NON-PROFIT COMPANIES: A NEW INVESTMENT DYNAMIC

The 21st century became the stage for greats Cases of millionaire and billionaire investments in startups. If at other times large investors, such as Warren Buffett, were looking for companies with professional management, strong budgetary control and good profit margins, in recent years the scenario has turned out to be different. This new scenario shows a logic hitherto unimaginable in the financial market, even altering some patterns on the Stock Exchanges, with numerous investments and going public (IPO -”Initial Public Offering“or public offering of shares) of non-profit companies or Caixa.com the high valuation of startups, some with a global presence, it can be said that large investors surrendered to these opportunities and began to invest in disruptive technologies with exponential growth, regardless of profitability. A survey by University of Florida professor Jay Ritter found that 81% of the 134 IPOs carried out in the United States in 2018 were from companies that registered losses in the 12 months prior to the IPO going public. Profit or Loss, the last line of the Income Statement for the Year (DRE), is an important indicator of the financial health of the business. However, as highlighted above, some companies valued at millions, or even billions, do not report a profit in their financial statements. Some examples of these companies are the global Uber, Spotify and the Brazilian Nubank. Due to the success of these companies, such as those mentioned above, investors were seduced by the possibility of becoming partners with potential unicorns (designation for startup who have a market price valuation of over 1 billion dollars) and began to carry out more flexible and generic profitability and growth analyses. Companies such as Amazon, Netflix and Facebook, which made losses for long periods, established themselves as large Players worldwide, making your operations profitable. These examples serve as a perverse incentive for these investors, who don't want to risk losing the opportunity to invest in a new unicorn. Many companies use this marketing to attract investment, such as Uber, which used the discourse that the company would be the “new Amazon of transportation” to seduce investors in its IPO, according to New York Times. In addition, many experts defend the thesis that startups disruptive and highly scalable need to maintain a high level of investments in order to create a solid customer base and constantly develop innovations in their product or service. Thus, losses are part of the growth and can be analyzed as an “investment” and not an indicator of a failed business model. Recognized as one of the leading specialists in Valuation, Aswath Damodaran wrote to BBC News Brazil: “They (startups) are worth so much in the first moment because the people who invest in these companies believe that they have the potential to generate a lot of money in the future and, more importantly, because they believe that they can sell (their participation) to someone else for an even higher price.” Successful cases from the past, markets with great growth potential, products or services with a strong competitive advantage, disruptive technologies, and spectacular entrepreneurs are some examples that can help understand this new pattern. It is a consensus in the Funds of Venture Capital and Private Equity that a high percentage of your investments will probably not bring the expected return or will even fail, but if a company fulfills its objective, the other investments will be compensated. To remain fully operational, those companies that show constant losses need several rounds of investments, in addition to funding from IPO processes, providing business continuity. In 2019, some news related to some of these startups began to have a negative impact, curbing the appetite of investors in this company profile and once again reinforcing analysis of profitability indicators. The surprising delay of WeWork's IPO is corroborated by this drop in market confidence. The co-working company saw its market value plummet abruptly after an unsuccessful IPO attempt. Its largest investor, Softbank, had to take control of the company and began to adopt measures focused on business profitability to the detriment of accelerated growth. Following the same trend, Uber announced in February/20 that it will change its position. “The era of growth at any cost is over”, said Dara Khosrowshahi, CEO of the company, at the release of the company's last quarter results. With the change, Uber will also prioritize profitability. There is no doubt about the enormous potential of companies like Uber, WeWork, Nubank and Spotify, and their business models that revolutionized the market in which they operate. They were pioneers and their disruptive technologies contributed to the paradigm shift of the markets in which they operate. This does not mean, however, that the old ways of valuing Assets have become obsolete, but it became clear that the new direction of these companies refers to profitability, indicating more sustainable growth, in line with the practices used by more traditional investors, creating value for Partners and/or Shareholders.ARTICLE WRITTEN BY PEDRO FENATI — PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br