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ILLUSTRATION BY GEORGE WYLESOLBloomberg Businessweek(USPS 080 900) September 23, 2019 (ISSN 0007-7135) H Issue no. 4630 Published weekly, except one week in February, April, June, July, September, and two weeks in December by Bloomberg L.P.Periodicals postage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Offices: Bloomberg Businessweek, 731 Lexington Avenue, New York, NY 10022. POSTMASTER: Send addresschanges to Bloomberg Businessweek, P.O. Box 37528, Boone, IA 50037-0528. Canada Post Publication Mail Agreement Number 41989020. Return undeliverable Canadian addresses to DHL Global Mail, 355 Admiral Blvd., Unit 4,Mississauga, ON L5T 2N1. Email: [email protected]. QST#1008327064. Registered for GST as Bloomberg L.P. GST #12829 9898 RT0001. Copyright 2019 Bloomberg L.P. All rights reserved. Title registered in the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or email: [email protected]. Educational Permissions: Copyright Clearance Center at [email protected]. Printed in the U.S.A. CPPAP NUMBER 0414N68830Banish thoughts of Uber Technologies Inc., Airbnb Inc.,
or whatever other flashy startup comes to mind when you
imagine Silicon Valley riches. In what’s been a bumpy year
for tech companies, the superdull are the few sure things.
These companies sell nuts-and-bolts software used by
businesses or office workers and include Veeva Systems
Inc., which makes programs that pharmaceutical reps use
to keep track of their sales prospects, and Twilio Inc., which
coders use to create automated smartphone notifications
when, say, an Uber is arriving. Their sales tend to grow like
weeds, making it easy for investors to fire up a spreadsheet
and predict when the company might turn profitable. (It’s
2019: Even the safe startups are unprofitable.)
But there’s good growth, and there’s unsustainable
growth. If you pay $2 in sales and marketing for every $1 soda
someone buys, that’s a recipe for a run on fizzy drinks and a
dead business. Young tech companies are particularly vul-
nerable to this pitfall. In the minds of investors, if they’re
not growing fast, they’re irrelevant.
The question is whether companies are spending for
ephemeral or lasting revenue. One way to figure that out is
by calculating the so-called magic number. The basic idea
is to look at how much additional revenue comes from sales
and marketing spending, but there are different approaches
to getting there.
So who’s got a magical magic number? Workplace data
analytics company Splunk Inc. does, as do Twilio and Veeva.
Closer to danger are Cloudera Inc. and Box Inc., both of
which are hugely unprofitable because of high sales costs.
Investors are beginning to notice. <BW>�Ovide is a tech col-
umnist for Bloomberg Opinion◼ LAST THING
●EASY COME,
EASY GO
What does all that
marketing money
buy? Mainly it
goes to salaries
and commissions
for guys who
play golf with the
executives who
control companies’
technology budgets,
free trial offers
to get customers
hooked on the
software, and
advertisements
placed in magazines
such as this one.With Bloomberg Opinion● A CAUTIONARY
TALE
When Blue Apron’s
marketing scaled
back, growth
evaporated.
Shares are down94%
since its 2017 initial
public offering.●LIVING THE
DREAM
Blue Apron Holdings
Inc.’s sales almost
doubled over six
months in 2014,
around the time it was
spending a quarter
of its revenue on ads,
free meal kits for new
customers, and other
enticements.●MAGICAL THINKING
This simplified tally of a few tech darlings’
“magic numbers” was created by multiplying
each of their latest change in quarterly revenue
times4, and dividing by sales and marketing
expenses. Anything greater than 0.75 is
considered solid.By Shira Ovide
Some Boring Companies
Are Safe. Others, Scary
Annualized share price
change since market debut
90%0-30Magic number0TwilioVeevaAtlassianSplunk0.75 2.5ClouderaSalesforceDomoBoxSlackWorkday