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Home > Legal & Financial > Money To Burn.

Money To Burn.

Summer 2019 looks like being the summer of the tech IPO as many internet based services are lining up to go public, and sell shares in their vision to the public. Vying for your hard earned cash is ride sharing app Lyft, possibly also it’s better known rival Uber, Pinterest and Airbnb are also rumoured to be considering a public float. Also in the running are Beyond Meat, PagerDuty, Postmates, Slack, Zoom, Bumble, Cloudflare, CrowdStrike, Grail, Health Catalyst, Medallia, Palantir, Peloton, Robinhood, and The We Company, and before you ask, I haven’t heard of most of them either, but they all want your money, and we are talking multi billions here, and almost all of them share one thing in common, none have turned a cent in profit to date. So what’s the deal?

An IPO (initial public offering) is a process whereby a company issues shares, and makes them available, at a predetermined price, to allow anyone who wants them to buy a share in your business. Aside from the obvious attractions or making their invariably youthful founders into instant billionaires, the idea is to bring in a mountain of cash to turn your baby from a neat idea into a global infrastructure by investing the shareholder cash back into the business. Many of these tech startups rely on scale, and market dominance for their success. The gamble is that you pile billions into building a dominant business and hope that before your capital runs dry, your business is large enough to grab enough customers to stem the losses, and turn into a profit. It’s called cash burn.

The chances are that in the fullness of time there is only going to be one ride sharing taxi app, will it be Lyft? Will it be Uber,? Will it be Google or someone none of us have heard of yet? Your guess is as good as mine, but there are long queues of people ready to place collective multi billion dollar bets on the outcome. Somebody is going to back the winner, most aren’t. Until recently, most of the start up capital has been provided by well informed venture capital, wealthy institutions or individuals who understand the risks, and have deep enough pockets to live with the loss if you back the wrong horse. Public IPOs are showing signs of enticing ‘normal’ investors, to pile their savings into these ventures, inflating a bubble that is storing up potential problems for a lot of people who can’t afford to lose. It’s a story as old as history, whether your ancestors were buying plots of land with the hope that there was oil, or gold underneath it, to backing a railroad company, motor manufacturer or telephone service, when we see a glimpse of the future, or smell a future profit people are willing to shut down their logic circuits and allow optimism to rule over realism. With the internet still in its infancy, and with ultra rapid 5G services launching for the first time last month it is likely that new ideas and technologies that will change our lives in a handful of years currently only exist in the minds of a few genius’ and chancers and the possibilities are intoxicating as we enter a new world every bit as game changing as the white heat of the industrial revolution, or the early decades of last century.

History has a knack of remembering the winners in the race for dominance, we have all heard of the Rockefellers, Gettys, Bill Gates, Alexander Graham Bell, Henry Ford, and the rest but history also is adept at very quickly forgetting the many many more who were second to the prize. We are in just such a time right now, the new dotcom bubble may just be inflating right now, and if you aren’t careful it might be doing it with your money.

Contrary to popular myth, fortune does not always favour the brave. Be careful out there.

 

By Phill McCoffers