Over the past five years, as technology companies have navigated through volatile supply-and-demand shocks (Covid-19, supply chain constraints, recession, inflation) and uncertainty on financing (higher cost of capital, closed equity markets), many have focused on growth at any cost. Their attention is shaped by the common belief that, in tech, growth matters most in creating value for shareholders.

The truth is more nuanced: Shareholders reward tech companies differently based on a company’s context and point in the life cycle. For more mature companies, their return on invested capital (ROIC) can matter much more. As markets mature, they also attract more conservative investors, who then pressure companies to turn toward more predictable, profitable opportunities. This then limits further growth and investment in the business and attracts a new breed of value investor who cares about stable revenue streams, reinforcing this cycle.

When determining a company’s value, investors often turn to total shareholder return (TSR), a financial metric that indicates the total amount an investor reaps for an investment. TSR has a few fundamental factors that measure strategy and operations (for example, revenue growth, profitability, and capital efficiency); investor sentiment (multiples); and capital structure (debt-to-equity ratio, buybacks, and dividends). The weight of these factors differs as companies and their markets pass through life stages with different growth rates (see Figure 1).

• Early-growth markets may be small, but they are growing fast, disrupting existing industries or creating new ones. Speed and innovation are essential for related businesses as they establish their market position. Revenue growth and future prospects drive TSR, creating value for venture investors who invest to scale new champions.
• Late-growth markets still benefit from robust growth as they expand and stabilize. TSR is based on growth, with credit for initial profitability as investors look for growing companies with proven economic viability and scalable profitability.
• Mature markets are relatively stable, with single-digit growth expectations. An incumbent’s share position may vary by only a few basis points a year. Investors focus on profitability and ROIC. Growth is less important, valued only if it’s efficiently funded.
• Asset-rich legacy markets may be fighting the gravitational pull of shifting customer needs. Investors expect highly predictable returns with low to no tolerance for risk.

Once a company is within a given stage of market maturity, it is important to maximize the sources of TSR specific to that phase. Although these phases seem logical, too many companies in late-growth and mature markets downplay the importance of profitability and ROIC. Growth still matters, but profitability and capital efficiency may create more value.

Companies in late-growth and mature stages should be improving the efficiency of generating revenue by:

• rethinking which markets are most attractive;
• reducing portfolio complexity and adopting design-to-value principles to match customer needs;
• revisiting ways of working to improve productivity (including AI and automation);
• deploying new business models based on asset-light solutions;
• pursuing M&A where operational synergies are clear; and
• reinvigorating a lean core to ensure new growth.

Moving back upstream to higher-growth phases can be extremely difficult. Few tech companies, apart from Apple, have produced successful second acts in unrelated adjacencies, but Adobe, Microsoft, Nvidia, and others have renewed themselves with an upstream shift by reigniting and modernizing the core. Late-growth companies such as Amazon have also successfully unleashed Engine 2 catalysts, generating a second wave of growth.

Interest rate hikes have increased the cost of funding, so shareholders are watching returns on capital more carefully and rewarding companies that understand when to reinvest in the business, when to use capital more efficiently, and when to return capital.

As businesses grow, their investors and valuations tend to reflect the maturity of their core business. Sometimes, smaller, less mature businesses trapped within the bigger company are not properly valued by the market—a fact that’s often pointed out to boards by activist investors rather than management. Portfolio restructuring can unlock value and help match these businesses with the right investments.

Companies should be proactive in shaping their investor base, targeting the type of investors they want and tailoring communications to them. Amazon did this by signaling its intent to deprioritize profit in favor of continually reinvesting in the business. By clearly communicating these priorities, Amazon was able to set expectations and attract growth-oriented investors who supported this reinvestment rather than conservative investors who would not have rewarded this strategy.

To maximize value, strategies for growth, capital allocation, and investor relations should change over time as markets mature. Shaping the investor base and communicating clearly to set expectations are essential to ensure investor support, whether growing the core business, searching for a new engine of growth, unlocking hidden assets, or improving capital efficiency. Understanding the roles among market maturity, investor expectations, and sources of TSR is essential to deliver shareholder value at every step of the journey.