A brief examination of some of the reasons why tech businesses still close although they appeared successful.
You have experienced it before: a tech business has been getting rave reviews for the products and services it offers. It has been growing rapidly, not necessarily just in North America, but worldwide, and appears to be well underway to become a global brand. However, and seemingly out of nowhere, the talk emerges that either this business has yet to make a profit, or has been incurring massive losses year on year. While it may not mean that such a prominent operation will shut down anytime soon, especially those based in North America, it does lead one to question whether, at the very least, it will ever become viable?
The impetus for that question is Uber, the online transportation network company. Though the firm is over seven years old, a report in Engadget earlier this week noted the firms has lost USD 1.27 billion in just the first half of 2016. Further, it lost around $2 billion total in 2015, and over $4 billion since its inception.
Having said this, Uber is not unique, there are a number of popular tech businesses, such as Twitter, that are in the same boat. Here are five reasons why some popular tech businesses can appear successful, but are not financially viable and ultimately will fail..
1. Firms too dependent on external funding
While this point might not obtain in the Caribbean, where funding options are still limited, in other parts of the world, particularly more developed countries, firms do not have to be as focussed from the outset on profitability. Thanks to the funding ecosystem available, the emphasis tends to be, how can the business owners and investors successfully exit the business eventually and recover their investment. Consequently, their long term goal tends either to be acquired by another firm, or to bring the business to a point where it can make an Initial Public Offer on a stock market.
2. Too much focus on market share and not viability
Coupled with the previous point, many tech businesses, and also industry experts, appear to focus, almost exclusively, on the market size – the number of customers or subscribers a business might have – and gloss over the issue of its viability. Though the majority of startups, generally, fail to make a profit for at least their first two years of operation, it ought to still be their endgame. Further, though the popularity of a business’ products or services among consumers can position it to be financially successful, the model being applied must be sound enough to deliver those results within a reasonable period of time.
3. Businesses are fighting for the same advertising dollars
To a considerable degree many tech businesses, especially those that are delivering their services online, or via mobile/cellular phones, tend to be overwhelmingly dependent on advertising revenues to finance their operations. Although spend on digital advertising in the United States is estimated at USD 69 billion for 2016, and will increase to over USD 100 billional by 2020 (Source: eMarketer), it is still a finite pool, especially when the number of businesses that are dependent on this source to be viable, is considered.
4. Customers reluctant to pay the true cost
To a considerable degree, the tech space has evolved to the point where, depending on the product or service, consumers are reluctant to pay for them. This is particularly the case with mobile/cellular applications, and social networks. Whilst freeness is useful to attract users and subscribers, it is difficult to build a sustainable business on such a model, as the previous points suggest. However, it can be difficult, or even detrimental, when fees or paid services are introduced, because consumers have become accustomed to not paying, and there may also be competing products that either are free, or are being offered a lower price points, resulting in a conundrum for many tech businesses.
5. Firms not prepared to cater to niche markets
Finally, as much as it can stroke the ego, is ‘world domination’ necessary, or good, in all instances? All too often, businesses can get enamoured with the concept of scaling their operation beyond specific markets to cater to a global customer base. However, in order to do so, not only requires considerable resources, but one may find that the uniqueness of the product or service can get lost in the effort to expand the business worldwide. Hence whilst the potential gains that could be made by ‘going global’ could huge, it is also high risk, which very few firms survive.
Image credit: Andrew_Writer (flickr)
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Indeed. I think reason 1, takes the bulk of the weight of the problem. The lessons of the dot-com bubble burst, at the turn of the century, have not been fully taken in. The so-called “unicorns” today abound with highly blotted capitalised values.
Blablacar for example, a French variant of Uber, is valued at almost $2bn. It loses money; it has always been losing money. Its value is purely based on the “perceived” potential to be realised “should” it be floated to the public.
Indeed, the true value of the company is its operating financials and how the assets are being utilised to generate revenue. When these things are taken care of, the results in the financial markets speak for themselves.