
What Is a Tech Company? - yarapavan
https://stratechery.com/2019/what-is-a-tech-company/
======
baxtr
I used to work for a Startup considered by many as tech company. Our devs
cared a lot about code quality, visited meetups, engaged in the community etc.
devs usually stayed for at least 3-5 yrs.

In contrast, there was a company that almost did the same business as we did.
But, they were what people would have called a sales company, not a tech
company. Decisions were based on sale opportunities, only. No one gave a shit
about code quality, devs didn’t stay long and often were frustrated when they
applied at our company.

Which one was more successful? Unfortunately they were... we were often slowed
down by discussions about code quality, ways of working, ethics and disrespect
for revenue driven decisions.

Maybe it was just an exception? But since then I have become skeptical when I
hear about “tech” companies. I feel we nerds need to be value driven, too, and
not die in beauty.

~~~
mharroun
Rant time..

Revenue and business impact are ALL that matter.

Good, clean, scaleable, and testable code only exist to rapidly support the
above. The moment you choose tech value over buisness you are a risk not asset
to a company.

I sware sometimes I see so many delusional software "engineers" who care more
about building technically excellent systems that are either delivered late or
dont solve a/the real problem... it disgusts me.

~~~
crispyambulance

        > Revenue and business impact are ALL that matter.
    

Sure, but only until your up-and-coming competitor eats your lunch because
everything got taken over by a-hole MBA and PMP-types, everyone cool leaves,
and the only people doing the work are disinterested consulting companies
charging you through the nose.

~~~
lmeyerov
Unless the the startup already nailed the startup part and is at $5-10M/yr or
will flip with 0 revenue, you have no lunch to be eaten, just aspirations.
Your biggest competitor is your internal non-business efforts that distract
from experimenting with what gets people to pay in a repeatable way. Only
after you have built a working revenue machine -- which (depressingly) can
simply be VC revenue and hoping the music doesn't stop -- do you have a lunch
to worry about. Luckily, as Twitter and friends show, once you have made that
lunch, you can turn even the biggest Ruby fail whale and php ball of mud into
engineering for scaling & doing tiny feature iterations.

Unfortunately, shiny engineering won't solve drastic product market fit
iterations, and consumes the limited time & $$$ for achieving it. That's a lot
of otherwise good habits and instincts to unlearn for engineers who never
really had to go from idea to paying end users and instead needed to ride an
existing monopoly and not break it: FANG, bigco, bank, consultants, etc. In a
disturbing sense, a small # of new grads can fit in better on a startup team
than a loud FANG cohort b/c most know how to do a bunch of small projects
without being distracted by post-growth table stakes. (And you avoid the
former-consultant "don't care about the end-customer, just the boss/politics"
problem b/c of passion for the startup's mission vs. the tech.)

I've come to appreciate either:

Team 1: Staying tiny with people who _demonstrably_ get that or are otherwise
mission-focused (vs. tech-focused) until you do hit growth,

Team 2: Or massively over-fundraising and over-hiring (with high risk of fast
death) simply to deal with sales/marketing/engineering that is only at say 10%
efficiency of Team 1

~~~
crispyambulance

       > I've come to appreciate either...
    

So basically either naked greed or blue-sky-burn-rate ?

I think there's room for balanced consideration. Sometimes, yeah, revenue and
time-to-market is everything. Sometimes there's a need for taking a risk and
creating something new.

~~~
lmeyerov
No: Either business-focused engineers, or enough money so that every 5 folks
who aren't ("scale!" "this adds velocity!" "10% faster!") can add up to 1
developer who is.

The new business _is_ the risk-taking endeavor. The job of the team is to
_derisk_ , taking the blue-sky concept to something the market will consume.
That's so hard and requires so much listening/iterating/etc. that it makes
most engineering cycles not spent on meeting customers in the middle (or
helping finding alternate customers/offerings) is eating the seed corn. Most
startups should assume "default dead" until the $5M/yr point.

There is an interesting question of how to do deep tech. ("10X cheaper
spaceflight", not "Tensorflow for AIOps"). That's more capital intensive, and
in turn, different kinds of business critical milestones. "We need to do X, Y,
Z so we can get $5M gov contract Y and the next round." That deal does _not_
hinge on whether you've upgraded from React 3 to 4 and have a much more
approachable graphql orm.

------
sweeneyrod
I'm not convinced by these claims: > While Airbnb’s accounting suggests that
its revenue has minimal marginal costs, a holistic view of Airbnb’s market
shows that the company effectively pays hosts 86 percent of total revenue. You
could make the same statement about a payment processor (with 1% fees it would
"effectively" pay users 99% of revenue) but I think in both cases the company
has zero marginal costs in the sense that it can scale to additional revenue
pretty much for free, in comparison with say a factory that has to hire new
workers and buy more raw materials to get more revenue.

------
mbesto
The problem is that this labelling does nothing but infer potential
profitability.

1\. Notice how the author mentions the term "tech industry"? However, when
most people talk about "tech companies" they refer to it as an industry. It's
not.

2\. People get lost in the semantics and just think companies are a binary
"tech co" or "not a tech co". I disagree. Tech is actually an operating model
which can help propel a company into high gross margins. When we analyze
businesses we usually put them on a spectrum of "IT Support Business" -> "Tech
Enabled Business" -> "Tech Lead Business" (with the latter synonymous with
that people call a "tech company").

3\. A "Tech company" and a "software company" is nothing more than an
investors way to imply underlying business fundamentals, which usually
translate into high gross margins. It can often be used to cloud judgement
about the actual underlying fundamentals.

------
ahupp
I think the key of the essay is this definition:

    
    
      * Software creates ecosystems
      * Software has zero marginal costs
      * Software improves over time
      * Software offers infinite leverage
      * Software enables zero transaction costs
    
    

So to the extent a business meets those 5 points, it's a 'tech' company. He
goes through a a few companies and sees how well they fit those points
(netflix, airbnb, peloton, wework) to give an intuition for it.

~~~
trimbo
I'm not sure how to reconcile the fact that Intel, nVidia, TSMC, AMD don't
seem to fit these criteria but are undoubtedly "tech companies".

~~~
TeMPOraL
The definition is apparently made from rubber. Let's talk, for example,
"Software offers infinite leverage" (infinite apparently meaning "able to
serve the whole world", but I guess "infinite" is just a synonym for "somewhat
large-ish" here).

The article says this about Uber: "Uber is able to serve the entire world,
giving it maximum leverage". Followed by this about WeWork: "WeWork is limited
by the number of locations it builds out".

Uber didn't _start_ with the ability to serve the entire world, and that
ability was earned not through software, but through lots and lots of money
and aggressive regulatory arbitrage (i.e. breaking laws faster than regulators
could react to). What's to say that WeWork can't spend money to grow into a
worldwide service?

I see this article as a list of interesting market features, but I don't buy
that you have to have _all_ of them to be a tech company, or that only
companies with _all_ of them will succeed.

~~~
varjag
Tech there seems to be a stand in for 'software assisted middleman service'

------
bitwize
> Fifty years ago, what is a tech company was an easy question to answer: IBM
> was the tech company, and everybody else was IBM’s customers. That may be a
> slight exaggeration, but not by much: IBM built the hardware (at that time
> the System/360), wrote the software, including the operating system and
> applications, and provided services, including training, ongoing
> maintenance, and custom line-of-business software.

Fifty years ago, IBM was the _computer_ company. There were other tech
companies: Xerox, Tektronix, Texas Instruments, and Western Electric to name a
few. Today "tech" largely means computing, especially applied to marketing and
advertising automation, but back then it meant something quite different to be
working "in technology".

~~~
esmi
I was thinking the same thing. Apparently tech means software now, at least
according to the author.

For example, what about companies like DuPont. Surely they are a technology
company. Are they also a tech company? The author provides no framework to
address the question which, in my mind, means they were largely unsuccessful
in their attempt.

------
cptaj
I think its silly to call "anything with an app" a tech company.

For instance, uber is a transportation company, not a tech company. They may
have been considered tech when they were developing self-driving cars but I
think that was abandoned for now?

Anyway, the point is that being in the internet and having an app is par for
the course of any industry today. You're not on the brave frontier of tech
anymore, you're just using existing tech to implement your business model.

If you're making NEW tech, you're a tech company.

~~~
quaquaqua1
Uber is not a transportation company-- they neither manufacture transport
vehicles nor provide transportation services (according to the law).

Rather, they provide a post-paid software platform for individuals to provide
transportation services to customers directly.

Delta is a transportation company because Delta is cutting the checks for the
purchases and maintenance of the airplanes.

Sure, it's a spectrum, but Delta isn't a tech company. Skyscanner and
Booking.com are tech companies that fulfill an Uber-like service for Delta.

~~~
marinman
This is trying to be too clever by a half with the semantics. When people say
they're going to Uber somewhere, they're not saying they're going to use a
post-paid software to connect with individuals offering rides. The fact
they've skirted the labor laws to technically not be the employers is neither
here nor there.

~~~
quaquaqua1
I honestly can see where you are coming from but I think the IRS distinction
is important here.

Uber isn't saying, "you must drive from 9am to 5pm. you must use our vehicle
and company expense account."

Mechanics get hit with these types of laws as well. Mechanics are often
required to bring their own tools to work, but since they often work at the
business' garage during the business' hours (not at their home garage at 2am
for example), they are W2.

You are exactly right that the service rendered is exactly the same ("I wanna
uber there" == "I want a taxi company to drive me there").

But from an expenditure standpoint, a Taxi Company is not spending money on
cloud services and programmer salaries.

------
jacques_chester
What the essay suggests to me is that folks are fighting for the "tech" label
because of the correlation with particular economics and accounting dynamics.
Essentially mistaking the map for the territory.

My view is that you're in the business that customers are paying you for. You
may have been founded by tech-heavy leadership and have a heavy reliance on
software, but that doesn't define what people actually pay you for. No more
than a company founded by bankers is a bank.

~~~
sah2ed
> _No more than a company founded by bankers is a bank._

Exactly. In fact, the most useful explanation I’ve found is to consider the
label “tech company” as mostly a legal term, similar to how a bank is a legal
label for a specific type of company (with the small difference that banks
must be _licensed_ by the government to conduct the activity of banking).

To intuitively understand the term tech company, consider the level just below
it: the tech-enabled company. The distinction between a tech company and a
tech-enabled company is exactly the same as the (legal) distinction between
ownership and possession.

Tech companies generally build (i.e _own_ ) the primary means of production
(i.e. tools, methods, raw materials etc used to conduct business). Exclusive
ownership of a valuable means of production is generally a source of
competitive advantage in most industries, until a new entrant with better
economics emerges to disrupt the status quo.

Tech-enabled companies on the other hand, generally buy or borrow (i.e.
_possess_ ) the primary means of production.

IOW, all companies can be placed on the tech-company spectrum depending on
whether they _build, buy or borrow_ the primary technology necessary to
conduct business.

An example of a tech company: Boeing; an example of a tech-enabled company:
United Airlines. UA cannot design or manufacture its own aircraft since it
does not own the underlying tech (IPR, manufacturing methods etc) behind the
aircraft it operates, instead it merely purchases from tech vendors like
Boeing (and Airbus).

If UA decides that battery tech will be viable in the near future and wants to
switch its entire fleet to all-electric aircrafts for instance, they _must_
seek the legal permission of their tech vendors to modify their existing
designs, since retrofitting will require recertification to ensure the
aircrafts can still be operated safely. If they go ahead with such
modifications without first seeking permission, they risk being sued by the
owner of the underlying technology.

OTOH, if Boeing were to make the same realization regarding battery-powered
flight, of course they would not need to seek any third party’s permission to
make the switch.

Let’s say UA or indeed any airline wants to take its destiny into its own
hands, what prevents them? Surely they could kick start their R&D efforts
buying an electric aircraft maker like Pipistrel [3]? UA used to be a
vertically integrated company known as UATC [0] but the USG found such an
arrangement too powerful and anti-competitive, which led to the split into
current day Boeing, UTC [1] and of course UA [2].

0:
[https://en.wikipedia.org/wiki/United_Aircraft_and_Transport_...](https://en.wikipedia.org/wiki/United_Aircraft_and_Transport_Corporation)

1:
[https://en.wikipedia.org/wiki/United_Technologies](https://en.wikipedia.org/wiki/United_Technologies)

2:
[https://en.wikipedia.org/wiki/United_Airlines](https://en.wikipedia.org/wiki/United_Airlines)

3: [https://www.pipistrel-aircraft.com](https://www.pipistrel-aircraft.com)

------
cdirkx
I keep seeing this discussion and people arguing over that some definition is
too limiting and that industry X is obviously also technology. But they are
missing the point: yes hardware, manufacturing and media companies are also
using tech or making tech, but in the context of the stock exchange and
evaluating a companies potential this doesnt matter.

In that context a "tech company" specifically refers to a company that is able
to take advantage of new business models or ways of operation enabled by tech
that allows them to scale and make large returns on investment. Thats it.
Thats why they are attractive to investors, which in turn is why every company
tries to convince people that they are also "tech".

~~~
amelius
But _anyone_ can take advantage of tech these days. If someone builds a CRUD
website to make hotel reservations, is it a tech company? What if someone
installs Shopify to sell goods, is it a tech company?

~~~
cdirkx
If you are scaling up, profitable (or speculated to be very profitable in the
future), and eventually get big enough to do an IPO, then yeah why not?
Booking.com a CRUD website making hotel reservations, and called a tech
company.

What is missing however in the picture of "someone building a site" is the
other points mentioned in the essay: network effects, building a platform and
forming an ecosystem around you. Everyone can do it, but not everyone
succeeds. This is why there is such a big rush within tech startups to be the
first in a space.

------
wiseleo
We used to have a term software company. That was unambiguous. At what point
did the nebulous "tech company" take over?

~~~
Traster
Tesla is absolutely not a software company, it's a tech company. Software is a
very concrete term which doesn't describe the category of companies we
reasonably want to talk about.

~~~
wongarsu
How are they a Tech company? Is every car company with in-house developed self
driving a tech company? Does that mean eventually most car companies will be
tech companies and the term car company will fall out of use?

~~~
Spooky23
Tesla is defined by its technology. Most importantly, it’s valued based on its
technology.

~~~
navigatesol
> _Most importantly, it’s valued based on its technology._

And other car companies are not? The modern internal combustion engine is a
technological marvel, and getting better every year.

~~~
Spooky23
No. They are mature companies with conservative valuations.

Tesla has a bigger market cap than Ford, isn’t profitable and is always one
deal alway from insolvency. The value is it’s tech and potential.

------
paxys
I don't get the "improves over time" requirement. Every company has the
potential to improve over time. Improving isn't necessarily a "tech" quality.

~~~
ricefield
He means specifically that the product improves over time. For non-tech
companies, the product you buy (a lamp, a car, a mattress) doesn't improve
over time. Once you buy it, there's zero expectation that the company
continues to improve it. You have to buy a new version of the product to get
and improvements the company produces

~~~
nordsieck
> He means specifically that the product improves over time. For non-tech
> companies, the product you buy (a lamp, a car, a mattress) doesn't improve
> over time. Once you buy it, there's zero expectation that the company
> continues to improve it. You have to buy a new version of the product to get
> and improvements the company produces

Software installed locally that doesn't run "in the cloud" would qualify as
not tech according to that definition.

For the most part Windows 98 just got bug fixes, in the same way a car might
get part recalls, until Win 2000/ME came out with new features.

~~~
Iolaum
This is factored in the article. As you know, Windows have moved to a new
model since then.

------
6gvONxR4sf7o
This is an fun interesting article worth perusing, but I disagree with the
analysis. It narrows the question of being a tech company to basically being a
SaaS company. Granted, that's a lot of the companies famously IPOing out of
the silicon valley venture capital community right now, but it's very limiting
and I'd argue it's wrong.

Lets make a hypothetical counterexample according to their guidelines:

\- Software creates ecosystems.

\- Software has zero marginal costs.

\- Software improves over time.

\- Software offers infinite leverage.

\- Software enables zero transaction costs.

Imagine that out of nowhere, we get a company making a JARVIS-like AI
assistants like in iron man, complete with google glass-like HUD. Suppose, due
to design/manufacturing restrictions or something, it can't update over time.
You have to buy a new pair of the glasses to get the improvements. There are
no third party apps, just what comes shipped with the product. If it was as
useful as envisioned all over science fiction, it'll take the world by storm
anyways.

Now imagine it's just catching on with consumers and is about to IPO. Is this
AI driven high-tech company a tech company? According to OP, this company may
as well be selling sunglasses:

\- No apps or ecosystems by construction.

\- Every unit is a physical object, marginal costs are about like expensive
sunglasses.

\- It doesn't improve over time by construction.

\- No more leverage than selling normal sunglasses.

\- No lower transaction costs than a company selling sunglasses.

Yet clearly this is a tech company and will be evaluated accordingly for its
IPO.

~~~
NickNaraghi
> Peloton is also iffy as far these five factors go, but then again, so is
> Apple: software-differentiated hardware is in many respects its own
> category.

Do you think your example fits into the author's definition of "software-
differentiated hardware"?

~~~
6gvONxR4sf7o
So do wifi connected microwaves and refrigerators. But when you open the door
to that, or more generally "technologically differentiated hardware," you're
essentially talking about anybody. Fancy lightbulbs, for example. Or hook them
up to wifi and now they're software differentiated, if 'technologically
differentiated hardware' is a step too far.

I read it as the author saying "oh by the way these other companies that don't
fit are their own (massive) category, not counterexamples to the criteria I've
laid out."

------
harimau777
My definition of a tech company, with respect to software engineering, is one
with some combination of:

1\. Software is the core product and/or not considered a cost center.

2\. Technical decisions are made by technical people.

What these both come down to is that a tech company is one where software
engineers are treated as full professionals rather than simply as labor.

~~~
jpindar
That would include many electronics manufacturers, since nowadays most
electronics contain firmware and sometimes are controlled by apps. But they
are apparently not considered tech companies.

(Note that I prefer the old meaning of the word "tech" when it was short for
"technology". But it's not up to me.)

------
stumblers
I think the label/type for a company gets figured about by asking: "what do
customers come to you for?" There are different ways of asking it, and maybe
different words to use, but that's the most direct, simple, and helpful
question I've found.

The article makes some great points, but I think the use of software and
technology for strategic advantage is different from the fundamental "purpose"
of the company.

------
40acres
Specifically, the word tech means very little. What Ben is describing here --
and what WeWork was trying to present themselves as in their S-1 (by using the
word _tech_ 100+ times) is some type of software platform.

For instance -- Intel is a clearly a tech company, but specifically they are
more of a manufacturing company than a software platform provider.

------
Aperocky
Any company where dev/tech have a substantial say.

I have worked for certain communication mega-corp, while the business is
(somewhat) technical, the dev have almost no say at all. That is where I would
draw the line and call that a 'traditional' company. I've since found job at a
real tech company.

------
mrnobody_67
By that definition, Allbirds, Away Luggage, and any number of others aren't
tech companies that deserve 20-40x revenue run rate multiples either...

------
sharadov
Isn't every company that uses technology extensively in their day-day work a
tech company. I hired a contractor to upgrade the kitchen/bathroom. The guy
was using Salesforce and other project management software and would keep me
appraised of regular project updates and scheduling. For the kitchen design -
their guy showed up with a laptop where he designed the kitchen using a
3D-design software. Not only that they got it finished in 5 weeks, granted I
paid 5% more, but it was well-worth it.

------
arcticbull
I posit these days it’s a company that’s valued as a multiple of earnings
instead of a multiple of EBITDA. Most companies these days are “tech
companies” once they reach a certain size, to the point where the distinction
isn’t particularly relevant.

~~~
s_Hogg
The "E" in EBITDA stands for earnings - what particular distinction did you
see between EBITDA and the earnings you're talking about?

Completely off-topic, I read somewhere recently that EBITDA could also stand
for "Earnings Before I Tricked the Dumb Auditor".

~~~
H8crilA
He should have written revenue. It is how the IPOs are priced these days (YY
times yearly revenues, with YY in the range of 15-25). It is a pretty useless
way of valuing companies.

While we're here it is worth remembering that unlike most of today's "rising
stars", most of the established tech giants were profitable at IPO time
(Google, Facebook, Apple, Microsoft).

~~~
arcticbull
Correct I meant revenue

------
einpoklum
Answer: Not WeWork.

------
smelterdemon
A tech company is a company that is:

(1) Marketed to investors as a tech company

(2) Valued by investors based on the premise that they are or will become
oligopolists in their market

------
AmericanOP
There are companies that are doing well and there are companies that are doing
well

------
rememberlenny
"In that respect, all successful companies, at least in a free market, are
tech companies: they do something more efficiently than anyone else, on
whatever product vector matters to their customers."

The simplification that doesn't do justice to the article is: Tech companies
are those that are more efficient than their competitors.

~~~
s_Hogg
> The simplification that doesn't do justice to the article is: Tech companies
> are those that are more efficient than their competitors.

That's a solid argument for abandoning the term altogether, in my view. If the
term could apply to such a gigantic amount of different things, what is the
worth of making that distinction?

~~~
maehwasu
This is why the author of the article wrote the article: it turns out that
there’s a real and useful distinction that takes more than 30 words to suss
out.

