September 27, 2021 | “In 2021, the Crazy is Alive and Well in the Private and the Public Markets.”

This weekend brought some excellent market perspective in the Globe read The Death of Profit:  Why investing feels broken and markets no longer make sense.  Here’s a taste:

It’s now not only acceptable for a company to bleed money as it acquires or spends heavily to achieve scale; it’s actually encouraged. Investors are so taken with the prospect of technological revolution that private backers are stretching the limits of reasonable investments and valuations – a mindset that’s also bleeding into public markets. “We’ve completely normalized this concept of no profit,” says Mr. Brown.

This is all extremely devastating for legitimate, responsibly-run competitors who are being undercut into oblivion by weaker businesses with access to indiscriminate capital:

“The amount of capital out there has made it acceptable to lose money for a longer period of time, in the hopes that eventually you tip the market and become a near monopolist, or at least a duopoly,” says Martin Kenney, a professor at the University of California, Davis. Prof. Kenney first wrote a comprehensive paper on the trend in 2018, with co-author John Zysman, called Unicorns, Cheshire cats, and the new dilemmas of entrepreneurial finance. In it, they noted that more and more startups were undercutting incumbents and other rivals on price and service because they were backed by billions of dollars worth of private capital that plugged their annual holes.

…With funding rounds flowing like water, valuations are soaring. It used to be that unicorns, or startups worth US$1-billion or more, were rare and therefore idolized. But since the start of the pandemic, at least 14 Canadian companies have attained that status, including FreshBooks, Clio and Benevity. Toronto-based fintech Wealthsimple recently raised its second round of capital in just seven months, boosting its paper valuation more than three-fold, to $5-billion – even though it has struggled to make money.

And then there are the retail participants who have borrowed record amounts to magnify their exposure to irrational, uneconomical security prices.

Thank you, easy money! Our economic tab for this destructive madness will be expensive indeed.

Danielle Park September 27th, 2021

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