Today profitability or bottom line has become a delusion in most businesses as the focus has shifted to growing top line. In this never ending race of revenue growth, many businesses and most start-ups have adopted strategies that focus on growing the top-line by accumulating losses overtime. Such losses are usually financed by investors and with each jump in revenue investors see higher potential thus valuing the equity at higher value in the consecutive round.
Although this “iski topi uske sir approach” (this guy’s cap – referring to liability, on another person’s head; sort of an idiom in Hindi), seems to have worked well during the bull markets, it may not stand disruptions like the current onset of Corona virus. As I am writing this blog, probably some VC analysts may be trying to find creative ways to write off investments in co-working, cabs and hotel room start-ups.
Although this is the only way to scale too big too fast this is not the way for most of the businesses. But this kind of growth requires a too big too fast approach and of course damn good luck. There are two facts of this approach; first is that some one is financing the discounts and second is that management is constantly racing against time to find the next investor.
The modus operandi of these disruptors is to challenge the survival of its competition by killing the margins. To put up a cruel analogy, let everyone bleed and hope that you live till everyone else dies. This is very effective to dismantle and destroy the small players in competition but turns self destructive if bigger competitors have deep pockets. And these are not just start-ups, airlines have been the second major industry.
There are just three possible outcomes of this strategy:
First is that your competition has deep pockets accumulated over decades of profitable business and outlasts your survival,
Second is that the competition is sufficiently irritated to cause acquisition or you make enough noise and attract the attention of new entrants to acquire your company as a vehicle and,
Finally the third one is that you run out of air! This process is slow and may range from a time span of few years to a decade.
Although revenue is the entry point of cash and logically widening the entrance should drive growth it does not ensure free cash. And today, with increased volatility, being broke or being on a budget is no longer acceptable.
Just as today the world has paused ; the disruptors are disrupted!
With inflows paused and expenses running, today the lockdowns and business shutdowns across the globe are have made us realize the importance of corpus or cash reserves. And as the too big too fast has no allowance for such reserves, I will not be surprised if the companies start running out of air quickly.
These disruptions not only have a ravaging impact on small businesses but also reshape stakeholder expectations and subsequent behavior. Although some will get flushed from the market, the ramifications will be permanent. Hence this should be taken as an ethical concern by industry leaders, as we recover from COVID19, and I hope that unwritten norms are established to protect against disruptions.
Finance is magic, changing a single factor in a cell at the corner of an excel sheet can affected valuation by millions. And it is for the investor to judge upon the manifestation in to reality along with all ramifications.
Thus investors should be at the forefront, for enforcing such unwritten norms, as no aircraft can take-off without fuel.
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Savvy Munshi 