Tech firms must have clear financial blueprint to survive, says Xero chair David Thodey

As many companies face an oncoming tech reckoning, Xero chair David Thodey lays down his advice on survival.

Australian technology companies will need to learn to articulate their expansion plans and a pathway to being cash flow positive in order to survive the oncoming tech reckoning, says Xero, Tyro and CSIRO chair David Thodey.

Mr Thodey, who spent nearly six years running telco giant Telstra, said doing so would be the only way to keep concerned investors on board as many start-ups and tech companies face the repercussions of a global market correction.

“I think the investment committee is now saying, ‘we want to be able to see companies that are on the way to, if not are, generating free cash flow’,” he said. “Those companies that are not at that point are being looked at more acutely, more seriously, and in some cases investors are saying unless we can see that pathway to free cash flow positive, we‘re going to re-rate you.”

The comments come ahead of the Australian New Zealand Leadership Forum’s annual Trans-Tasman Innovation and Growth Awards, of which Mr Thodey is chairing.

Over the past few months, dozens of listed technology companies have seen their share prices plummet, with the likes of Xero shares ($84.90) and Block ($98.65) down more than 35 per cent and 46 per cent, respectively, over the past six months.

The sharp fall in valuations has raised major doubts over the sustainability of big tech and start-ups, many of whom were paying salaries thrice that of the average Australian worker to graduates, which has been reported in this newspaper.

Mr Thodey has cast doubt over whether those large pay packets will last amid the current downturn, warning that these amounts are likely to shrink over the year ahead.

“It's just the dynamics of any market and I think in the tech sector, there probably will be a shift over the next six to 12 months,” he said. “As the demand starts to loosen up, there’ll be a reduction in packages and salaries that are offered.”

On surviving the current market, Mr Thodey said that tech companies should consider bringing on senior staff to help navigate a successful financial plan out of the downturn.

“I think people who understand the fundamentals of finance and have good financial discipline (will be needed),” he said. “You do need to be able to be financially astute and also be able to communicate what those finances will look like in the future. And I think those companies that do will continue to prosper going forward.”

While Australian tech investors have been told to expect a long and painful market reset, Mr Thodey said the local tech market’s status as emerging would provide some relief to investors. This, he said, is largely different to the US, where the economy is more reliant on big tech companies.

“(The fallout from US technology companies will affect Australia) to some degree, but not maybe as acute as we’re seeing in the US,” he said. “Obviously, the US economy is heavily skewed towards the tech sector in the top 10 listed companies. There’s been a different view that the market has taken towards tech companies as inflation comes in.”

“It's hard to be really specific in forecasting the future of the Australian tech sector, and we now have an industry, has not been as strong as the US who really started on that journey 40 years ago.

“I think maybe because we’re not so heavily oriented or dependent on the tech sector that the downside will be less than Australia. However, I’m sure there’ll be some impact.”

Despite the current market, Mr Thodey said he remained optimistic that the tech market would bounce back.

“We had the dotcom bust back in 2008 and the industry was able bounce back because the fundamental tenet that technology is an enabler of innovation, that it drives change and new sources of value, will never go away.”

Mr Thodey, who was succeeded at Telstra by Andrew Penn in 2015, also ran IBM Australia.

Originally published as Tech firms must have clear financial blueprint to survive, says Xero chair David Thodey