Facebook is out with second quarter earnings, and the company reported steady growth in revenue and its user base. Twitter and Yelp, on the other hand, disappointed investors with growth numbers.
Not to be too dramatic about it, but if you’re a tech company, it’s pretty much grow or die.
“Growth is actually the most important thing, especially for companies that are small,” says Kara Sprague, a partner at McKinsey & Company, and co-author of a paper titled “Grow Fast or Die Slow.”
By small, she means under $4 billion a year in revenue. (Twitter, at less than $2 billion, still counts as small.)
By growth, she means explosive growth.
“If you’re a health care company and you’re achieving 20 percent growth, everyone would be ecstatic,” says Sprague, but if you’re a tech company, 20 percent growth could mean it’s time to call the undertaker. “That is actually a low number. It means the company won’t be around in several years.”
If a tech company does manage to survive to corporate adulthood, like 11-year old Facebook, astronomical growth gets harder and harder.
Analysts like Alan Pelz-Sharpe, from 451 Research, says investor focus really should be on other things. “Iit should be on revenue and profit, but it isn’t.”
Instead, the obsession with a tech company’s growth sticks around. It helps convey relevance to investors, which means companies keep throwing money at new users and new markets, worrying less about the bottom line today in order to stay alive tomorrow.
As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.
Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.
Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.