As Cisco Capital reaches an important milestone, Kristine A. Snow looks at the evolution of technology vendor finance over the last 20 years. Once a static exchange between vendor and customer, it has now evolved into a long-term partnership that meets the needs of today’s consumption-based economy.
This year, Cisco Capital celebrates its 20th anniversary. Amid the celebrations of reaching this considerable milestone, we reflected on the past two decades and recognized several insights into both the evolution of technology vendor finance and the technology industry as a whole, which have shaped the industry as we know it today.
From the dot-com boom and bust, to the banking industry’s collapse and rebirth, to today’s era of digital transformation, many technology vendor financing organizations have encouraged companies to rethink how they acquire and leverage technology to gain competitive advantages and transform their businesses.
The 90s: Adapting to the Dot-Com Boom & Bust
In the mid-90s, technology vendor financing was positioned to help companies compete in a crowded market and meet demands associated with the rapidly growing technology sector. As switches, routers, storage, servers and data center technology became the integral foundations of both established businesses and startup companies alike, financial innovations allowed organizations to scale as needed. Along with advancements in hardware, new financial strategies enabled companies to meet market demand and stay competitive by refreshing outdated equipment or simply growing their overall infrastructure in a cost-effective manner.
The dot-com boom fueled an era of seemingly endless growth opportunities, catapulting both established businesses and new technology startups to the upper echelon of the global marketplace. To support this rapid growth, companies needed secure, scalable equipment to accommodate new market variables like internet traffic and the impact of rapidly expanding customer bases.While companies like Cisco provided the practical hardware and software to solve scale-related challenges, technology vendor financing delivered the financial means for organizations to acquire these solutions without exhausting available capital.
These new financial options, reducing the dependence on venture capital, created mutually beneficial vendor-customer relationships. On one end, the customer preserved capital, and on the other, the vendor fostered a long-term relationship with an important and valuable customer. As internet-based companies grew and these relationships prospered, so did the importance of acquiring technological equipment efficiently.
Despite several years of unprecedented growth, the dot-com bubble burst over the course of 1999 to 2001, causing an overall loss of roughly $5 trillion in enterprise market value. Market growth slowed drastically in 2001, forcing companies to adapt to diminished demand by cutting costs and conserving capital. Only 48% of internet-based start-ups across the globe survived the dot-com crash (through 2004),1 teaching a sobering lesson to investors who perhaps leveraged a somewhat cavalier approach during the seemingly endless growth of the 90s. This crash also ushered in a new period where companies began to rethink their internal financial strategies.
As internet- and technology-based companies began to mature while recovering from the fallout, many started to champion new approaches, leveraging financial strategies as precautionary measures to future market fluctuation. Companies increasingly purchased refurbished equipment in an effort to preserve capital, employed more conservative approaches to loans and leases and began to rethink the role of IT with newly formed C-suite technology management positions — blurring the line between chief financial officer (CFO) and chief technology officer (CTO).
Even with these new approaches following the fallout of the dot-com and telecom collapse, the pace of technology industry growth began to accelerate into the new millennium.
2000s Policy, Change & Dynamic Transformation
While things seemed to level off, the 2000s came with their own set of major industry challenges — and I’m not referring to Y2K. Policy changes, banking deregulation and the subsequent 2008 market collapse forced many organizations to once again reconsider their technology acquisition strategies and think more innovatively about how to finance them.
The evolving tie between IT infrastructure and revenue generation led many businesses to seek dynamic financial offerings that could add value to the bottom line while delivering against organizational goals. Mirroring the evolution of the new role of chief technology officer, businesses needed something that could not only help meet market fluctuations but enable competitive advantages by optimizing the accelerating technological lifecycle. Compared to the 90s, with the true potential of technology-focused finance still hidden in plain sight, new financial paradigms became somewhat revolutionary approaches to solving old problems previously associated with scale and growth.
Realizing the importance of technology’s role in organizational expansion in the 2000s, several technology vendor financing organizations introduced programs to help companies proactively manage technology maturations. With lifecycle financing, companies could redefine the internal relationship between finance and IT by aligning technology investments with a new end-to-end solution. Companies could invest in the latest technological innovation while simultaneously limiting and reducing both operating and capital expenditures with a single financial solution.
Similar to the financial options introduced following the dot-com boom and bust, lifecycle financing provided businesses with an innovative new option to help them transform and meet market demands.
New Challenges & New Consumption Models
Today, organizations face another significant shift in the way they do business and how they use technology vendor financing to adapt. Digital transformation and the exponential acceleration of innovation and business development present a new set of challenges — as we can see with today’s “consumption-based economy.”
Today’s tech titans like Uber and AirBnB have proven the value of consumption-based services, and established businesses are looking toward technology vendor financing to help implement a similar model to preserve capital while acquiring technology at scale and on an as-needed basis. Instead of buying or using a traditional lease, new financial offerings help organizations acquire technology in tailored, simplified packages based on metered usage instead of previous static, loan-based models. Just like the evolution of the market itself, technology vendor finance has grown into a crucial factor in today’s constantly evolving market.
Consumption models provide organizations with more convenience at a fraction of the cost. We see a similar paradigm developing in the financial sector with evolving demand and scalability requirements.
Organizations no longer want a static technology investment plan. Instead, customers require something that can dynamically adapt and reliably address today’s demand fluctuations. In order to help customers pay for variable capacity as needed and better align future payments with actual usage, we now look to flexible financing solutions.2
As companies continue to advance and innovate at a hastening rate, accountants and financial organizations can look toward the future. By focusing on digital-first business models for inspiration, financial professionals can arm companies with financially-driven competitive advantages.
Coming Full Circle
As we reflect on the maturation of technology vendor financing, we can begin to analyze and dissect some of the major industry events to recognize patterns and trends. With experience gained from the dot-com crash, policy changes and current digital marketing transformation, valuable insights are provided about how financial professionals can use technology vendor financing to stay ahead of future business challenges.
Vendor financing in the technology industry, which once functioned as a static exchange between vendor and customer, has evolved into a long-term partnership where vendors tailor financial solutions to specific customer needs. With new financial technology like metered usage enabling customers to pay only for what they need, financing can now help organizations gain a strategic advantage in the rapidly-changing market. This new relationship and vendor-customer dynamic simultaneously mitigates the need for readily-available capital while giving organizations the full benefit of the latest technological developments.
Inspired by 20 years of fluctuation, new financial models pair past learnings with current digital-first approaches, driving organizational financing to meet the accelerating rate of business transformation in the digital age.
From the initial loan and leased-based relationships of the 90s to today’s end-to-end financial partnerships, the transformative nature of business and technology proves that a little bit of ingenuity can unlock massive dividends in an industry fueled by innovation.
Goldfarb, Brent, et. al. “Was there too little entry during the Dot Com Era?” Journal of Financial Economics. Vol. 86, Issue 1. October 2007, pp 100–144.
Vice President of Financial Services,
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