May 28, 2022

Last weekGlossier laid off about 80 employees (or a third of the company’s staff), most of whom were on the technical team.

While the company focused on technology when it was still a cosmetics company, it’s not hard to see these layoffs in light of the tech collapse of the public market.

Many venture capital-backed companies think they are technology companies—in fact, they were born that way—when in fact they are not. The leaders of these companies need to know what industry they are in, what these companies are good at, and focus their technology efforts on that.

Fundamental gap: Software companies don’t necessarily earn the same as software companies.

Technology companies receive the highest ratings and are awarded the highest multiples of any industry. Chasing those high numbers means you struggle to demonstrate operationally and financially that you look like a tech company.

For a company like Glossier, looking like a tech company is the difference between a price-to-sales ratio of 5.44 like Estée Lauder or 31.6 like MongoDB. Glossier founder and CEO Emily Weiss knows this, as do her investors.

Technology companies are valued for one reason: when they operate, they have high growth rates and very high profit margins. As a result, companies often make product decisions in order to achieve a technical business profile, such as investing in development or avoiding profit-driven activities.

For example, Hunter Walk noted that studying software margins may be one reason why social media companies avoid human moderation costs.

The difficulty with such decisions is that you direct your technical talents to the wrong problems.

But when you go public, the story changes. Marketers work by taking companies, classifying them, and then ranking them against known metrics. You do not determine what kind of business you are in.

You can advertise as a tech company and you can make very good use of technology, but if the public market decides you are a cosmetics company, you are a cosmetics company (to a lesser extent for valuation purposes) unless you can prove otherwise.

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