Why the Spinvox saga shows one rule applies for tech companies and another for everyone else.
Technology businesses have been doing something curious to all of the conventional measures of a company’s worth for a few years now. The phenomenon arguably reached its nadir not during the dotcom bubble, but with the incredible valuation that came with Microsoft’s $240m investment for a 1.6% stake in Facebook back in 2007. That gave the social network a valuation of $15bn, as well as a frankly insane P/E ratio based on its 2007 revenues of $150m.
Its then 52 million users and 65 billion page views a month were undoubtedly impressive and even worthy of all the hype, especially given that they were achieved with just 350 employees. But could that eye watering valuation really be justified when the business had no clear path to profitability and its investors no exact understanding of what its actual value was? In any conventional sense, of course not.
The traditional measure of economic success, profit, doesn’t fit well with numerous web companies. The rules are different. No one would question the value of Twitter, which took just two years to reach one million users on the back of $5m of initial funding. It also has just 50 employees as of year three, although it’s still waiting to be profitable and no one is quite sure how to monetise it.
Companies that use technological capital can sign up millions of users and even change the world without having the kind of impact on GDP a traditional company does. The ‘products’ are largely free to the end-user, they don’t create many jobs, the work is done by servers and software and the companies often have little physical impact on their own home towns. Giants of industry had cities built around them. Facebook, unquestionably a powerhouse of the web, is little more than a medium-sized employer and hasn’t dramatically changed the city of Palo Alto in California.
Perhaps web and tech companies will necessitate a change in the way we measure success. The Spinvox saga, which has been rumbling on for almost four weeks now, reminded me of the dichotomy between the judgements and ‘valuations’ – in a literal, financial sense and in a more general, social one too - of technology firms and those given to more conventional businesses.
Led by the (apparently now fallen) darling of the business press, Christina Domecq, Spinvox was been touted as a rare example of a UK tech firm that we could really shout about, a genuine world-beater that put the usual depressingly parochial fare in the shade.
Having embarked on a heavily VC-backed land grab, the only way the voice-to-text messaging firm could go if it was to achieve any success, its metrics certainly made it look like a classic technology play.
Masses of start-up capital? Check. A long, uncertain road to profitability? Certainly: it’s been burning through cash like nobody’s business, and losses grew more than 30% last year, with a reported pre-tax loss of £49m in 2008 compared with £37m the year before. It even had the relatively light employee count that characterises a tech business – in the UK at least.
All of this would have been forgivable, and more besides, had it not been for the allegation which started what Domecq’s supporters call a ‘smear campaign’ one month ago. Would we all have been so intrigued by the changes in the firm’s articles of association, which have seen major shareholders tighten their grip on the firm? Or so alarmed by the dossier, circulated anonymously to shareholders, which contained accusations of misappropriated resources?
All big stories in their own right, but the blockbuster which kicked it all off came from BBC allegations which suggested that, far from being converted by proprietary technology, the majority “of messages have been heard and transcribed by call centre staff in South Africa and the Philippines”.
If it’s relying too heavily on people to do its work, the business won’t be able to get the scale it needs to succeed because of a forbidding wage bill, which would go a long way to explaining the financial problems the firm is clearly facing.
The company has never made any bones about the fact that it uses human intervention when its technology can’t interpret a message. Indeed, it claims to be most proud of its patents which pertain to how the technology passes over to human operators in real time when it fails. Some combination of costly, accurate humans and cheap, yet unreliable automation characterises Spinvox’s offering.
The debate, however, hangs on the extent to which the firm is relying on the intervention. In an effort to stave off the criticisms that followed the BBC’s allegations, the firm invited a group of journalists to see a demonstration of its technology in action at its headquarters in Marlow, Buckinghamshire. This did little to assuage the doubts over the technology because it didn’t reveal the proportion of messages which were being transcribed by human operators.
Depressingly for Spinvox, the consensus is that the vast majority of the messages it transcribes are seen by call centre staff. This partly explains the vitriol the firm, and its embattled founder, have been subjected to. For all its talismanic stature at the forefront of the UK tech scene, the suspicion is that Spinvox isn’t much of a technology business after all. And only technology companies are forgiven the kind of losses and burn rate which Spinvox has.
While the state of the firm’s finances has certainly been brought into the spotlight in recent weeks, and its losses of £49m might be worse than previously thought, it won countless awards and plaudits with judging panels fully aware that the firm had a pre-tax loss of £37m on revenues of around £2m. But if Spinvox is really using human capital as opposed to technological capital, it will have to be judged by the old rules.