What’s a Tech Company?

Scaling Strategy by The Family

By Nicolas Colin (Co-Founder & Director) | The Family

This story is part of a The Family series exploring business strategy in the 21st century. Sign up for my weekly newsletter to make sure you’re up-to-date on how businesses thrive in the digital age.

Today’s digital age has led to many misconceptions, such as when everyone you meet supposedly works for a “startup” because the company was founded 3 years ago and has 18 employees.

Just as the definition of a startup is cloudy for many people (I’ve talked about that here and here), so is the definition of a “tech company”. So I’d like to take a few moments to present The Family’s framework for exactly what a tech company is, and what it isn’t.

A tech company is not simply a company that uses technology. Nor is it just a business model that is scalable. A telecommunications company is also scalable. But in truth such a company makes a living off its rent, while dominant tech companies such as Facebook, Uber, Netflix, or Amazon remain constantly on the edge.

In fact, we’re now able to underline the extent to which tech companies are different from traditional companies — even from those which operate networked infrastructure. A tech company fits three criteria:

• Its business model is marked by increasing returns to scale, sustained thanks to supply-side economies of scale, strategic positioning, built-in network effects, and supply-side platform effects.
• Its main strategic goal is to provide its users with an exceptional experience, as it’s the only way to inspire trust and retain those users that are so critical for sustaining increasing returns.
• It collects user-generated data on a regular and systematic basis — which enables it to constantly improve the experience and, again, sustain increasing returns.

Notice how consistent this is with the definition of entrepreneurship provided by Babak Nivi:

For entrepreneurs, there is no tradeoff between quality [exceptional experience] and scale [increasing returns]. The job is to do both [by collecting user-generated data] — not one or the other. If it can’t be done, you innovate [use those data].

Notice also that the importance of data collection for improving the user experience is probably one of the biggest problems with the move toward the future of data. People have essentially come to believe that companies gather data so that they can sell it to marketers or otherwise use it for nefarious purposes — in large part because we’re so used to predatory companies from the old world (such as Equifax). There’s very little sense among the general public that their own lives/services utilized will be improved through the collection of user-generated data.

In thinking about which companies fit these three criteria, it’s also interesting to think about how non-tech companies may fit only one or two out of them.

Exceptional experience only = local stores. Many small businesses provide an exceptional customer experience, without monitoring user activity or benefiting from increasing returns — typically a local shop where customers are served with great care.

Exceptional experience + data collection = luxury chain stores. Some businesses provide an exceptional customer experience and collect lots of data because they’re really eager to know their customers, if only to take better care of them. Luxury chain stores and luxury brands typically fall in that category, but they’re not driven by increasing returns.

Data collection only = hypermarkets. A few businesses collect data on a regular and systematic basis, but without bothering to provide an exceptional experience or benefitting from increasing returns. Hypermarkets are a good example: they know so many things and collect vast amounts of data, but they don’t know a thing about providing an exceptional experience — and they’re trapped on the Northern Side, without the increasing returns that only Amazon generates.

Data collection + increasing returns = banks & telcos. A few very big businesses check two boxes: regular and systematic monitoring of their user activity and increasing returns. Verizon for instance, like every telco, is a case in point: it knows everything about its customers and enjoys increasing returns thanks to its infrastructure. But that kind of business will never provide an exceptional experience for one very simple reason: it is so easy, when you own an infrastructure that generates increasing returns, to live off your rent that there’s no point in wondering about your customers’ feelings. This is, I think, the reason why both telcos and banks take so little care of their customers — and why they’re among the most hated corporations in the world. They use our data not to serve us better, but to act as predators.

Increasing returns only = postal services. I found an example of a business that enjoys increasing returns, but that doesn’t check the other two boxes: postal services. National postal services don’t know their customers, since in the pre-digital world you couldn’t track customers who sent mail to each other. Also, they don’t really provide an exceptional experience — some would say it’s an understatement but surely they’re willing to do better and they’re trying hard.

Exceptional experience + increasing returns = ∅. I didn’t find any example of a company that has both an exceptional customer experience and increasing returns without collecting data from its users. I guess to achieve that goal you really need to collect user-generated data and become… a tech company.

Here are three series of questions for you:

• Do you match the three criteria? If not, do you even want to? (Hint: Because being a tech company is a wild ride — not for the faint of heart.)
• Can you devise a plan for improving customer experience and converting to regular and systematic monitoring of your users’ activity? If not, whom do you intend to ask for help? (Hint: Entrepreneurs know best.)
• If you’re enjoying increasing returns to scale, is it because you serve your customers well to the point of forging an alliance with them? Or is it because, like some telco or utility, you’re living off the network effects brought about by your infrastructure?

I’m glad to have your comments and feedback. Also, sign up for my weekly newsletter to be notified when new issues are published.