From the finance desk: Challenges facing the tech industry today
Editor's note: The following is a guest article from Brock Killen, SVP — Finance & Business Operations of Infinite Convergence Solutions.
In recent years, technology has given us some of the greatest innovations — from self-driving cars to collaborating messaging apps and the sharing economy made up of successful startups like Uber and Airbnb.
As a result of this impressive level of innovation, technology companies today are experiencing record growth coupled with even higher profits.
In today's increasingly competitive environment, a tech company's success hinges on its ability to continuously and quickly adapt in this evolving industry. As the industry has continued to shift and evolve, here are some of the the challenges companies are facing today:
Winning and maintaining top tech talent
Regardless of whether a technology company is private or public, its strongest asset is most often an intangible one — its talent.
A company's success ultimately starts and ends with the talent it recruits. This holds true for all organizations, but in technology specifically, talent has become precious due to the fact that tech is infiltrating every industry, making for a very competitive landscape.
In looking at years past, those with engineering experience or a programming background would traditionally develop a career strictly in the tech field. Today, we're seeing graduates with any type of technology degree being recruited by organizations in a wide variety of verticals.
For this reason, technology-specific companies are challenged to not only remain competitive against other tech companies during the hiring process, but companies in other industries, too.
Even after the hiring process is complete and a company secures top talent, there is pressure to hold onto it. Talent is one of the most important financial investments an organization will make, so keeping talent from walking out the door is just as challenging as finding and hiring the right people.
The cost of turnover for replacing talent can range from 16% of an employee's annual salary for a lower paying position to 213% of annual salary for executive positions, according to the Center for American Progress.
For most tech companies, there's always a lag between the development of a product or service that the market truly needs and when people actually start adopting it and revenue begins coming in. Companies often find themselves stuck in the middle ground and die during this critical stage.
How can companies successfully bridge the gap between development and profitability, at a point when they're getting some revenue, but still need outside funding?
The answer lies in monetizing new technologies more quickly, but this is often easier said than done. In early stages, it's important for companies to prove their value and measure traction in other metrics as they are figuring out monetization.
Take Facebook as an example — it had the user numbers first, which is what early investors bet on. The monetization aspect came much later.
Measuring traction often comes by establishing a "magic number" to prove a company's worth, outside of just revenue. This number is often in the form of users on the product or service — can you build some critical mass of users and then prove that this number will just keep growing?
Next, will you be able to charge these users at a rate that will cover your cost of growth? If not, it's time to look for more investment until you can bridge this gap. Figuring out this gap period is a consistent struggle for today's tech companies.
Making the transition from startup to IPO
Going public or filing an IPO can be a strategic way to facilitate company growth and financing. The process is often time consuming and expensive, but the result of a successful IPO can bring an influx of cash that can help grow a business exponentially, without going through rounds of venture capital funding. An IPO is often the ultimate goal for many tech startups.
One of the reasons 2016 saw just a few tech IPOs was winners were just starting to emerge in various industries.
However, the start of 2017 saw the most significant uptick in IPOs since 2007, with two-thirds of tech IPOs worth more than $1 billion. Tech IPOs are often initially valued for their growth prospects, which, for several companies, is quantified by an increase in registered users or app downloads — seen as predictors of future revenues and market share.
When a company goes public, the pressure to deliver revenue growth and increased profitability each quarter can be a difficult challenge to meet.
The challenge lies in the growth process itself – maintaining company momentum, business cycle time, financial stability, attracting investors and new users and the ability to cover costs associated with growth.
That said, it's important for tech companies to assess the risks as well as rewards associated with going public.
Under the right conditions, an IPO can be a strategic tool to open new opportunities for a company. However, it is not right for every business — particularly those who have failed to prove their value in their industry.
Also important to consider is the significant pressure from original investors for a liquidity event to meet their investment horizons, weighed against whether an IPO is the best route forward in general.
As the industry continues to advance and grow, there will always be room for new players to bring innovative technologies. Technology will continue to infiltrate all companies in all industries, fueling ongoing growth.
Organizations will continue to struggle to find ways to monetize these new technologies quickly, while trying to cover their growth in costs — particularly in hiring and maintaining top tech talent.