Those with opposite views feel that now that Zomato. since a long period of 7-8 weeks has passed IPO, their approach is proven and once can move on to other similar IPOs.
To understand the underlying point here, let’s go back to basics and ask ourselves why a . What is the goal of Business Is. Note that we’re talking about actual goals here, not the kind of sweet nods that get put into mission statements and other PR material. Let’s continue. What is the goal of a business? Make Pennies. What is the goal of a shareholder, whether he is a founder or not, small or large? to make money.
Unless the first step works, the following won’t work. They may give the illusion of working for some time, or they may operate by breaking rules and laws, but there is no way for shareholders to make money permanently and legally unless the business itself is profitable. In a way, that’s all there is to it. Once an investor understands this, their entire approach to investing changes.
A strong implication of this is that making/not making money is not binary. Over time, shareholders will make money in a way that ties strongly with the underlying business. There will be temporary deviations big and small, but ultimately, shareholders making increasing amounts of money from a business that isn’t doing it are not going to happen. It’s all so basic, and so fundamental to invest in, that I feel a little embarrassed to put things like this down to simple and obvious when I write this. However, in today’s hype investing environment, it’s almost a fringe view.
“Back to basics isn’t just a buzzword – it’s something equity investors should always be doing.”
Of course, an obvious counter-argument is that any asset (and therefore investors’ profits) is priced not by what it is doing now, but by what will happen in the future. This is true no doubt. However, in the case of these new age businesses, it is not so easy to determine the path to future profitability. At a fundamental level, there are two big drivers of profitability—the business a company is in, and the ability of management to build a profitable business. Again, in this new crop of businesses, none of this is proven.
Traditionally, it was the axiom that management quality meant the ability to run a profitable business. You can see how it has changed. Today we have a crop of people who have become role models as entrepreneurs and business leaders in some way, without ever building a business that can make money. Many people have been extremely successful in reaching their personal goal of becoming extremely wealthy, which is great for them and their families. This makes him a role model for other youths who wish to emulate him. However, for one share For investors looking to invest in a company, what matters is that such an entrepreneur has a zero proven track record of being able to build and maintain a profitable business.
What’s worse is that the business models themselves are also unproven. I mean if such a person was running a scooter or a paint or clothing manufacturing company then you can say that such businesses can obviously be very profitable. That is the only proven truth. However, the unfortunate fact is that no e-commerce company or restaurant delivery company or digital wallet company has ever been profitable in India. A hardened, pragmatic investor should wonder if this can be done.
These are the risks that an entrepreneur or a venture fund must definitely take. Whether an equity investor who has many other options in the market should do the same, I am not sure.
(The writer is CEO, Value Research)