This is part of a story from the weekend Globe. Here at the MCR bullboard, we have been feeling this for a very long time.
Substantial profit and a rock solid balance sheet with surplus cash is discounted (ignored) by the market. Who is right? Not us so far....

This euphoria for money-losing companies emerged in the aftermath of the 2008 financial crisis, when disruptors like Facebook and Netflix prioritized scale and global reach over profits. Because they were so successful at it, many investors became desperate to latch onto the next big thing, and by the middle of the last decade, private startups were often considered sexier investments than many publicly traded companies, no matter how much money they lost.

But in 2019, after a decade-long bull run, it finally seemed there was a reality check coming. Few of these money-losers had existed in a world of rising interest rates, and with the global economy heating up, central banks had started to hike rates, taking some of the wind out of growth stocks. With the future looking less certain, institutional investors started asking more questions. Famously, WeWork tried to go public in the fall of 2019, but the deal failed spectacularly after IPO filings showed US$2.8-billion in losses over the previous 18 months, plus a slew of governance issues (as chronicled in a new tell-all book called The Cult of We).

The pandemic, though, has made this era of sober second thought seem like little more than a blip. With interest rates back near zero, and with trillions of dollars in bonds once again yielding next to nothing, growth at any cost is back in favour. Investors are once again willing to underwrite years of losses in hopes of backing the next Amazon or Shopify.

“When we started writing the book, we thought WeWork was the bookend to this crazy era in Silicon Valley,” says Eliot Brown, a Wall Street Journal reporter and one of The Cult of We’s co-authors. “We literally had to rewrite the epilogue a couple of times.”


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.

Somehow, the only thing more tantalizing these days than investing in a company that makes $1-billion a year in profit is finding one that loses it.

The dominant ethos emanating from Silicon Valley over the past decade can be summarized by a simple phrase first coined by venture capitalist Marc Andreessen: Software is eating the world.

When he first used the term in a Wall Street Journal op-ed in 2011, Mr. Andreessen, who co-founded early internet browser Netscape, was angry that the broad stock market was rather dismissive of startups. Back then, many investors likened the new wave of companies – the Zyngas and Facebooks – to those that famously crashed during the dot-com bubble. “Today’s stock market actually hates technology, as shown by all-time low price-to-earnings ratios for major public technology companies,” he wrote, citing the fact that Apple was trading at a mediocre PE ratio of 15.2. The revolution was coming, he opined, because “more and more major businesses and industries are being run on software and delivered as online services – from movies to agriculture to national defence.”

Because software is so easy to access, many startups eschewed early profits in exchange for national or global reach. Some, such as Facebook, sought scale by making their products free to use, while others made theirs extremely affordable. One of Uber’s defining features was its cheap rides, even though the fare rarely covered the true cost of the trip – which meant Silicon Valley money subsidized the rest.



Looking back, it now seems obvious that software really was eating the world, but it took some time for Mr. Andreessen’s thesis to become a mantra. Facebook was originally ridiculed for paying US$1-billion for Instagram in 2012 because the photo-sharing app had hardly any revenue. But after a few years as a publicly traded company, Facebook’s profit potential became undeniable. In 2020, the company made US$29-billion, up 58 per cent from a year earlier.

Once investors caught on, money started pouring into venture capital funds. There was also a growing consensus that traditional investment vehicles like mutual funds were dying because they couldn’t compete with low-cost exchange-traded funds. Almost by default, then, money managers with expertise in alternative investments – private equity, venture capital, real estate – had a certain shine to them, and in no time there was so much money flowing into VC funds that they started to change the way they supported their portfolio companies.

“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.

SoftBank, led by Masayoshi Son, embodies this model. Five years ago, the Japanese investment firm laid out plans for its US$100-billion Vision Fund, then deployed the cash with the specific goal of flooding its investments with so much of it that they’d outlast their competitors. Famously, SoftBank invested US$4.4-billion in WeWork after spending less than 20 minutes touring its offices, according to Forbes.

In Canada, the situation was radically different. Save for a few homegrown funds, tech was largely a backwater in a country dominated by natural resources and financial services. Aside from Shopify’s US$131-million IPO in 2015, there wasn’t much progress until early 2019. That’s when the tech sector finally seemed to gain some momentum, fuelled in part by the expectation that more U.S. startups, such as Airbnb Inc. and Uber, would finally go public. That March, Montreal’s Lightspeed Commerce Inc., which sells payment software for restaurants and retailers, pulled off a $240-million IPO on the TSX.

At first it seemed the party wouldn’t last long. By September, WeWork’s plans to go public blew up. A month later, GFL made its first attempt to go public in one of Canada’s largest ever IPOs, but ultimately pulled the deal because it couldn’t shore up enough investor demand. Where private investors had been willing to write cheques that continually boosted corporate valuations, public investors were suddenly more discerning.