One would think that achieving profitability would be the goal of any business model, including that of a start-up. However, at least in some quarters, it seems that this is becoming a somewhat genteel relic of a simpler past- as Uber’s latest results emphasize.
Of course, one could understand how the founders of some form of truly-advanced technological concept or process might focus on gaining sufficient scale to become “prey” for serial acquirers such as Google, Amazon and Facebook, and, more recently, Softbank via its Vison Fund (now going through a second iteration).
However, when the CEO of a company which is supposed to be a regulated bank can comment that profitability is “not a core metric”, one begins to wonder how this can be equated with any economic system resembling capitalism. The CEO in question was Maximilian Tayenthal, co-founder of N26, supposedly one of Europe’s most valuable “fintech” companies. Apparently, he is so sanguine because N26’s financial backers “have very deep pockets… and are willing to support the company for many years to come.” Perhaps he has visions of being the last bank standing? We doubt that BaFin, the German financial regulator, would be entirely comfortable with a supposed bank that does not see the ability to generate capital as important.
It may be that those of us who have been through decades of business cycles, including the GFC, in which both liquidity and the ability to generate a profit most certainly mattered, are somehow no longer conversant with some modern form of economic and financial theory. After all, before the Great Dotcom Crash almost 20 years ago, profitability had been superseded by “clickthroughs” and “ARPUs”, and those who then stated that profitability mattered were derided for their lack of vision about the “potential” of the businesses that subsequently failed.
One could be facetious and label what exists now as the “Greater Fool” theory, yet there is no doubt that we live in an economic environment in which supposedly sophisticated investors somehow persuade themselves that there will always be someone else who will provide a “liquidity event”, so that they can make a return on their investment, even if the underlying business investment has never generated a profit. After all, a surprisingly large percentage of companies that undertake IPOs currently (at least in the US) can properly be labeled as being still in the “pre-profit” stage. Yet this seems to represent little or no obstacle to entering their public equity markets.
We suspect that Amazon’s 25-year growth and track record has a lot to do with this reality- an economic version of “build it and they will come”. Yet, we would argue that Amazon (or Google, or Facebook) is the exception that proves the rule, in which a disciplined, long-term business model that provides something to its clients that never existed before will create a sustainable, profitable franchise that will endure and prosper until something even more effective comes along. Many hitherto lauded businesses have simply faded away, or proved to be fool’s gold.
At Awbury, we believe very strongly in the virtues of sustainable profitability. We have built our business and franchise on disciplined underwriting of carefully-sourced transactions that provide sound risk/reward ratios. “Loss-leading” pricing does not really play well in the (re)insurance realm, as risks are transferred to the true “greater fool”. Eventually one goes bust, which is not the ideal outcome for an industry built on the fundamental premise of meeting all its obligations when they fall due!
The Awbury Team