Is Everything a "Tech Company?"
Does this look like a “tech company” to you? (Photo by amirali mirhashemian on Unsplash)
I read an article in the Wall Street Journal yesterday about “Tech IPOs” this year and the fact that many are trading under their opening price. One exception? Beyond Meat, which is trading around three times its IPO price. Which made me think, “Beyond Meat is a tech company???”
I’ve seen many articles like this lately that lump a bunch of companies — including WeWork, Peloton and Compass — under the moniker of “tech companies.” But, like Beyond Meat, these businesses all feel like the obviously correct answer to a Sesame Street production of “One of these things is not like the others” that a kindergartener could pick out.
Beyond Meat, while I applaud their mission and their product, is a consumer packaged goods company. WeWork, while I love their hip office spaces and enjoy their cucumber water, is a sublessor of office space. Peloton, while I admire those who can complete their online training classes, is an exercise equipment and entertainment company. And Compass, at the end of the day, is a real estate agency.
While all these companies, and others like them, can certainly point to some technology, classifying them as “tech companies” is misguided. Being based in SF or NY doesn’t automatically make you a tech company. Being founded in the last five years doesn’t make you a tech company. Having tech workers as founders or employees doesn’t make you a tech company. Getting money from VCs doesn’t make you a tech company.
What has traditionally caused tech companies to be valued at such high multiples is the fundamental economics of their business — including high gross margins, minimal marginal costs, low cost of acquisition, huge scalability and, ultimately, the ability to create and then dominate new markets via virality, unique IP, scale, and network effects. The non-tech “tech companies” mentioned above have none of those properties.
It’s not surprising that the recent "tech IPOs" that are trading above their opening price (Zoom, Pinterest and Fastly were all mentioned) really are tech companies. What is surprising is the stunned media coverage of the recent IPO challenges of companies that never should have been valued in the private markets at tech company multiples in the first place. That reckoning should have been expected. As Wall Street analysts dig into the core financials, no amount of flashy websites, distressed wood lobbies or breathless tech blog media coverage can sustain the illusion.
It doesn’t mean there aren’t great investments in non-tech sectors. In fact, I believe some of the most compelling startup opportunities today are in transforming legacy business categories with new products, business models, distribution channels and executive leadership that rapidly steals market share from incumbent providers in large markets. But don’t get confused about what those business really are, or the basis of rational valuations.
Not everything is “tech."