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Why Startups View Losses As Negative Profits

Why Startups View Losses As Negative Profits

In the language of accounting, profit is a liability but loss is an asset. The owners and their business are two separate legal entities. Owners or investors provide funds to the business. Therefore, logically, when the business makes profit, it is liable to pay the money back to the owners. But when it incurs a loss, it is the owners who have to replenish those lost funds back into the business. This dual aspect of accounting has gained greater prominence under the present circumstances for Indian startups. It is, in my opinion, perhaps the most relevant discussion in the context of mounting losses for ecommerce companies in India.

Losses get easily highlighted. Recent research reports published by brokerage houses and analysts have discussed the reasons for increasing ‘loss margins’ in the ecommerce space. Although there is a handsome growth in revenues, there is a lot of concern about piling of huge losses year-on-year. But as investors turn jittery, the entrepreneurs have managed to stay calm and carry on. So, why do startup founders remain confident about the future of their business despite of rising accounting losses?

Any new form of business, irrespective of the use of ultra modern technology, is an attempt to change behavior of consumers in the market. It is primarily an effort to shake the convictions of people about what they think they already know. It runs at the risk of disrupting their accepted buying practices. This is not easy. An average Indian consumer takes considerable amount of time to catch-up on a technology driven platform. In fact more than the learning time it is the trusting time which makes things go slow. People do not want to switch from what they trust to what forces them to redo the whole exercise of building that trust. Hence, in order to gain the early mover advantage and survive the competition, modern day startups have to communicate with the consumers.

Advertising is by far the biggest reason for burning cash raised through painstaking funding efforts. Companies have to spend humongous amount of money in order to ‘convey’ their ideas to people. All they are vying for is the space in consumer’s mind. Ad spends are therefore not operational expenses but amortizations of capital cost incurred in creating a social infrastructure. Apart from advertisements, startups also do deep discounting of goods and services to occupy the share of prospective consumer’s mind.

As Maya Angelou, an eminent American memoirist once said, “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

Traditional avenues of business are stagnating. Investors who invest their wealth in startups do not invest in physical infrastructure. They bet on the potential of smart people. They plan to leverage talent for Indian markets. Umpteen opportunities are waiting to be explored by way of technological revolutions happen around the world. Those who are willing to take this risk are open to the idea of going two steps backward to leap five steps forward. Loss is viewed by these risk takers as profit in opposite direction. The direction reverses when the scale of operation becomes large and customer base turns profitable. The investments made in building the corporate ‘brand’ starts paying off.

Finally, for a startup, loss in profit is acceptable but not the fall in number of customers. All the negative financial impacts can be inverted if a company is able to create loyal customers. From Henry Ford to Steve Jobs, the world of business is filled with miraculous stories of businesses which rose to become number one from the brink of bankruptcy. The passion to stay foolish has to be balanced with the passion to stay hungry.

Author

Anil Kshatriya works as Assistant Professor in the area of Finance at Institute of Management Technology, Nagpur. His teaching and research interests include Managerial Accounting, Management Control Systems and Strategic Management.

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