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Not so long ago, investors would have frowned on a company headed for the stock market with no profitability – and no clear sight of future profits – to show. Yet in recent months, ride-hailing companies Lyft and Uber Technologies both rode into Nasdaq IPOs, egged on by eye-popping valuations but apparently running on fumes – neither had made any profit despite having been in the business for close to a decade. (And Uber had in its offer prospectus said it would not be profitable in the foreseeable future.)
They tanked, not surprisingly. Lyft started trading at US$72, giving it a valuation of US$24 billion, and rallied momentarily before moving south, last closing on Thursday at around US$63. The much larger Uber, whose US$82.4 billion valuation made it one of the biggest IPOs in American trading history, never traded above its US$45 IPO price in May.
Uber subsequently reported losses of US$1 billion for its latest quarter, in its first public earnings statement post IPO. The company now trades at around US$44, buoyed by a recent rally in IPO stocks.
Loss-making of course is not peculiar to Uber and Lyft, which have been in the business for 10 years and seven years respectively. Internet poster boy Amazon was 14 years in the red after its 1997 IPO, before finally turning a profit.
Singapore's homegrown grocery delivery startup honestbee, facing a cash crunch, stopped operating some services in Hong Kong, Indonesia and Thailand last month.
Honestbee, established in 2015, which raised at least US$15 million in initial funding, is said to have burned through US$6.5 million cash in December alone, with profitability still elusive.
Ride-hailing player turned "super-app" Grab, now officially a unicorn with a valuation in the billions, fights shy of revealing bottomline details and will only say it is "on the path to profitablity".
While startups, by definition, are young, new businesses, and new businesses are rarely immediately profitable, it seems to be the new normal that startups will not be profitable - for a long time.
Yet, losses used to be a dirty word. In the "old economy", a business that was not generating profit couldn't last long, and it would not make economic sense to continue bleeding even if the owner had the capital. Now, cash-burning is routine.
What has changed? Where is profitability in the picture? How are startups valued, given that most have no profits to speak of but profit is a key input for most valuation methods? How patient are investors with seeing red ink before they start seeing red?
It's all about the liquidity
Investors, hunting for outsized returns in an ultra-low yield environment, are plying startups with funds and biding their time through the cash-burn phase, in the hope that they've bet on a winner.
Walter Theseira, economics professor at the Singapore University of Social Sciences, thinks that it's a combination of growth of private equity (PE) and venture capital (VC) and the high scalability inherent in many "new economy" startup business models that has led to the new "profitless" normal.
He says: "First, sophisticated capital increasingly prefers to be deployed as private equity or venture capital, because of the belief that returns in public capital markets are inferior for a variety of reasons... So there is a lot of money available."
Investors believe - not without good reason - that the greatest returns are in investing in a business model with great potential to scale. So they are willing to stay invested in anticipation of outsized returns.
Indeed, Helen Wong, a partner at Qiming Venture Partners, says that investors who understand the network effects model are willing to wait for profits. The VC veteran notes: "There is a lot of capital hungry for technology startups these days, which drives greater tolerance for losses."
And the depressed cost of capital has swayed priorities. Professor of management and innovation at the IMD Business School Howard Yu points out that it is cheaper to borrow capital in the current very low interest rate environment compared to the past. "That in part explains why investors or the financial market historically valued profitability much higher in the past than today," he says.
The startup phenomenon is itself a revival of the expectations reminiscent of the dotcom boom in the late 1990s, says Kenneth Goh, assistant professor of strategic management at Singapore Management University.
He says: "Investors are betting that today's startups will become the Amazons and Googles of tomorrow. It took Amazon 14 years to make a profit."
More at https://www.businesstimes.com.sg/brunch/show-me-the-money-whats-wrong-with-the-startups-picture
They tanked, not surprisingly. Lyft started trading at US$72, giving it a valuation of US$24 billion, and rallied momentarily before moving south, last closing on Thursday at around US$63. The much larger Uber, whose US$82.4 billion valuation made it one of the biggest IPOs in American trading history, never traded above its US$45 IPO price in May.
Uber subsequently reported losses of US$1 billion for its latest quarter, in its first public earnings statement post IPO. The company now trades at around US$44, buoyed by a recent rally in IPO stocks.
Loss-making of course is not peculiar to Uber and Lyft, which have been in the business for 10 years and seven years respectively. Internet poster boy Amazon was 14 years in the red after its 1997 IPO, before finally turning a profit.
Singapore's homegrown grocery delivery startup honestbee, facing a cash crunch, stopped operating some services in Hong Kong, Indonesia and Thailand last month.
Honestbee, established in 2015, which raised at least US$15 million in initial funding, is said to have burned through US$6.5 million cash in December alone, with profitability still elusive.
Ride-hailing player turned "super-app" Grab, now officially a unicorn with a valuation in the billions, fights shy of revealing bottomline details and will only say it is "on the path to profitablity".
While startups, by definition, are young, new businesses, and new businesses are rarely immediately profitable, it seems to be the new normal that startups will not be profitable - for a long time.
Yet, losses used to be a dirty word. In the "old economy", a business that was not generating profit couldn't last long, and it would not make economic sense to continue bleeding even if the owner had the capital. Now, cash-burning is routine.
What has changed? Where is profitability in the picture? How are startups valued, given that most have no profits to speak of but profit is a key input for most valuation methods? How patient are investors with seeing red ink before they start seeing red?
It's all about the liquidity
Investors, hunting for outsized returns in an ultra-low yield environment, are plying startups with funds and biding their time through the cash-burn phase, in the hope that they've bet on a winner.
Walter Theseira, economics professor at the Singapore University of Social Sciences, thinks that it's a combination of growth of private equity (PE) and venture capital (VC) and the high scalability inherent in many "new economy" startup business models that has led to the new "profitless" normal.
He says: "First, sophisticated capital increasingly prefers to be deployed as private equity or venture capital, because of the belief that returns in public capital markets are inferior for a variety of reasons... So there is a lot of money available."
Investors believe - not without good reason - that the greatest returns are in investing in a business model with great potential to scale. So they are willing to stay invested in anticipation of outsized returns.
Indeed, Helen Wong, a partner at Qiming Venture Partners, says that investors who understand the network effects model are willing to wait for profits. The VC veteran notes: "There is a lot of capital hungry for technology startups these days, which drives greater tolerance for losses."
And the depressed cost of capital has swayed priorities. Professor of management and innovation at the IMD Business School Howard Yu points out that it is cheaper to borrow capital in the current very low interest rate environment compared to the past. "That in part explains why investors or the financial market historically valued profitability much higher in the past than today," he says.
The startup phenomenon is itself a revival of the expectations reminiscent of the dotcom boom in the late 1990s, says Kenneth Goh, assistant professor of strategic management at Singapore Management University.
He says: "Investors are betting that today's startups will become the Amazons and Googles of tomorrow. It took Amazon 14 years to make a profit."
More at https://www.businesstimes.com.sg/brunch/show-me-the-money-whats-wrong-with-the-startups-picture
