Amazon approach
Amazon's founder Bezos has tackled the issue of short-term profitability for longer than most people. In his first letter to shareholders when the company publicly listed in 1997,
Bezos said: "We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."
That the letter has been reproduced with each year's results announcement – for a stock that had grown 28,500 per cent since its debut – shows the continued need to educate those investors seeking returns in all the wrong places.
There is nowhere that education on the technology sector is more needed than in Australia.
The co-founders of Atlassian, the $3 billion software company born out of a $10,000 credit card debt in Sydney, have publicly stated any IPO will occur overseas, due mainly to the fact that local investors struggle to understand technology stocks.
It isn't a stretch to determine that other Australian technology success stories, from Campaign Monitor to Bigcommerce, SiteMinder and Envato, could look outside Australia for public investment.
Even those software companies that generate profits, and significant ones at that, struggle to communicate how they should be measured.
We talk about Australia moving away from a resource-dependent economy, to an innovation or technology economy – but if we don't learn how to evaluate high-growth tech stocks in the right way, we are in danger of losing our best and brightest.
Instead of listing on the ASX they will most probably list on the Nasdaq or NYSE, where media, investors, and the public have more support to scale a high-growth technology company.
The market in North America would never ask an early-stage SaaS company (that is well stocked with hundreds of millions in the war chest), to chase profits while they are growing 50 to 100 per cent year on year.
We should be celebrating the technology companies that are creating hundreds, sometimes thousands of jobs in Australia, not chastising them for not generating a short-term profit.
We need to focus on the right metrics for the right companies. For SaaS, particularly in the growth stage, it is revenue growth and cash burn, not profit.
One only needs to look at Salesforce.com, a company that is reportedly for sale. In just 16 years, it has built a market valuation of $US48 billion.
Yet the company has never turned a profit. Think Facebook, and others. Are profits really that important in the short term?
Snapshot, page-362
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