My father used to say that the key to business success is having more checks in one hand than bills in the other.
That advice seems as outdated today as a flip phone if you consider most of the hot technology initial public offerings (IPOs) this year are money-losing companies. According to a new report in the Wall Street Journal, 83 percent of all IPOs in 2018 went public without being profitable, compared to 81 percent during the dot.com bust.
Closer to home, real estate companies like Compass are on a spending spree with a profit and loss statement that would make my Dad’s head spin.
How do they cover their losses? Super deep-pocket global investors from places like the Middle East and Japan. These aren’t your ordinary run-of-the-mill investors.
Take the Qatar Investment Authority, which co-led the $400 million Compass round that closed last week. It was founded by the State of Qatar in 2005, “to strengthen the country’s economy by diversifying into new asset classes.”
With $170 billion in assets, QIA has an ocean-size supply of money from its natural gas reserves. It’s placing lots of big bets on U.S. real estate and tech companies, including a 2014 investment in Uber.
“Our portfolio is intended to create long-term value for generations to come,” according to a company statement. “It is therefore not subject to conventional short-term performance measures or tactical portfolio optimization.”
In 2015, QIA announced it would be investing $35 billion in U.S. assets. It has already purchased $3.78 billion in Manhattan properties since 2014.
The recent round of Compass investors also includes the 75-year-old mutual fund investor Fidelity and IVP, a later stage $7 billion VC fund that has invested in Dropbox, Slack and Snap. All are money-losing ventures with lion-sized valuations.
Another is the $93 billion Softbank Vision Fund, which is taking hefty stakes in companies that defy economic common sense.
Softbank CEO Masayoshi Son says he has a 300-year investment horizon. “He is known for pushing entrepreneurs to raise more money than they’d originally planned and expand their ambitions beyond their wildest dreams,” according to an analysis by Wired magazine.
The Compass “pre-money” valuation was allegedly over $4 billion, according to Crunchbase, double the market cap of Realogy ($2 billion) and five times the valuation of RE/MAX ($790 million).
All of these folks are sophisticated investors who say they are in it for the long haul and are undeterred by company losses.
The 500-year plan that went bust
Back in the late 1980s, I wrote a number of stories about the Japanese going on a U.S. real estate buying binge from Hawaii to California to New York. The investors willingly overpaid for “trophy” properties.
For example, Mitsubishi Estate Company of Japan invested $2 billion in the famed Rockefeller Center in New York City. At the time, it was described as “the hope diamond of world real estate.”
Back then, I interviewed the head of Mitsubishi who engineered the U.S. land grab. I challenged him about the excessive prices he was paying for property here.
He was quick to lecture me on how Americans failed to think long term. His investment horizon was “500 years,” he told me.
A few years later, Mitsubishi walked away from its investment in Rockefeller Center and almost everything else it owned in the U.S. Many of its holdings were bankruptcy work-outs at pennies on the dollar.
Technology investments are often riskier than real property portfolios. But losing money does not seem to matter.
Most of the recent money-losing tech company IPOs have performed well in the public markets. DealLogic says IPOs of newly U.S.-listed tech companies have risen an average of roughly 50 percent this year, according to the Wall Street Journal.
And Zillow and Amazon produced remarkable returns to their investors, even though they both lost gobs of money for many years.
But long-term is always relative.