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Disruptive with huge losses? Not for me.

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I need to pen this down because I know I will refer back to it many years later. I disagree with companies which keep getting ever more money from investors simply because they are ‘tech-related’ and thus deserves to focus on GROWTH instead of profits. The unfortunate thing about growth here is that the growth is BOUGHT (SUBSIDISED) and not because of better service. In fact the service part is usually similar. So much so that if another competitor is able to get another round of funding, it could then subsidise higher and it’s market share will grow. It has nothing to do with better service, only higher subsidies due to more money being pumped in by investors who BELIEVE that these companies will be profitable once all their competitors stop receiving new funds from their investors. Anyway, when the final company remains, then it is possible for it to have huge profits. Question is, when.

Article in CNBC.com here. (Very good but long article, please click to read)“No profit? No problem. Investors keep snapping up loss-making companies.” It gave examples such as Tesla or Spotify which are publicly listed but continue to suffer from billions in losses. (Billions here is in USD, so I dare not even convert to Ringgit). Uber lost US$4.5 billion in 2017. (Still losing money as at latest news). 76 percent of listed companies in the US were UNPROFITABLE in the year before their initial public offerings (IPO). For the past 4 decades, it was 38 percent. Amazon’s profits for the last 20 years was less than US$8 billion. It’s founder Jeff Bezos has a net worth of more than US$150 billion. (You may read the whole sentence again, there’s no typo).

Market’s euphoria is now for the so-called “growth companies.” Millionaire hedge fund manager David Einhorn questions. He write this in an investor note last year, “the market is very challenging for value investing strategies, as growth stocks have continued to outperform value stocks.” He has supporters along the same thought. (me too!) A venture capital program known as Indie.vc — owned by VC firm O’Reilly AlphaTech Ventures — is focused on profitability when deciding which companies to invest in. Indie.vc says it looks at startups that “bleed black” — a reference to firms that make profits. This is very different from venture capital firms which typically puts emphasis on growth and rely on a few lucrative exits. This is what it said in its website. “Real businesses make products and sell them for a profit. They focus on customers, revenue and profitability not investors, valuations and the next fundable milestone,” it wrote on its website. “We believe real businesses make really great investments.” Article in CNBC.com here. (Very good but long article, please click to read)

Yes, I have shared with many friends about my thought. To me investment must go into businesses which is able to differentiate themselves well enough so that they could be profitable and in the near future become independent. Investors could then start earning REAL returns from their investments and not because a BIGGER investor has agreed to pay a higher valuation for the money-losing company. Personally, I could not accept it if a company which has been around for over 10 years and which has gone through more than 10 rounds of financing still continue to present their company as a ‘Growth-Focused’ story. Thank you for reading my point of view. I know, I am in the minority perhaps.

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written on 20 April 2019

<Featured Image is courtesy of Stock Photos from Leremy>

Next suggested article: Anything overvalued is best skipped. Stocks too.

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