Why Tech Firms Will Focus on Profitability Over Growth in 2020

WeWork’s crash last year was a sign of what is to come for technology companies. Venture capital funds—whether due to WeWork, the handful or failed tech IPOs in 2019 or simply changing market trends—will now want evidence of profitability, not just growth and market share. This is a turnaround for tech companies, which have focused on rapid growth and expansion first.

“Venture capital will no longer fund these continuous losses any more. They will stop funding these companies until they see a path to profitability,” David Shulman, senior economist for the Ziman Center and UCLA Anderson Forecast, tells GlobeSt.com. “Tech firms will have to go for profitability as opposed to just going for growth.”

Last year, several tech companies, like Uber, for example, in addition to WeWork, launched unsuccessful IPOs. These showed a weakness in the market, and as a result, tech firms are going to need to switch strategies. “The market isn’t going to accept losses forever. You are going to need to show a path to profitability,” says Shulman. “That means slowing down growth as profitability becomes more important.”

Unfortunately, tech firms won’t be able to have it both ways—profitability and growth. This is because growth and profitability are working in opposition to each other, at least for tech firms,” says Shulman. “It is the growth that drives the demand for space, not profitability. However, growth is expensive; it costs earnings in the short-term for many of these companies. So, if they are focused on profitability, they will have to slow down growth. That is going to slow down growth in Silicon Valley.”

The slowdown in the tech growth will have a major impact on office leasing activity in 2020, particularly in markets with strong tech markets. “That is going to slow down leasing demand, especially in tech markets like the Bay Area,” says Shulman. “I think that leasing demand for office space will be slower this year than it was last year.”

While this trend will certainly impact the office market, it won’t lead to a recession or trigger a downturn. “It is going to slow down investment and it is going to slow down leasing, but I don’t think that tips us into a recession,” says Shulman. “It is a real estate issue, and some markets might see a bigger impact from the slowdown. However, I don’t think that will impact the national economy.”