In days gone by, a business that wanted to secure investment would have needed to prove it was capable of turning a profit by, well, turning a profit. Pitching untested ideas for which there was no demand (for how could there be a demand for something so far unthought of?) would have seen budding entrepreneurs laughed out of the bank, or destined to fall to the cutting room floor of Dragon’s Den.
But then there was tech, and things began to change. Industries were disrupted by external forces who spotted a new way to do things, using technology to find innovative solutions. Suddenly, businesses such as Netflix, Uber and WeWork were able to scale at pace, taking on huge amounts of debt, with assurances that dividends would be paid to shareholders in due course.
It’s a model that has unquestionably paid off for early investors in Tesla. Despite stock hitting a three year low in mid-2019, delays to production and a high-profile leader with a tendency to overshare on social media, Tesla was valued at $150bn at the beginning of this year, with share prices rising to $887 apiece.
Meanwhile, billion dollar brands like Snapchat, Spotify and Pinterest have never made a profit – though this has never affected their ability to attract cash. So, does it matter if tech firms are profitable?
The Netflix Effect
Netflix has an enviable ability to raise cash, and has always been able to attract investors who can see a bright future for the streaming service. Recently however, things have slowed and backers have been more cautious in parting with capital. Netflix’s business model is built upon spending massive amounts of cash which it gains back from subscriptions, but there are concerns around the number of subscribers which are realistically attainable. In early 2019, critics judged that in order to meet Netflix’s financial targets without raising prices, 50 per cent of the global population would need to subscribe to the streaming service. Presumably, those subscribers would share their passwords with the rest of us.
The problem is that the Netflix idea was too good. A true industry disruptor, the streaming service has changed the way we consume television and film, creating a “binge-watching” culture and appealing to multiple generations with its blend of original content and nostalgia-inducing hit series. Existing media giants had to find a way to compete – and they have. What was once a monopoly is a rapidly maturing market with plenty of competition from industry heavyweights. How will Netflix compete with the likes of Disney, BBC and ITV, who already own a back catalogue of popular content and have the financial prowess to create new material, huge marketing budgets and undercut Netflix on pricing? A world without “Netflix and Chill” seems almost unimaginable now, but Stranger Things have happened.
Disrupt and prosper
This is something all industry disruptors will need to determine. Take Tesla as another example: how will the company survive now that every automaker in the world is investing in alternative fuels and autonomous vehicles? Imitation may be the sincerest form of flattery, but it can seriously undermine your business if organisations with deeper pockets, proven experience and existing resources begin to market products and services which are similar to yours.
Although businesses have built themselves successfully using this “buy now, pay later” model, investors are more cautious now, particularly after the failed WeWork IPO. Backers want organisations to at least show a path to profitability, towards a time when the books will balance. Disruptors will need to think about the longevity of their organisations to ensure they are the ones who benefit from their innovation.