Author: Kevin Roose / Source: New York Times
I’ve got a great idea for a start-up. Want to hear the pitch?
It’s called the 75 Cent Dollar Store. We’re going to sell dollar bills for 75 cents — no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It’ll be huge.
You’re probably thinking: Wait, won’t your store go out of business? Nope. I’ve got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we’ll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we’ve got plenty of options.
If you’re still skeptical, I don’t blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road.
Over all, 76 percent of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to data compiled by Jay Ritter, a professor at the University of Florida’s Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81 percent of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only 3 had positive earnings per share in the preceding year, according to Mr. Ritter.
Silicon Valley wrote the playbook for spending money in pursuit of growth, and the tech industry remains a hotbed of fast-growing yet unprofitable companies. Uber, which is expected to go public this year, reportedly lost $4.5 billion last year as it sought to expand internationally and fought price wars with competitors including Lyft. Snap lost $3.4 billion last year, its first as a public company. Airbnb just had its first profitable year after a decade of investor-backed losses.
But the smell of burning cash has spread beyond Silicon Valley. Spotify, the popular music streaming service based in Sweden, lost $1.5 billion last year, even as it continued to add millions of users. New York-based Blue Apron, the meal-kit delivery service that conducted one of last year’s most-watched initial public offerings, has not yet had a profitable quarter. ADT, the home-security company based in Boca Raton, Fla. that went public this year, posted a $157 million loss last quarter.
The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development, Mr. Ritter said. But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential “winner-take-all” market. Today’s public tech companies generally earn more revenue…
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