Some people think we’re returning to the Bad Old Days of the late 1990’s dotcom bust. One after another, recent hot tech IPOs have been disappointing investors. Many these companies are underperforming financially, and some have yet to turn a profit.
Three of the more high-profile tech stock debuts of the past 24 months — Pandora, Trulia, and Zynga — continue to lose money over the long haul. The questions investors need to ask themselves are, what true assurances to they have that any “hot” company will become profitable? Beyond pure speculation on stock returns, what makes money-losing companies worthy of investor interest?
We’ve been here before. From 2000 to 2002, $5 trillion in market value was lost in the stock market; much of this evaporation was due to the loss of confidence in dot-coms that looked like sure-thing juggernauts despite their lack of making a dime. Anyone remember Boo.com, Pets.com, or GovWorks.com? All looked like they were a lock at the time they went public. Today, all are gone.
Profit is fundamental. It’s the air companies breathe, it’s the reason they exist. Moreover, it’s the function they fulfill in a thriving economy. Profit allows a company to grow, to meet customer needs, to support employees and their families. And yes, to reward investors.
It seems, however, that every ten years or so we find new reasons to delude ourselves about whether it’s important for growing companies to actually turn a profit. Much of the time the excuses involve new paradigms and uncharted territory. Fifteen years ago it was the rise of the Internet. Today it’s cloud infrastructure and Software-as-a-Service. Different names, same result: a gauze that falls over our eyes, blurring and obscuring the realities of business.
In the HR recruiting industry, of which my company is a part, we had over 200 direct competitors in the late 1990s. Today we’re one of the few still standing. Much of the reason, if I can boast, is that from the very beginning we sought to turn a profit. We knew it wouldn’t do our customers any good to form a close relationship with a business partner who would be gone or gobbled up five years hence. That strategy has paid off over time.
Many entrepreneurs looking to make a killing on their firms will say, “We may not be making money right now, but we can be profitable any time we want. Whenever our customers say so, we can flip that switch.” Trouble is, many of those companies never do. By the time someone insists on profitability, the exit strategy is fulfilled and customers (or public shareholders) are left holding the bag with whatever survives.
Now obviously, a reasonable amount of operating losses are expected from startups. And I’m not saying that no big tech IPO will ever make money. But anyone who invests themselves in an unprofitable company with minimal track record — whether for portfolio growth or as a customer — should insist that the period of losses be short and well-defined, with a clear path established toward running in the black.
As the recent U.S. presidential election season made clear, political parties are loathe to offer visions that are long-term in nature. Companies have even less of an excuse. Strategies that support short-term speculation over long-term profitability are in the interest of the few, not the many. Just ask any customer, employee, community, or shareholder who’s benefitted for 20 or 30 years from a strong company, one that assures its future through profitability. They’ll tell you who’s really sexy.