort. Plenty of people opine about how important human labor is to software, and of course it is. Good development practices reduce time to delivery and create low-maintenance, easy-to-evolve software. What labor does and does not do is extremely important to the viability of software investments.
But software is an asset, not an operating expense. If there is no yield on a software asset, investing in software is a bad use of capital. No yield, no capital, no cash for salaries for people developing software. Money matters, whether or not we like to admit it.
This is a stark reversal for tech. When money was cheap and abundant as it was for over a decade, tech had the opposite problem: no yield, no problem! When capital wasn’t a constraint, the investment qualification wasn’t “what is this asset going to do for us” but “what are we denying ourselves if we don’t try to do something in this area.” Trying was more important than succeeding.
There are those who want to believe that financial markets are unemotional, but they are not. Momentum is a crucial factor in finance. Momentum is what gets investors to pile into the same position. Momentum turns a $100k plot of land into a $2m real estate “investment”. Momentum is an emotional justification in that the rationalization is hope, not fundamentals.
Tech rode momentum for a long, long time. Before COVID, the story that built momentum for tech was disruption. During COVID, the story was tech as a commercial coping mechanism. Momentum put abundant amounts of cash into the tech sector. Abundant cash inflated more than just salaries: it also inflated technical architectures and solution complexity. Money distorts.
That momentum has run its course. Tech is reaching - grasping - for any growth story. To wit: GenAI here, there, everywhere.
There are two winning hands in momentum trades: “hold to maturity” and “greater fool theory”. The prior requires a lot of intestinal - not to mention free cash flow - fortitude. The latter requires finding somebody foolish enough to spend as much (and ideally more). Nearly two years of contraction in the tech sector indicates a shortage of greater fools. Yes, some subsets of tech still command premium pricing; suffice to say there is no rising tide lifting all boats, and has not for quite some time.
Tech rode the wave of price inflation. The yield curve indicates that the wave has crested.
