Is too much emphasis being placed on revenue growth as a measure of success? It’s a question that crossed my mind again last week when the Deloitte & Touche Fast 50 award-winners were announced.
Now in its third year, the awards scheme ranks the fastest-growing technology companies in Northern Ireland and the Republic.
Central European telecommunications provider eTel was this year’s winner. The company had topped the ranking based on an aggregate growth in revenue of 1,173pc over the past three years.
Responding to the award, eTel CEO, Sean Melly described the listing as representing “the cream of Ireland’s fastest growing technology companies.” But recent events have cast doubt on the credibility of using revenue as the prime method of measuring success within the Irish technology sector.
Last year’s Fast 50 winner, Riverdeep, was plunged into crisis recently when it fell prey to short sellers in the US and questions were raised about its accounting practices, while another of last year’s top 10 companies, storage distributor Xnet, ceased trading during the year. Both companies had grown at a ferocious pace in recent years but did their efforts to meet their growth targets come at the expense of other equally important business objectives such as cash flow, profitability and, in Riverdeep’s case, investor confidence?
Defending the awards, Tom Cassin, a partner at D&T, argued that revenue growth was indeed a valid measure of company performance. “We’ve been using the metric for a number of years and we see it as a reasonable measure of activity and growth,” he said. He added that measuring performance over a three-year period meant that to make the top 50, a company would have to be reasonably well established and not just a start-up that happens to win a couple of early contracts.
This point was echoed by Melly who noted that companies that make the ranking “are clearly showing some consistency”, rather than just being flash-in-the-pan operations.
He added that while other measurement criteria are perhaps more relevant in a maturing or mature company, revenue remains a good benchmark for early-stage ones. “I don’t think revenue should be the only measure, but it’s an important one, particularly for young companies that are developing. In the first few years, most people don’t make any profits or free cash flow. You can have an awful lot of zeros there, but there’s no point in measuring them.”
David Dalton, chief executive of venture capital firm Hot Origin, which works almost exclusively with start-up and early-stage technology companies, noted that rapid revenue growth used to be a realistic objective for tech start-ups, but the deteriorating market conditions have in many cases ruled out massive revenue gains. The response of the investor community has been to put considerably less store by sales growth as a useful measure of business performance. So, if there is pressure on companies to drive revenue, it’s not coming from the market, he argued.
“The outlook of the investment community has changed dramatically over the last 12 to 18 months,” he observed. “I think most investors these days are looking for businesses that have realistic plans. It’s no longer realistic to say that you’ll be able to grow revenues dramatically. So any revenue projections tend to be very closely scrutinised by the investor to decide if they really are deliverable,” he said.
If revenue is no longer king, what has dethroned it? A number of things, suggested Dalton. “What you need is a balanced set of objectives. We would make other objectives a higher priority than revenue. Being able to win business with customers in the target market is critical — for example, a software company looking to sell into the telecoms sector winning business with a France Telecom or a British Telecom. Another key sign of success is getting sustained or repeat business — getting the critical customers and then doing business with them over a sustained period of time.
“Positive cash flow is also a critical factor. Being cash flow positive and the path to it are much, much higher priorities these days than just blindly chasing revenue growth. Sales are absolutely critical but not to the point where you’re growing sales at a rate that’s slower than your costs.”
When it comes to technology successes, we’ve all been conditioned to applauding the tech sector’s hares as they leave the competition in their wake. Maybe it’s time to pay more attention to the tortoises ambling up behind.
By Brian Skelly