"Tech Company"
What Does That Even Mean?
There is an article below in the Friday links section that has made me think a lot about what it means to be a “tech company”. On the face of it, that should be a pretty straightforward definition - a company that leverages technology for it’s own advantage, creating operations that could not exist without that technology. Of course, that’s a little sloppy to use the word “technology” when describing “tech company”, but I think the general point comes across.
But somewhere down the line, I think “tech company” started to mean something else. It was a Company that had a corporate culture like Google’s or Facebook’s. It hired a ton of software engineers and product managers. It was focused on growth-at-all-costs and had a venture capital firm somewhere on the cap table. It was probably based somewhere in the Bay Area. While there are a lot of tech companies out there that fit that bill, those are no longer the best signals for determining whether something belongs in the tech sector.
First of all, corporate culture has radically changed over the past decade. For instance, my old employer, Fifth Third Bank, no longer requires its downtown employees to wear a suit and tie. While this might seem like a minor shift, it’s actually pretty big if you consider the Bank’s old conservative corporate culture. Right before I left the Bank, they started remodeling a bunch of workspaces to be open-office and modern. They put in bean bag chairs and a Foosball table - if that doesn’t scream “late-aughts tech-company”, I don’t know what does. And that was in 2017.
I am sure Jack Gusweiler is reading this and thinking about how he wishes people would wear a suit and tie into the office more often, but the reality is that’s changed, even for conservative Fifth Third. And if you used workplace decor or clothing as a signal of a tech-company, you would be hard-pressed to find a company that wasn’t moving in Silicon Valley’s direction in that regard.
Sure, Fifth Third would love to be considered a tech company, and be valued at a tech company valuation. But it’s a bank that has been around for 150 years, so it gets valued based on NIM and P/E ratio, not it’s annual growth rate nor investment in technology. And I bet, if you asked the folks at Fifth Third who are in charge of these kinds of decisions, they would tell you they are investing in technology at an enormous clip.
But that’s the funny thing about Fifth Third (and pretty much every company) - there is a heavy dose of technology in everything they do. They employ hundreds, if not thousands, or software engineers, architects, and coders. The current CEO got his start in the IT sector. They have made some big investments into tech companies over the past decade.
But still, no tech valuation for the old Fraction Bank. And that’s probably the correct outcome - an example of Mr. Market doing his job well.
There are some obvious examples of Mr. Market falling asleep at the wheel however. A Company that looks like a tech company and sounds like a tech company, but isn’t actually a tech company, still somehow garnering tech multiples and tech valuations. In 2019, everyone paid attention to the WeWork story and it’s the most obvious example of this signal-error at play (WeWork had a million other things going on, so this is a little reductive, but you catch my drift). But there are a bunch of other examples that are going to be tested by the markets in the next couple of years because they have the facade of a tech co, but really act like something else. Maybe an insurance carrier in the case of Lemonade, or a stock brokerage in the case of Robinhood, or a mattress retailer in the case of Casper. The question for all of these will become - are they a “tech company” or something more traditional? (I don’t have the answer for any of those, but I am excited to see the market answer the question).
The trick here is that “tech company” valuations frequently have less to do with the underlying technology, and have much more to do with the business model and the growth story. For example, SaaS companies generate higher multiples because they are generally higher margin businesses with stickier customers and a better story of growth. Social media companies are able to take advantage of massive network effects, improved customer targeting, and scale - if you mix those three things together, you will almost certainly have an extremely long-term-profitable business.
Certainly technology (read: PC’s, internet, and smartphones) led to the rise of these businesses and business models, but it’s how the technology was used that really makes it meaningful. Every company uses technology at this point - but it’s how you use it that matters.
And, look, I don’t want it to sound like I think all technological advancements are created equal. Some folks have just flat-out built a better mousetrap, or invented something that nobody can duplicate, or radically altered the way something works for the better. Those kinds of companies will likely experience success in their own right. My favorite examples of these kinds of businesses are Tesla and SpaceX. Not because I am a Musk-disciple (far from it), but because they both have done something crazy using technology and, at least for right now, it’s working better than anyone would expect. And those are not SaaS or Social Media businesses! They aren’t cloud computing or anything like that - just purely built on the back of interesting, novel technology.
But the funny thing is, Tesla isn’t classified as a “tech company”. It fits squarely in the auto manufacturer sector. But in order to grasp what is going on at that company (if that’s even possible), you need to understand the technology to a certain degree.
And so, if you want to be an investor in any sector, you have to be tech literate in order to get the whole picture. But today, every company is a tech company, just not every company is a “tech company”.
Friday Links
Are Tech Stocks Immune To Recession?
Reading this article with a slight tongue-in-cheek attitude is what worked best for me.
If you are interested in startups between the coasts, I recommend checking out the writing from Jackie DiMonte at Hyde Park Ventures. Her posts are very solid, always on point, and aesthetically pleasing. The one from this week is a good spark-plug to drive forward the conversation we are all having: what does the new normal look like? A lot of people have related the economic effect of COVID-19 as an accelerant for all things - while I think that’s true, I am curious if that acceleration will last, or run into some friction.
Invest in the Midwest - Part 2: Talent Networks
Part 2 is just as good as Part 1. There is plenty of talent in the Midwest and, while I personally think we can do more to prevent the brain drain, it’s not really as bad as you think it is. People love the Midwest. Smart people who want to build cool things live here. If you aren’t investing in the Midwest, give me a call and I will change your mind.
Mike Camerlengo is a twitter god
Lol.