Who ever said that the path to success meant being in the black?

A smart technology-industry observer here in the Northwest had a great saying when he spoke of the dot-com companies that flashed and fizzled last decade: Profits: Nature’s Way of Saying You Belong. Mark Anderson made and sold T-shirts and bumper stickers that tech geeks like me thought were hilarious. The rest of you are probably scratching your heads and saying, No kidding. Why is that funny?

Mark was mocking the fact that investors poured millions of dollars into ridiculous opportunities in the hopes of a quick flip. Many were burned in the tech collapse of mid-2000. When that famous bubble burst, many companies went extinct because they failed to make profits. Last month in this space, I talked about the Darwinian effect that economic downturns can have across industries. Why, then, are there tech companies that, having never made a dime, managed to survive the last meltdown – and may even survive the current economic mess?

Exhibit A: Intrinsyc Software International. This publicly traded Vancouver company is a real head-scratcher. It appeared to be a winner when it started in the late ’90s in the field of “embedded software and devices.” Like any tech startup, it was expected to lose money as it commercialized its technology. But it’s now been 12 years, and an accumulated $82 million in losses. There hasn’t been a single quarter of profitability. It has a cash cow in its money-making J-Integra division but continues to pour money into its Soleus smart phone division. No profits, but a survivor!

Exhibit B: Absolute Software. This public-market darling has been losing money every year since it went public, in 1999, with accumulated losses now totalling $61 million. Unlike Intrinsyc, Absolute’s revenue has been increasing every year, to its current level of $42 million. It has created an impressive recurring revenue stream by monitoring companies’ PCs, laptops and smart phones. No profits, but still growing!

Exhibit C: Ballard Power Systems. We all know this story: the pollution-saving company that tried to develop the fuel-cell-powered automobile. Ballard has accumulated losses of over US$821 million in the past 10 years. That’s well over a billion of our Canadian loonies spent employing highly skilled people and advancing a technology to commercialization, albeit for non-car markets, such as remote power generation.

If Mark Anderson’s tenet about profits is true, then what is going on? In technology, markets change quickly. New innovation causes great upheavals and companies can emerge from nowhere to become market leaders (Google was two guys in a garage when Intrinsyc was already two years old). Investors in technology want to hit the home run by attacking new markets aggressively. When you spend heavily to get into a market, you lose money. Intrinsyc was betting on its new platform and its investors agreed (otherwise, they never would have forked over the money). Absolute continues to spend beyond profitability to grow. Ballard raised money on the promise of being a leader in automotive power and the investors supported it with their chequebooks. Once investors stop funding, a company had better get profitable, or die.

Two last points about losing tons of money to build a technology company. First, the accumulated tax losses are worth money if you can sell them (as Ballard just did for $41 million, which might be the last kick at the can for them). Second, you don’t have to lose money for 10 years to build a successful company. There are plenty of local examples of technology companies that raised little money and yet became profitable quickly, growing big organically, over time.

No, technology isn’t part of some “new economy,” exempt from the basic laws of business: inevitably, profits are a necessity. Companies can, however, continue to pile up losses – until investors tire of funding the dream.