The big news in the world of business is the collapse of the cryptocurrency exchange FTX. The collapse has wiped billions off the value of cryptocurrencies, and investors have been sent scrambling for cover to lick their wounds.
In Singapore, the collapse has been double compounded by the fact that Temasek Holdings, one of our sovereign wealth funds (technically Temasek isn’t an SWF but acts like one), was a prominent investor. A lot is being said about the collapse, so I shall not dwell on what happened. However, a recap of events can be found at:
https://theindependent.sg/crypto-exchange-company-ftx-files-for-bankruptcy-its-investors-including-temasek-may-lose-lose-millions-if-it-cant-be-saved/
While I shall let the more intelligent deal with the collapse of FTX, I will make the point that it appears that FTX is part of a larger trend in the world of business. Back in the day (1990s), I remember being told by a very senior banker that business at its most basic was simple – you bought a product or service at “x” dollars and sold it for “y” and then kept the difference. Everything in the world of business was about helping increase the difference between buying and selling.
Just as the basic concept of business was simple, so was the basic concept of accounting. There was the top line, which was your “revenue” or how much you sold your product or service. Then, there was the bottom line, or your “profit,” which was what you had left after you paid off the expenses (rent, salaries, stationery etc).
Based on this concept, it was said that businesses would only see a profit after three years of operations because they would have to take the time to get their product or service known at a scale where they could make money. Then, after surviving long enough, that business might grow to the level where it would be attractive enough to get people wanting to invest in it.
The investors would then pour over the financial statements because the story of what was going on was there. What did investors look for? This was best answered a few years back when I ran into a mainland Chinese customer who asked how much the Bistrot would be sold for. I told him the owner’s asking price and gave him an indication of what our revenue was from the two branches. His next question was, “what’s the profit?” This was something the owner was not willing to disclose, and so the deal didn’t go through.
Interestingly enough, the basic concepts of business and accounting started to change in the 1990s with the arrival of the internet. This was a time when everyone was talking about how the internet would change business. This was not wrong in the sense that the internet had the ability to change the way things were done. Small businesses could overcome geographical hurdles and team up with businesses from elsewhere. The Indian IT and call centre business started to grow in this period because it became easier for Western companies to get cheaper Indian labour to do certain tasks, which they could then resell at Western rates. Western companies grew their margins and a new industry grew in India.
However, the one thing that changed was the nature of business. The “internet” hype created a new way of doing business – find something – hype it up as the latest thing around and then get the Venture Capitalist to pump in money and on IPO day, everyone would be popping champagne.
There was a reality check at the start of the millennium with the dot com crash and old economy businesses started to take over the once sexy dot coms. One only has to think of AOL, which bought Time Warner and ended up as a subsidiary of Time Warner.
However, this reality check seems to have been forgotten. We’ve seen a number of “rock star” CEOs of start-ups who were supposed to make and create billions on the stock market because they had the latest and greatest business idea. However, a number of these CEOs and their IPOs have come crashing down. Before FTX, there was “WeWork,” which failed in its initial efforts to lift because there were questions about its business model. Here is a list of failed IPOs.
There are companies coming up with revolutionary technologies, which will need financial backing and will, if backed, make fortunes for their investors. However, companies bringing out such technologies also need to get their business models correct, which in turn means ensuring that they really have a product or service that will live up to their promise.
Investors must also examine the companies they put money into. Fortunes will be made, but only for those who are capable of looking beyond the hype and understanding what they are investing in. Top line and CEOs drumming up their achievements makes good headlines, but one should check the rest of the P&L statements before putting money with today’s business heroes.
A version of this article first appeared at beautifullyincoherent.blogspot.com