Counterfeit Capitalism
Why VCs fund billions into loss making startups?
A quick glance at the balance sheet of Indian unicorns such as Flipkart, Meesho, Zomato, Swiggy, Dunzo, Rivigo clearly shows a common trend that even though these companies are growing at a fast pace and revenues are increasing every year, these companies are burning money at an unprecedented rate and making huge losses every year.
But even as this worrying trend continues, many VCs and other companies are writing bigger cheques than ever before for these startups. Companies are growing at exponential pace and achieving valuations like never before. So, the question is ‘Why do VCs continue to fund these cash burning behemoths?’
1X revenue 5X loss:
It is true that revenue has increased every year for the startups but it is minuscule when compared to astronomical losses which are pilling up alongside of it.
A look into companies like Meesho, a marketplace for resellers who are connected to consumers via WhatsApp and Facebook has reported a loss of ₹100.4 crores in 2019 compared to ₹ 5 crores last year. While revenue has increased to ₹84 crores from ₹6 crores in 2018. There is a ever widening gap between loss and revenue.
Even Paytm’s losses increased from ₹1,490Cr to ₹3,959Cr in 2019 which is 165% from last year. Similarly, India’s e-commerce giant Flipkart saw 40% increase in loss amounting to ₹1,624 crores, while its operating revenue grew by 51% to ₹4,234 crores. Even worrying figure is the company’s net loss which increased to whopping 86% to ₹3,837 crores.
Other companies like hyperlocal delivery company Dunzo has made a loss of ₹168.9 crores which completely eclipses its revenue of ₹76.59 lakhs. While its revenue increased five-times, its losses have grown eight-fold.
Counterfeit Capitalism: Destroy competition, monopolize market
“Competition is for losers.”-Peter Thiel
The rampant funding of billions of dollars works on the belief that ‘just because a company isn’t making profit now doesn’t mean it could not be profitable’. Companies focus on building better infrastructure and more emphasis on marketing and R&D. Investors are more concerned about ‘path to be profitable, rather than being profitable’.
The billions which are injected into these loss making startups is primarily used to underprice competitors i.e. provide the same service as of the competitors but at lot less price. This in turn will drive out competition from the market and the company could monopolize the market, and then start making profits.
Essentially if you can counterfeit something for cheap, the counterfeit will take over the market and drive out the real product giving rise to ‘Counterfeit Capitalism’. Classic example of Big Bank vs Small Bank.
The wework debacle-A lesson to be learnt?
A recent lesson that we can learn where this process of killing competition with endless funds to monopolize the market can go horribly wrong is from wework debacle. The company raised a few eyebrows when it was valued at staggering $47bn dollars, with Softbank putting in billions of dollars into the company. The startup was the starchild of Softbank’s $100bn ‘Vision Fund’. But when it decided to debut its IPO, a sneak peek in the company’s financials showed major losses over the years and gross corruption by its ‘unorthodox’ CEO Adam Neumann. Consequently the IPO was postponed and Adam was forced to resign and it sent a waking call to other startup founders and VCs.
So, should we continue going like this or take a turn?
The strategy of monopolizing the market has been since Rockefeller’s time. But Amazon seemed to have popularized the current model, when it underpriced the retailers and eventually took over the market, in lines of what Walmart has also done. But both these companies have positive balance sheets and also diversified streams of revenue.
The wework fiasco is not a lone example. After disappointing IPO performance of Lyft and Uber, both companies which have not made profit till now and companies like Netflix which are constantly pushing the time by when they will be profitable have forced some to rethink if this model of investing is right.
Are we heading to another dotcom crash?
Short answer- Unlikely. As majority of companies which went burst in the dotcom bubble, were concept companies. They had no plans of making money or post any profit even in the long term. Today’s companies have much better consumer acceptance and a better and well laid out to become profitable even if in the long term.
But if this system of funding of bleeding the competitor out of the market will work in the long term can only be decided if it passes the litmus test of recession.
