The success of Zomato IPO has unleashed a debate on the reasons behind investors rushing to invest in companies where profitability is still light years away. Everyone is scratching their heads to somehow make sense of this phenomenon where burning cash is being celebrated by the markets without any clarity on the path to profitability. Some divine future potential of the business forgetting that in this age of disruption, a better business model may just be around the corner. Some explain it as the lack of investment avenues in a stressed economic world. Some ascribe it to excess liquidity making people more prone to taking risks.
All these and other explanations make partial sense but do not fully explain the phenomenon. The same phenomenon can be discerned when people invest in Cryptocurrencies that do not have any underlying value or backing. Here too, prices display erratic and wild swings independent of the state of the economy. So what is happening here? Is there something more fundamental that we are missing?
What we are witnessing is a fundamental shift in the way we perceive money. Money was invented as a medium of exchange replacing barter. Later, it became a storehouse of value and people started accumulating money for future use. The basic premise was that supply of money was to some extent finite and hence one needed to hoard it. While hoarding it, one also wanted it to grow. This led to the idea of investing and ROI. Today, we apply this idea to evaluate investment options. State was the maker of money and backed it with reserves of various types and its prestige. In the 20th century, the relationship between money and reserves broke down as countries printed more and more paper money. However, the idea of ROI held its sway.
It is this idea of ROI that is coming unstuck when people invest in companies where the road to profitability is not clear. They do it because of various reasons. The notion that the supply of money is limited was demolished initially by our Central Banks. CryptoCurrencies further the process. Secondly, in a world that has an oversupply of various kinds of products, the sense of lack that played on the minds of our forefathers has disappeared. It is being gradually replaced by a feeling of abundance. This has led to placing more value on ideas than physical goods as their relative importance diminishes. No wonder we have so much money chasing ideas in the new economy. This feeling of abundance has also raised the risk appetite of society considerably. This partially explains investing in loss-making ventures.
The new generation is more rooted in the present. The sense of abundance gives it the freedom to not bother much about the future. Earlier generations hoarded money because it provided a sense of security. The new generation is inclined more towards freedom, exploration, enjoyment, comfort, satisfaction, contentment, and happiness, rather than security. For such a mindset, the concept of future ROI is more of an abstraction than reality. It is learning to deal with the uncertainties of the future more through ideas than through accumulated wealth. For such a mind, it is not difficult to invest in an idea that generates value in the present rather than wealth in the future. Incidentally or co-incidentally, when all our accumulated wealth or status could not get a hospital bed or oxygen during the pandemic, it struck a blow to the idea of money as a store of value.
It seems we are moving towards the concept of money as a tool to create value rather than a store of value. When a venture capitalist invests in a new idea, he is basically using his money as a tool to manifest the value inherent in the idea. As every new idea has a shelf life before it is enhanced or supplanted by another new idea, the reconversion of the value created into money must be done quickly or it may be lost. Further, even the money so generated has to be mostly reinvested in another idea, rather than physical goods or services.
Therefore, the “concept value” being created through ever new ideas may be a better way to look at the new economy rather than the traditional ROI. Since ideas are generated in a particular context to satisfy a specific need, they cannot be a permanent store of value in the traditional sense. Hence looking at future ROI to understand either companies like ZOMATO or looking for underlying value in Cryptocurrencies may not be the correct approach. We need a new model to understand the value of an idea in a time-space context.
(The author is a serving officer. The thoughts are personal.)
