Bain – Technology Report, 2023

The Bain Technology Report 2023 discusses how investors in the tech sector are attracted to young, disruptive companies for their growth potential. However, as companies and their markets mature, investors expect a mix of growth and returns. More mature companies in stable markets can expect slower growth, but profitability and return on invested capital become more important to investors. It is crucial for companies to understand their position in the life cycle and communicate expectations to attract the necessary capital. In the past five years, technology companies have faced challenges such as supply-and-demand shocks and financing uncertainty. As a result, many companies have focused on growth at any cost, believing that growth is the most important factor in creating value for shareholders. However, the truth is more nuanced. Shareholders reward tech companies differently based on their context and life cycle stage. For mature companies, return on invested capital becomes more significant. As markets mature, they also attract conservative investors who prioritize stability and profitability. This limits further growth and investment in the business and attracts value investors who care about stable revenue streams. Investors determine a company's value based on total shareholder return (TSR), which measures factors such as revenue growth, profitability, and capital efficiency, as well as investor sentiment and capital structure. The weight of these factors varies depending on the company's growth rate and life stage. Early-growth markets prioritize revenue growth and future prospects, while late-growth markets focus on growth and initial profitability. In mature markets, profitability and return on invested capital are valued, and asset-rich legacy markets prioritize highly predictable returns. Companies in each stage of market maturity should maximize the sources of TSR specific to that phase. While growth is still important, profitability and capital efficiency can create more value, especially in late-growth and mature markets where companies often downplay their significance.