Can the business you invest in be profitable? | Economic Times

In recent weeks, a certain type of investor and investment analyst has drawn attention by being strongly opposed to investing in high profile loss-making startups. This is not about Zomato because that is merely the first case and quite clearly, there will be many, many others. Personally, I’m a full-fledged, card-carrying member of this group of sceptics and I firmly believe that more investors should be.Those with the opposite view feel that now that the long period of 7-8 weeks have gone past since the Zomato IPO, their view stands proven and once can march onwards to other similar IPOs.To understand the underlying point here, let’s go back to the basics and ask ourselves what the goal of a business is. Note that we are talking about real goals here, not the kind of sweet nothings that are put in mission statements and other PR material. Let’s continue. What is the goal of a business? To make money. What is the goal of a shareholder, whether a founder or not, small or large? To make money.Unless step one works, the following ones will not work. They might give an illusion of working for some time, or they might work by breaking rules and laws, but there is no way for shareholders to sustainably and legally make money unless the business itself is profitable. In a way that’s all there is to it. Once an investor understands this, their entire view of investment changes.A strong implication of this is that this make/not make money is not a binary. Over a period of time, shareholders will make money in a manner that correlates strongly with the underlying business. There will be temporary deviations big and small, but ultimately, shareholders making growing amounts of money from a business that is not doing the same is not going to happen. All this is so basic, and so fundamental to investing, that even as I write it I feel a little embarrassed about putting down such simple and obvious things. However, in the hype-driven investing environment today, this is almost a fringe view.Of course, one obvious counterpoint is that the price of any asset (and therefore investors’ profits) are driven not by what is happening now, but what will happen in the future. This is no doubt true. However, in the case of these new age businesses, the course of future profitability is not that easy to postulate. At a basic level, there are two big drivers of profitability—the business that a company is in, and the management’s ability to create a profitable business. Again, in this new crop of businesses, neither of these are proven.Traditionally, it was axiomatic that management quality meant the ability to run a profitable business. You can see how this has changed. We have today a crop of people who have somehow become role models as entrepreneurs and business leaders without ever having to build a business that can make money. Many have been tremendously successful in reaching a personal goal of becoming enormously wealthy, which is great for them and their families. It makes them role models for other young people seeking to emulate them. However, for an equity investor looking to invest in a company, what matters is that such an entrepreneur has a zero proven track record of being able to create and sustain a profitable business. What makes it worse is that the business models themselves are also unproven. I mean if such a person was running a company that made scooters or paint or clothing then you could say that such businesses can clearly be very profitable. That much is a demonstrated truth. However, the unfortunate fact is that no ecommerce company or restaurant delivery company or digital wallet company has ever been profitable in India. A hard-headed, practical investor should wonder whether such a thing can be done at all.These are risks that an entrepreneur or a venture fund should surely take. Whether an equity investor who has plenty of other choices in the market should do the same, I’m not so sure.(The author is CEO, Value Research)