Attracts Millions of Investments, but Operates at a Loss: Why Big Lithuanian Startups Still Not Profiting

Mantas Mikuckas, CEO of Vinted Delphi You have said that the main task of start-up is to maintain the fastest growth stage possible, so you invest all your earned capital in growth and development. Another Lithuanian startup, Trafi, is operating on the same principle this year. Although the start-up has been profitable for the last two years, this year Trafi has opted for faster development and will suffer losses.

For example, Vinted’s sales revenue grew impressively last year, reaching $ 83.92 million. EUR. The company’s losses increased on a similar curve. Net operating income last year was $ 17.95 million. Loss of euros. Vinted’s turnover last year was almost three times higher than in previous years and compared to 2018. The losses were almost six times higher, announced the portal vz.lt.

KTU School of Economics and Business Professor of Finance dr. Rytis Krušinskas, first of all, points out that most of the unicorns’ success stories are related to their uniqueness, market potential or growth forecasts, and the amount of capital raised.

These factors, together with investor confidence and the expectation that the start-up will “skyrocket” with its income and participate in the international market, are the driving force. This is a risk assumed by the investor in the hope of obtaining a high return in the future. Also believe in a business idea, its uniqueness, value creation and a value creation team. Therefore, an accounting loss can mean more investment, development for future growth and waiting for that big financial breakthrough, ”explains the KTU finance professor at the expense of these startups.

Confidence in a sustainable operating model

Both Trafi and Vinted executives are convinced that the operating model of both start-ups is sustainable, because if they stop active development at any time, they would be profitable. R. Krušinskas points out that the financial sustainability of a company depends on the resources available and managed and the maturity of the start-up, that is, how long it lasts.

“As long as the income is less than the cost incurred, we have an accounting financial loss. Part of the costs incurred can also be indirect – monetary, such as the depreciation of technological equipment. But a sustainable business must be profitable in the long run. As long as it is not, the organization is on a continual cultivation path that requires additional resources.

As long as investors believe in the prospects and to the extent that they take risk, expecting high returns in the future, this model is possible. However, in the long run, venture capital can lose faith without receiving its dividends or the expected increase in value. Traditionally, venture capital may want high returns or value gains for 3-5 years. In the case of promising start-ups, each situation with a potential investor can be individual, not standard, ”says the KTU Finance professor.

It can turn into a fight for survival

According to the head of Vinted, the first thing to take care of is the development of the startup, not to start generating a profit growth account. According to him, if the company starts to deal with dividends first, it is a very risky strategy. However, long-term unprofitable activities also pose a number of risks.

“In general, the resources available at the beginning of the activity of the company are accumulated, the objective is to guide them to the use of the potential of the company and the market: growth. Therefore, the payment of dividends generates economic benefits for investors, but “eliminates” part of the financial resources of the operations of the company.

If a company makes a profit that is not paid out as dividends, but is left in the operations of the company, the profit is the basis for the frequent growth of the company. And if a company is operating at a loss or the internal resources it generates are not enough to grow, it is necessary to look for the missing resources in investors. If these investors do not emerge, the company has to settle for what it is or seek other solutions to ensure business continuity. It becomes a struggle for survival ”, R. Krušinskas mentions the possible risks.

According to him, generally the funds attracted by new companies are used for development, it can be various: creation of the technological base, acquisition of the necessary equipment, formation of development teams, preparation of the marketing information platform, “launch” of product production, etc.

The fair market value is shown by another indicator.

Vinted raised $ 128 million last year. investment in euros and became the first Lithuanian unicorn. Trafi has also attracted millions of investments from Japanese investors this year, but does not disclose the exact amount due to confidentiality.

The market value of the unicorn must reach one billion. EUR. As the KTU professor explains, it is a kind of financial contractual evaluation, for example, when a start-up attracts 100 million. Eur, and the desired return for investors is 10%. The ratio of these two sizes and allows to calculate one billion. Value in euros. However, the interlocutor points out, it is a highly conditional valuation, more focused on the valuation of prospects and investors’ expectations.

“Of course, the ‘conditionality’ can be removed if there really is an investor who invests or buys a newly created unicorn worth a billion. However, with further proof of its financial value in the market is a public offering – IPO (IPO). initial public offering), which reveals the next stage in the development of the organization.

According to global trends and analyzing the available information, it can be stated that only on average 7-8 years after the IPO do start-ups begin to generate real profits. However, of course, each situation can be exceptional, because we are talking about unique companies with high growth potential, ”says R. Krušinskas.

According to the interviewee, many beginners in the world are not listed, the number of unicorn IPOs is also small, about 50.

A new Lithuanian unicorn may appear in 2022–2023 m.

Earlier this year, experts predicted that we would have more unicorns this year and named potential candidates: CityBee, Tesonet, Transfergo. Of course, the pandemic has rectified everything, although it is said that we still have an unofficial unicorn, Tesonet. According to the KTU professor, in the optimistic scenario, the new Lithuanian unicorn could appear in Lithuania in 2022-2023.

“This year is a prudent evaluation period for financial investors due to the pandemic, the uncertainty of the financial markets and the general state of the global economy. As a result, optimism and the promising process of forming a billion expectations have slowed. Until now, I couldn’t say anything other than Tesonet, Trafi and Transfergo.

Being an informal unicorn is also recognition, but more symbolic, it draws attention, creates strategic but not yet financial value. I am considering that optimistic investor expectations will have to wait alongside the post-pandemic recovery in financial markets, and would have expected it in 2021 at the earliest. in the end. Therefore, optimistically awaiting the recovery of the world economy from COVID-19, it would be good to be happy with the new Lithuanian unicorn in 2022-2023, ”predicts R. Krušinskas.

Lithuanian beginners show good profitability results

There are currently around 500 official unicorns in the world, according to the professor, this is a large number of success stories, but not that large compared to the number of all companies.

“The path of beginner ‘unicorns’ is fraught with challenges, and really few on this path can enjoy financial success,” he notes.

Together with the KTU researchers, R. Krušinskas analyzed in detail the financial situation of “entrenched” startups that have a connection to KTU. The data obtained revealed that the financial situation of the newly created companies depends to a large extent on their age, that is, on the history of operations in the market. Furthermore, emerging companies operating in Lithuania have historically shown good results with average annual profitability (15-16%).

More often, younger startups suffer losses in the first year of life, which they aim to reduce in later years to “enter” the profitability zone.

The results also differ in the different ways of doing business: a limited liability company (UAB) or a small company (MB). The study revealed that in the case of the UAB there are higher sales volumes, indicators induced by growth and, at the same time, better financial results.