A broader lesson for innovators.
For years, making money hasn’t mattered for many tech start-ups, like Uber, WeWork, and Lyft. And, the common rationale is Amazon, the company that commanded investors to accept large losses while the business established its base for long-term growth. But thank goodness for public investors, those outside the tech bubble of Silicon Valley, who can bring a clearer lens to current ventures and their financial health. With these new eyes, profitability and continued severe losses are finally coming into question. Uber is under scrutiny and conducting layoffs. WeWork has infamously pulled back its IPO and is replacing its CEO.
Part of what’s under question is the valuation of such companies and if they should command the common multiples of tech companies. Consider this chart from The Economist comparing WeWork to a rival shared workspace provider, IWG, that has higher revenue and is profitable, yet has a much lower market valuation.
This extends to other categories in the “tech” space. As Vogue Business reported, a number of newly public fashion “tech” companies are also unprofitable. Again, these companies receive an assumed higher multiple for aligning with “tech,” even when it may not be justified or the business models are untested. Yet, it’s the companies with strong financial fundamentals (i.e., making a profit) like Stitch Fix and Revolve that are maintaining their share prices.
Given WeWork’s fumble, Airbnb, which is looking to go public in the coming year, is under scrutiny given the significant loss it posted this past quarter. Yet, some say the company is in a different position with large cash reserves. Plus, consider that this quarter’s results come on the heels of the company having posted a profit in 2018.
So, the trend in accepting such losses from tech companies may be turning. What’s the lesson for entrepreneurs and innovators? Simply, don’t ignore business fundamentals. Sure, it can be fun to get swept up into an idea. Yes, you may need to run fast to get ahead of the competition or invest in the early years of a new product’s ramp to build awareness and drive trial. But just like with physics, some fundamentals hold. A company needs capital to run, and each time a company looks for funding those with the dollars will judge if the company is worthy. Having healthy business economics will influence if you receive capital or not. And that’s true if you are receiving money from a VC or a bank for a small business loan.
I was around during the first dot com boom, early in my career after business school, and my counterparts thought I was weird for not jumping into a tech company at the time and instead joining Clorox, a stable CPG company. It’s not that I didn’t consider tech or try to join a tech company, but the companies I interviewed with couldn’t even articulate their revenue model, which didn’t give me a lot of confidence. They were caught up in the exuberance of the times, were in love with their ideas, and had been able to convince investors to give them cash. Yet, these companies hadn’t thought through the viability of the business model. And, we all know how that ended.
It’s easy to get enamored with our ideas. It’s great to get fueled by the sparks of building and growing a new venture. Yet, it’s important to consider the broader viability of an idea before jumping in and investing too much time, money, and energy. Complete an early Viability Assessment considering factors across Consumer, Business, Technical, Customer/Channel, and Competition. Or, think through the Business Model Canvas to frame out your business ecosystem. Understand early on if you can get the economics to work.
And once you’re in business, always think about your next financial transaction and where you’ll be looking for capital to fuel growth. This needs to be considered for bigger companies and for self-funded or bootstrapped start-ups. Know your numbers, understand your cash flow, and have a strategy for funding growth. Not all our businesses are Amazon. Frankly, few are. Sometimes going back to basics offers the best guide for continued growth.