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Some Amazon Lessons For Start-Up Investors

EDITORIAL
Mint, New Delhi.

There is no doubt that Amazon has been an exceptional company. It began selling books online in July 1995. These past two decades have seen many hyped digital commerce companies reduced to rubble once they burned through their cash. Few today would remember many of the first specimens of the dotcom bubble, companies that got immense amounts of funding based on airy concepts such as eyeballs.

Amazon has been one of the few new companies of that era to actually generate strong cash flows.

But, Amazon has prospered in a very unique way. It has done better with its revenues rather than its profits. Consider this. Amazon has reported revenues in excess of $400 billion in its two decades, but less than a measly $2 billion in cumulative profits. The prophet of the digital economy has essentially been profitless.

This is a paradox that matters at a time when digital companies across the world–including many in India–are sucking in new capital at huge valuations. And, just this week came the news that Facebook now has a higher stock market valuation than Wal-Mart.

A successful capitalist company that does not make profits is what baseball fans describe as a curveball. One view is that Amazon has preferred to use its cash flow to build new lines of business. It has assiduously expanded its range of products all the way into cloud computing. These are investments in future growth.

Some management thinkers point out that Amazon is in this sense quite different from companies such as Microsoft that starved innovative projects of funds in the quest to earn more profits. That is a debatable view. All companies eventually have to show profits to their investors; even Amazon, which generates impressive amounts of operating and free cash flows, cannot keep pushing the goal of profitable growth into the distant future.

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