Tech startups seem to be valued mostly by simply number of unique active users rather than profitability. Yes, there needs to be some semi-credible route to this but that’s more of an after(IPO)thought. True for Fintechs tho? ie Lending Club, Square, etc? Or is profitability / credibility of argument for that as important or more so than size of user base?
Profitability was very important as of 2019. Remember, in October 2018, a Goldman Sachs (or was it ML?) promised Uber an IPO of $120B. Well before Uber even had intention of profitability. Fast forward to April 2019, and it gets hammered in the stock market due to not having a profitability story. Trump’s trade war, economic uncertainty and fears of a recession, have all caused this obsession with profitability. And it’s not a bad thing — would rather have this as compared with a hard bubble burst like in 2001.
So Uber getting hammered just based on fundamentals is not 100% accurate. You have to consider supply and demand of shares. In the time since Uber went public 1) Travis K has divested himself of a large piece of his stock block 2) locked up period expired and there is a surge of shares of employees selling. This has created a situation where value was lost as general consumers of the stock had more supply than demand.
@BD Those things happened well after Uber IPOd and its stock price tanked. (6 months to be exact.) But now that Uber is focused on profitability and the factors you mentioned (TK selling shares and lockup expiring) are no longer at play, we’re thankfully seeing the stock price increase.
Fintech companies make a profit tho
LC has been making tons of efforts to be profitable. It is very critical to us.
Why are you unprofitable today?
Shots fired
It does, over a period of time. If you are not financially viable, then what’s the fin in it 🙂
What do you mean by “over a period of time”. Meaning it doesn’t always have to be profitable?
I saw some numbers that last year was the worst year for IPOs in the last 20 years, measured by the performance 1 month after IPO.
The very profitable ones stay private ;)
Because they don't have a reason to go public or raise more money. I feel like most of the companies that don't make a profit, simply expedite to go public 1) because founders, investors want to cash out 2) market is way over-valuing everything and they can raise a ton a money that will last them at least few more years without turning a profit. Finally, when they actually do end up making money by that time their valuation is 1/4th of what they IPOed at. 12 to 20 times earnings lol
Logically speaking, all companies should have an eventual roadmap to being cash flow positive, which you can proxy through income statement profitability metrics. Startups argue that they start small and require funding to grow e.g. user acquisition and as they develop economies of scale, the fixed costs of running and setting up the business from initial investments will be paid off and the business becomes self sustainable, and not require consistent (e.g. every year or two) injections of cash to keep the business afloat. At some point, growth will taper off and if your business has no idea how to become cash flow positive (e.g. WeWork / Ride hailing) - then you might be in trouble. FinTech represents a different user acquisition and monetization model (with different nuances and risks) - and may have more established industry benchmark (e.g. banks in the case of loans and other banking products) in terms of what an eventual resilient business looks like. Businesses are typically valued based on future cash flows, but for most startups - that’s negative so private investors just use other metrics. However, public market investors might not jive with the rationale of private investors and that becomes detrimental for companies looking for a financial exit through the public markets.
Thanks for this sage information. Is the fintech-specific user acquisition and monetization model such that profitability is expected at a smaller scale than with ordinary startups? That seems unfair as there is a significant advantage to having more volume for a fintech startup too: lower costs of funds and better leverage in dealings with partners.
Not sure what you mean by “unfair,” OP. Economies of scale! But with the caveat that you need a free market. CK can also do more for users as it scales. We can do a lot more with 100M than we could at 10M. Yes, the logical extension of this a monopoly, so there has to be a balance (as with all things). Hope that helps. :)
Pure bubble valuations. The dot com bubble was all about “eyeballs.” The current bubble is little different.