There are valid reasons to invest in a company that doesn't make profit now, but will in the future. Almost every business has this phase - it could be short (a lawnmower company that goes 5k in the hole for equipment) or big (a company with an idea to revolutionize the DVD to consumer marketplace, that starts operating at a loss until they build up the required customerbase).
Now, the big issue is that everyone thinks they're the company that's just operating at a loss right now, until they get the big break and start pulling in gigantic profit. That's simply not true for every startup, and right now I think we see VC is far too optimistic. But we don't want all the VC money to dry up, as then those companies that truly do have an amazing idea, that really will revolutionize their industry, will not not be able to get the necessary VC money to get past the unprofitable phase.
I think the problem is less companies that don't make profit and more all the companies that have raised a lot of capital without making that much revenue.
Not really, if you have access to capital it's easy to fudge revenue by selling dollars for ninety five cents, which is more or less what many of these companies are doing.
As long as the investor can make money by selling to the greater fool it's all good. I think that's the current strategy with the companies that keep losing money. Pump up validation and then dump it on the public markets.
Agreed. Grow at all costs is what incubates the "fail fast" approach, which I, personally, disagree with. There's a reason why you need to spend most of your time designing and architecting and jump to implementation only when the viability of the solution has been justified. And part of this justification has to be a solid business model that has a clear road to profits. And a path to profit that's not decades away. As things stand, it looks like most startups want to exit through an acquisition and not ever have to talk profits.
Huh? If investors demand immediately profitability, wouldn't that push companies to "fail fast" even more? The point of failing fast is to spend as little time as possible working on the wrong ideas, i.e. to find 'market fit' as soon as possible.
Time spent designing and architecting isn't free either and, for a lot of people, 'implementing' is the only viable means of testing designs and architecture, and more importantly whether there are any (potential) customers.
An "exit through an acquisition" is a perfectly sensible goal if acquisitions are common or expected. It's pretty common in (some) other industries, e.g. pharmaceuticals.
> Time spent designing and architecting isn't free either and, for a lot of people, 'implementing' is the only viable means of testing designs and architecture, and more importantly whether there are any (potential) customers.
That's exactly the problem I see. We're going about it backwards. Shouldn't you start something because you have a customer need and not start something and then find a customer?
The basis for investing should be connecting companies that actually need money with the money they need.
If a company is already making enough money to fund its whole operations plus make a profit that it can use to grow, and it isn't trying to massively grow at all costs, then it has no reason to sell itself to an outside party for an injection of cash
Some business models don't work unless they're a decent size, like marketplaces and social networks. Beyond that I generally agree. E.g. MoviePass, huge growth but no revenue. There are probably some good companies mixed in with the lemons but with the inverted yield curve etc. it's clear the tide is going to to go out sometime.
If the market return on capital is mid to low single digits, then some new high growth opportunity will tend to attract capital just early enough that the money losing period cancels out the excess returns, if markets are efficient (neglecting the risk of failure). Otherwise, someone else takes the opportunity instead. No?
