This post originally appeared on Inc.
Walk past a Sweetgreen during lunchtime, and you’re bound to find a line of famished office workers snaking out the front door for a shredded-kale caesar salad or quinoa bowl. But when the Los Angeles-based farm-to-table salad chain launched a new appin January, it curiously referred to itself as a business that had developers—not produce or salad dressing—at its core. “We’ve always acted more like a tech companythan a food one,” read its press release.
In recent years, Sweetgreen has grown an in-house tech team and created an algorithm to make ordering more efficient. It’s raised $95 million in venture capital. But does all of this make a salad retailer a tech company, particularly when all of its revenue still comes from selling roughage?
These days, businesses across every sector—from fashion to finance—are claiming the tech label. The recasting is seductive: It’s simply a lot cooler to be about the internet of things than to be about just things.
But whether or not you declare yourself a tech business is more than just semantic—it’s an existential choice. Before you identify too closely with Silicon Valley, consider the potential dangers and rewards.
Upsides
- Appeal to talent: Advertising, consumer goods, and media companies are losing the talent wars when they face off with tech companies. “I can say I’m a water-bottle company, or that I’m a tech-focused, direct-to-consumer water-bottle company,” says Bettinelli. “One has much greater perceived growth andcoolness.” Talent from Google and Facebook might even give you a second look.
- Attract funding: With $60 billion in VC money at play in 2015, it’s no surprise that every company is looking to cash in. Take a startup like The Melt, which managed to raise $10 million from Sequoia Capital in 2011 despite being a grilled-cheese chain (with a fancy mobile ordering system). “In general, tech companies are seen as faster growing, so their marketability and perceived value are greater,” says Bettinelli.
- Access tax incentives and subsidies: According to the Council for Community and Economic Research, 42 states offer incentives for nonmanufacturing tech startups. New Jersey, for example, entices companies with its Angel Investor Tax Credit Program, offering more than $50,000 to those in the tech sector.
- Avoid, or at least delay, regulations and taxes: By positioning itself as a tech platform instead of a hospitality company, Airbnb initially avoided regulations that would have handicapped its ability to compete with industry stalwarts. By the time local legislation caught up, it was already a serious player that could influence public policy.
Downsides
- Invest in the wrong brainpower: Founders often feel pressure to structure themselves as a tech company to appeal to VCs. As a result, you could staff up incorrectly. “Companies might hire expensive engineers early on to suit the expectations of their investors,” says Payne. “Only later might they realize that it would have been better to just use off-the-shelf software.”
- Possibly inflate a bubble: Last year was the second-best for VC investment since 1995, but it ended with massive write-downs of self-identified “tech companies” that couldn’t hit their marks. “I think there will be significant implosions of highly visible startups by year-end,” says Payne. “In five years, when someone starts a clothing app, they won’t call themselves a tech company.”
- Struggle with growth expectations: Staffing startup Zirtual cast itself as a tech platform for freelancers, until labor lawsuits forced the company to convert its then-sizable work force to traditional employees. Its burn rate skyrocketed, and investors who had been funding the lean tech firm became disinterested in what was actually a fat HR company.
- Become vulnerable to write-downs: With early backing from Peter Thiel and Sean Parker, e-cig startup Njoy considered itself a tech company, but the brand struggled in an exploding, unregulated market. Earlier this year, Fidelity Investments owned up to its unrealistic growth expectations and wrote down $10 million of its common stock to just $12.
- Raise money for the wrong business: In 2011, Fab.com launched as an e-commerce site selling products, but then decided to also manufacture its own products. VCs who largely had no experience with capital-intensive manufacturing injected $330 million into the startup. Fab quickly burned through its funding, and was sold for a paltry $15 million.
What’s the definition of a tech company? It’s complicated.:
“You are a technology company if you are in the business of selling technology–if you make money by selling applied scientific knowledge that solves a concrete problem.”— Alex Payne, Co-Founder, Simple
“It’s generally a company whose primary business is selling tech or tech services. A more nuanced definition is a company with tech or tech services as a key part of its business. It’s a hard question.”— Todd Berkowitz, VP of Research, Gartner
“A tech company uses technology to create an unfair advantage in terms of product uniqueness or scale or improved margins. Ask the question: Could this company exist without technology? If the answer is no, it has to be a tech company.”— Greg Bettinelli, Partner, Upfront Ventures
“I think there’s a false dichotomy in the idea that a company either is or is not a tech company. I think it’s possible for a company to be a hybrid if tech is giving it an edge over incumbents.”— Hayley Barna, Venture Partner, First Round Capital
See also: Study: Poor Writing Skills Are Costing Businesses Billions
