Recently there is quite a bit of chatter about tech company being unprofitable, and burning money.
“Burning is bad”
Some people believe that losing money is bad, companies should try all they can to be profitable. They should feel ashamed if they are losing money.
In these people’s mind, spending $50k on promotions to acquire customers is wasting money (and being ‘reckless’), but spending $5m to get expensive executives on a doomed corporate innovation project is NOT.
Yes it is more ‘tangible’ as ‘real things are being built’, but tangible garbage is still garbage. Besides, it costs more to remove the tangible garbage.
But it often hides behind the strong corporate balance sheet / P&L – much less visible than customer acquisition costs.
“Burning is good”
On the other hand, there are people who are so bullish that they believe that they should spend all they can to grow the market, and marketshare. Many of those who are doing a lot of voucher campaigns in Vietnam belong to this category. Some aggressive fintech players in Indonesia last year belong to this category as well.
The problem with this, often, is that the people who are authorising the spending believe that they can take the market with the promotions – and no external factor can stop that.
What if the market stage is earlier than you have thought (think Jumia)? What if other players are already taking a vantage point in an adjacent sector while you are still spending your money away for the bones? What if a major disruption happens and you do not have an alternative (think about Zilingo)?
No difference, really
Both mindsets are actually the same – of not knowing the market dynamics they are in, not understanding the logic behind ‘burning money’.
Lack of such understanding is dangerous for corporate decision makers because you might just laugh at the (funded) disruptors while they chip your foundation (and customers) away; it is also dangerous for (loaded) startup founders because any disruption causes your train to derail and turn into wreckage.
Burning money is not always long term thinking, but it can be (and often is). To really master it (and master the response to it) you need to think deep, think strategically.
Actually it is kind of funny I am writing this piece during the ‘ghost month’ in Chinese lunar calendar, where people burn (fake) money ritually.