What denotes a technology company?
Tags: technology, finance, career, leadership
Published: 2024-04-06 00:53:49

---
title: What denotes a technology company?
published: true
date: 2024-04-05 03:59:44 UTC
tags: technology,finance,career,leadership
canonical_url: https://makerwork.hashnode.dev/what-denotes-a-technology-company
---

[Ex-technology companies](https://lethain.com/ex-technology-companies)

Will Larson, a writer and a software engineering leader, delves into a thought-provoking inquiry posed by software engineers: "What denotes a technology company?" His exploration yields several insights into the essence of what truly defines a company as a technology entity.

> The first perspective, aka. the investor perspective, is Ben Thompson's "Software has zero marginal costs". You're a technology company if adding your next user doesn't create more costs to support that user. Yes, it's not _really_ zero, e.g. **Stripe** has some additional human overhead for managing fraud for each incremental user it adds, but it's a sufficiently low coefficient that it's effectively zero.

However, the above perspective may be under fitting, as it overlooks some companies, such as Visa, which exhibit negligible marginal costs upon adding new users. Moreover, merely adopting a technology doesn't elevate a company to the status of a tech company, which is why entities that utilizes current software are no more than users of the most modern SaaS applications.

This distinction is evident when considering companies such as **WeWork** and **Peloton** , which have more in common with companies that own physical assets than a tech company, where the former company leases empty buildings and converts them into office space, and the latter sells home fitness equipment and streaming classes.

> The second perspective, aka. the employee perspective, on being a technology company is captured by Camille Fournier, "A company where engineering has a seat at the table for strategic discussions." If engineering has a meaningful influence in how the company makes decisions, then doing engineering work at that company will generally be a rewarding experience. If they don't have much influence, then they'll generally be treated as a cost center.

By applying both perspectives in the case of WeWork and Peloton, we may be able to classify Peloton as a tech company, while WeWork falls short of the definition.

From the investor perspective, adding a user to Peloton comes with the costs of both hardware (e.g. bicycle and cloud infrastructure) and software (e.g. streaming software). The marginal cost benefits will come mostly from the software component, as Peloton adds more users. In contrast, adding a user to WeWork comes with primarily the cost of hardware (e.g. office space, utilities), but adopting a software to manage its users base does not make WeWork a tech company.

From the employee perspective, WeWork's investment in its software would more likely be treated as a cost centre, rather than an asset. On the other hand, Peloton's investment in its streaming software is likely classified as an asset that will generate revenue from the next user.

However, Peloton may not be classified as a fully tech company, in the sense that it can never reach the ideal zero marginal costs, due to its hardware cost that increases for each additional user, unlike companies such as **Netflix** , **Facebook** , etc that may approach zero marginal costs in the long run.

> The third perspective, aka the innovator's perspective, centers on Clayton Christensen's "The Innovator's Dilemma", suggesting that companies who are creating or leveraging disruptive technologies are tech companies. In this case, only businesses that obsolete a previous generation of businesses deserve the moniker, and only history can ordain whether a company is a technology company. In a future where Tesla successfully disrupts the existing automotive industry giants, they are such a company; in a future where they fail to build a durable business, they are not. This definition, reaching back from the future to judge todays companies, is interesting but not very useful.

The author labels Peloton a "tech company" due to its disruptive technology, in this case creating a new market for online cycling classes and taking away market share from physical gym classes. But it is yet to be seen if Peloton can build a durable business that will make obsolete the physical classes.

Larson's article offers a multifaceted perspective on defining a technology company, suggesting that the answer is broader than a sole perspective. It involves a blend of litmus tests that encompasses economic models, strategic roles of engineering, and the potential for disruptive innovation.