The 'new reality' in the Tech sector

Heneghan consultant Gavin Daly, a former business journalist, shares his perspective on the 'new reality' in the tech sector'.

I got my first full-time job in journalism, as Technology Reporter at the Sunday Business Post, in 1999. Internet adoption was spreading, helped by Google's launch the previous year, and web companies with exotic names were raising big investments.

My editor at the time, the brilliant Damien Kiberd, wanted to know who these companies were, which ones were likely to make it and when normal rules of business - income and expenditure, profit and loss, supply and demand - would begin to apply to them.

The answer seemed apparent the following year when the dot com bubble burst, obliterating countless ventures. A minority - those with actual customers and money coming in - limped on in leaner condition. Some, having learned their lessons well, went on to great success.

The start of 2023, though not nearly as severe as 2000, has a similar feel to it, as tech companies deal with new realities around funding, valuations and post-Covid customer demand. Boring business fundamentals are back in vogue.

When software group Salesforce - which is in the midst of laying off 8,000 staff - reported quarterly results last week, Bloomberg reported that company executives on the earnings call used the word 'profit' as many times as in the last nine earnings calls combined. (The Wall Street Journal recently reported that Salesforce was paying actor Matthew McConaughey, $10 million a year to be a "creative adviser" but that's another story.)

Tech sector poster child Stripe is reported to be 'on track' to turn a profit this year after losing money in 2022. Stripe is reportedly raising new investment at a valuation of $50 billion, down from $95 billion two years ago, when it was the world's most valuable 'start-up'.

Similarly, when fintech Revolut - valued at $33 billion in its most-recent fund-raising - recently published its 2021 accounts, all the focus was on its first-ever annual profit, some £26 million. Its chief financial officer, Mikko Salovaara, told CNNC that "the worst possible scenario would be if Revolut wasn't sustainable or if it were to require external funding".

That new reality doesn't just apply to the unicorns (though not many people are using that phrase these days). In a new survey from Scale Ireland, the representative body for start-up and scaling tech companies in Ireland, 51.6% of the 248 founders and chief executives who responded identified 'securing funding' as the biggest challenge.

In response to the question 'how difficult is it to attract private capital', almost 80% of the respondents said it was either 'difficult' or 'very difficult'. Less than 18% described fund-raising as 'straightforward' and only 2.4% considered it 'very straightforward'.

Behind the funding challenge, 'recruitment and retention of staff' - an industry bugbear in recent years - was a distant second, troubling just 16.9% of the survey respondents. That seems to reflect the new reality in the tech jobs market, with fewer staff likely to jump ship for new opportunities.

Having swapped 20+ years in business journalism for communications consultancy, a number of things seem clear to me as we head further into the year. The 'good news' tools of announcing investment and expansion are gone for a lot of companies - though certainly not all, as seen in recent news from Swoop, NoFrixion, Medihive and others.

Many companies that have only ever grown are facing communications challenges around layoffs, scaling back office space and cost-cutting. A strategic approach will be required to communicate key messages, internally and externally, and keep the business on track. Customers, employees and investors - both existing and potential - must all feature in any plan.

At the same time, the perception of the tech sector as one that is always growing - where jobs are plentiful and salaries always increase - has been rattled. More traditional employers such as the public sector and banks might look like safer bets (for a while at least); it's no coincidence that Bank of Ireland has announced plans to hire 100 tech workers for "exciting digital projects".

Uncertainty breeds innovation, however. Just like in 2000, there will be opportunities for the companies that can navigate the new conditions - in the form of new customers, new markets and M&A activity. And the ones that come through will be stronger for the experience.

About the author: Gavin Daly

Gavin joined Heneghan as a Consultant in 2021. A former business journalist and editor, Gavin has a deep network of relationships across business, public sector, professional services and media, built up over more than 20 years' experience working in national newspapers.

Gavin was most recently Deputy Business Editor of The Sunday Times (Ireland), where he had key responsibility for driving the paper's market-leading business news and analysis.