“A shareholder in a company is entitled to a pro-rata share in the profits generated by the company”, says finance theory. And That makes equity investing risky, since the share in profits is irrespective of whether there is a “plus” or a “minus” sign in front of the profit number. In other words, the shareholder has to share the losses, too.
About a month and a half ago, we had written about a news item that in Uber’s IPO filing with SEC, it is mentioned that the company may never make any profits – and the investors were invited to invest in this (You may read it here). And now, this news from Uber Eats: The management says that “In India, we are funding the eater, courier, and restaurant in terms of building the business.”
See the video here: In India, we are funding the eater, courier and restaurant: Uber
So long as you are able to build the business, sustain the losses, and get profitable some day, the shareholder may see some hope of making money. Till then, the current shareholder would need to believe in the presence of another stronger believer to buy out one’s stake. As someone says, “Hope springs eternal”. Well, with that kind of time horizon, we may find someone, at some time in future, but the (loss-making) company must survive till then.
These days, some people are talking about the concept of “infinite capital” in start-up funding. The idea is to find capital at all times to fund the losses incurred by the business. As long as a company invests heavily in income generating assets (and yes, the income must translate into profits), the losses in the initial period may be ok. This is quite possible in capital intensive businesses, e.g. a power plant cannot make profits in the initial years, since the plant has to be put up first, and only after a few years, power generation would start. Till then, there would be no profits. However, a food delivery business is quite different.
Riding The Roller Coaster talks about many episodes that led investors to lose money. It is important to start with caution and cover the downside as much as possible – Ben Graham spoke about “margin of safety”.
