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Summary:

Alex Payne, formerly of Twitter and more recently of Simple, a banking service, asks the all-important question: What is and is not a technology company? He is right in asking this question, but shouldn’t we also be rethinking how to value some of these companies?

Silicon Valley & The Scent of Money

Alex Payne, formerly of Twitter and and more recently of Simple, a banking service! asks the all-important question: What is and is not a technology company:

It’s now accepted-going-on-cliché to say things like ‘software is eating the world’, which is an aggressive way of assuming that every company now has to be at least a bit of a technology company, and those that want to grow rapidly even more so. Many new companies targeting industries as diverse as eyeglasses and baby food are, at the outset, leveraging technology for everything they do: supply chain management, marketing, recruiting, internal communication, product development, and so on. This makes these businesses look like technology companies, if you squint. But, of course, they aren’t. They’re eyeglasses and baby food companies.

Now that every growing business requires significant competence in technology to succeed, the distinction is even blurrier. Is a company that has staff members with ‘programmer’ or ‘engineer’ in their titles a technology company? Are they a technology company if they were funded by venture capitalists who have previously funded businesses that we think of as technology companies? Are they a technology company if their founder was using a laptop when she came up with the idea for the business?

‘Tech company’ and ‘tech startup’ are over-applied labels that have outlived their usefulness. Calling practically all growing contemporary businesses ‘technology companies’ is about as useful as calling the enterprises of the industrial era ‘factory companies’; it accurately describes an aspect of what they are (or were), but it doesn’t really capture the totality of their operation. It certainly doesn’t tell you anything substantive about how they’ll behave in the market over the long term, which is probably the most useful reason to label a business at all.

I think he is right in asking this question. I am old fashioned like that and believe there is a huge difference in technology and tech-enabled companies. Facebook is both. Twitter, too is both. Arista Networks is a technology company and so is Nimbula.

However, the very idea that Groupon or Birchbox are technology companies confounds me. Just as Pets.com never made sense to me as a technology company. Or even Exodus, a data center real estate company posing as a technology company.

Just like anyone else, I like buying stuff from all these new e-commerce companies and will continue to favor them over their offline counterparts, but to value them differently from a retail business doesn’t make much sense. Sure, investors should give them a premium for being more efficient than their lumbering offline counterparts, but to label and value them as technology companies — give me a break!

Groupon’s year-to-date stock performance.

 

 

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  1. How is Facebook any more of a tech company than groupon? neither sells technology products. Or twitter? They all employ lots of engineers, but they’re not a tech company like Cisco, or Intel, or Apple, or Microsoft, all of whom sell technology products. Being able to broadcast to the world what you’re eating is nor more tech than looking for discount coupons.

    By the standards of many “tech” bloggers, FedEx is a tech company. Every bank is a tech company. Most retailers (especially Amazon) are tech companies. They all employ lots of engineers, but they don’t sell technology products.

    Most websites are stores or media companies. They either are retailers or sell ads. They may use technology, but probably not as productively as FedEx or Wal-Mart, two companies that you wouldn’t call tech companies.

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    1. Keninca

      I think now that Facebook offers its API for all sorts of data (such as web identity) it does qualify as tech-company, as per Alex’s definition. Same goes for Twitter too. Amazon offers Kindles and AWS and that makes it a technology company.

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      1. That’s setting the bar low. And what else does Alex get to define?

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    2. Keninca

      I respectfully disagree. Web Identity is not an easy thing to do and is a complex problem that has eluded even big guns like Microsoft and Sun. In my books ID/Open Graphs do qualify as technology and we see the impact of it on all non-core tech operations every signel day.

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      1. Getting web identity right is not a question of technology, but one of definition. If MS can’t get it right, it’s not because the technology is too difficult for them, but they just can’t create the right interface that appeals to third parties. Definition is more of a marketing issue.

        But even if you consider defining the API to be technology, that still isn’t what Facebook is selling. They are selling information, and just using technology to distribute it. Kind of like on-line brokers. Virtually every company uses technology to sell their products, with the medium for some more complex than others.

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      2. Keninca is absolutely right, Facebook is and always has been a user information brokerage company. It brokers between users, users and companies, users and marketers and marketers and companies.

        The social vehicle is not a means to an end but a process to a monetization. Facebook could give a shit about its actual users.

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    3. Again, I disagree. Getting Web ID at scale is a massive technology challenge and what it does is productivity in the consumer web. Definition is only part of it. To make it work for nearly a billion people and work for billions of transactions on a daily basis is not a trivial task and I view it as a “technology” component necessary for the new web fabric.

      as for @ric ‘s comment, I am not even going to disagree. It is what it is. :-)

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      1. I will agree with your assessment on how they get there. I dont think that is the issue as they are using and supporting some serious tech to keep it running. Your original point is so valid its funny really. Tech means very little these days just like a lot of monikers such as Social, PR or Marketing. Which I have seen morph into things unrecognizable to the savvy even just a decade ago. Thanks for the nod Om!

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      2. OK, Om, we’re just not going to agree on this. Getting Web ID at scale may be a massive technology challenge, but so is building FedEx’s network. Or automated food processing plants. Or payment processing systems. Are those companies “tech companies”?

        Having a tech component as part of a company’s infrastructure doesn’t make it a tech company, it only makes it modern.

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  2. I got in a long discussion today about social media and compared it to AOL. I blogged about thinking “it’s just a trend.” Few will last and the value of things like “Facebook” seems pretty artificial. In my opinion. They will fade with Reebok pumps. Remember those?

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  3. Phil Simon  Tuesday, May 8, 2012

    Tech permeates just about every company these days and platforms are doing the same thing. Of course, I see just about everything as a platform these days. SDKs, APIs, app stores, and developer ecosystems are there to take even traditional stalwarts into the Age of the Platform.

    Phil
    http://www.theageoftheplatform.com

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  4. B.N. "Nat" Kausik Tuesday, May 8, 2012

    Om, this is prob your best post in a long time IMHO

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    1. Thanks! On the flip side, have I been asleep on the wheel or what ;-).

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  5. Tac Anderson Wednesday, May 9, 2012

    My real question is why does it matter anymore? What does labeling something a tech company or not mean? Does it matter if something is a technology company versus an agriculture company?

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    1. Actually that is the point of the post. There are some “tech” companies and others are just a “company.” Alex is trying to make that point and so am I.

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  6. Love this post Om! So many people are removing vowels from the names of their company in the hope that somehow they fit into the web 2.0 bubble. Totally ludicrous. Keep up the awesome work Om! :)

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  7. I tend to think of tech companies from a hardware perspective. As in making hardware sufficiently advanced that it is at the leading edge of technology. That is not to say that a washing machine with a touch screen is leading edge, but someone making a gesture based interface device would be. I’ll grant that some software only companies would qualify as leading edge tech if they are creating tools and languages that advance the state of the art in getting a processor to do work. But taking those software tools and using them to automate or improve the automation of existing functions is not leading edge or tech. Even things like Facebook are not creating something new. They just leveraged existing database tools with a different user interface and structure to good old BBS groups.

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  8. When discussing multiples, incremental costs and scalability are key determinants. This tends to favor software over hardware. Silicon Valley VCs understand this.

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