The big news in
the world of business is the collapse of the crypto currency exchange FTX. The
collapse has wiped billions off the value of crypto currencies 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 a SWF but acts like one),
was a prominent investor. A lot is being said about the collapse, so I shall not
dwell into what happened. However, a recap of events can be found at:
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 the 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 of 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, stationary 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 what was going on was there. What did
investors look for? This was best answered by 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 owners asking price and gave him an indication of what our revenue
was from 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.
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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 task, 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 bough 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
of its business model. Here is a list of failed IPOs.
https://www.sofi.com/learn/content/ipos-that-failed/
There are companies
coming up with revolutionary technologies, which will need financial backing
and will, if backed, make fortunes for their investors. However, companies
brining 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
putting 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.
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