Maybe profitability doesn’t matter

By Team YS|18th Jul 2011
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View from the sidelines by Venkatesh Krishnamoorthy

Are all businesses profitable? A weird question, you may think. The context of this question is not the early-stage startups that pump in seed capital to realize revenues and profitability much later. It is about investors showing interest in businesses that are yet to become profitable or have little by way of revenue. What drives investment decisions in such cases?

In the Regional RoundTable at Chennai as part of TechSparks 2011, Badri Seshadri, founder of New Horizon Media and also cofounder of cricinfo.com, the cricket portal now run by ESPN, said that the entrepreneur should look for profitability before rapidly scaling up. He was talking out of his experience. His cricinfo.com attracted investor interest even before it became profitable or had no revenue to show. What then attracted the investor? Badri had a point of view. If the investor feels the business will scale up in future so as to attract a PE investment or some other way of huge investment, the present investor can exit with a bang. Not all businesses are built to create enduring value that will keep its customers coming to it again and again. The typical example is Facebook. Its user base growing in the order of hundreds of millions is a sure investor interest. So the investor keeps a long-term view about sustainability and uniqueness of a business before taking a call on investment even if the business is not making profit at present.

Let us look at two more scenarios. Take the case of airline business. The low-cost carriers are bleeding. They always look up to the government to offer them sops on many issues like fuel pricing, subsidies, etc. Their balance sheet is a perennial red. Indigo is now profitable and that’s a great news, which will help it pump in millions of dollars from an investor. Still you will find that none of the airlines are shutting down. They find a way to attract money from investors. Maybe the exit option is something that attracts investors. Sahara Airlines was taken over by Jet sometime ago. Sahara was never doing well. So any investor in Sahara or its promoter always had a viable exit option. When the time came, Sahara took the decision to sell. In this case, vibrant exit options attract an investor.

Next are the television channels. Now and then, we see launch of TV channels. Not all TV channels are profitable. Some TV channels are said to be making losses on the order of hundreds of crores every year. What then makes them sustainable and investor-philic, if you may call. It’s a high-visibility business and without a vibrant media that has good TRPs (this is the measure of how successful a program or the channel is), there would be a vacuum in a democracy perhaps. Still investors keep pumping money into TV channels.

Both airline and TV channel businesses are high-fly businesses. They have a huge overhead and any amount of cost cutting wouldn’t eat into certain spends. They also attract good revenue. But the match between spends and revenue is too large to bridge. It is the long-term view of the investor that makes them stick to these businesses.

This is just a point of view. Startup entrepreneurs could never be lured into businesses in the expectation of attracting investors without revenue or profitability. They are of course the basics but there are exceptions.

—Venkatesh Krishnamoorthy, chief evangelist

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