New Trends in Business: Putting Huge Amount of Cash Into Projects Regardless of Their Profitability

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Recently, Google agreed to pay $3.2bn for a privately owned four years old start-up, Nest. It specialises in smart gadgets for the home, such as a WiFi-enabled thermostat that might cut heating and cooling bills. Whether it is worth $3.2bn, no one can say. The discussion among the tech experts and in financial circles is that Google paid so much simply because it could.

Is this a “right” approach to business investment? While macro strategists say that most companies in particular are over-investing in the face of sharp deflationary pressures and shrinking margins, is it true that a combination of tech-fever and feverish greed has caused investors to lose touch with reality?

Fifteen years have passed since the Dot Comedy. The era has been mocked ever since, yet many specific instances of craziness have been forgotten or brushed away. In the same way that a company can invest $3.2bn in a man producing thermostats and smoke alarms, there were similar examples of investors betting fortunes on individuals before those people even had a business to invest in. In short, investors were prepared to pay a premium for cash. All that was needed was for three or four well-known business figures to band together and express their interest in acquiring something in the field of the internet. They could then list the resultant shell company, raise cash and watch as the value of their sole asset – money – set off in the general direction of the moon.

Investors suffered a collective psychotic episode. The fact that successful businesses depend on sane business models, which bring in customers and profits, had been scrubbed, temporarily, from their minds. Yet, fifteen years later, it is considered dull, stupid or both to question the $40bn valuation afforded Twitter. The opportunity for Twitter is to become the largest real-time delivery system, large enough and pervasive enough to exert noticeable ‘pressure’ on the overall internet itself. Since the messaging service joined the New York Stock Exchange in November, Silicon Valley has continued in its role as a seemingly magical valuation creation machine. This week Square, the mobile payments business, was valued at $ 5bn after a private placement that allowed a number of insiders to cash out $135m of stock. There is no discussion of profitability anywhere near this. Revenues might get a mention but only as a secondary matter to market share.