The new business model of losing money
KCL Fintech Soc - Sophie Bieber, London 09.07.19
Now more than ever, companies that we herald as incredible successes have yet to turn a profit. Tesla, Uber, Monzo are among a few with losses rising into the £ million every year.
However, this is no longer such a problem for rising start ups, as investors are less concerned by initial losses.
83% of US companies that have gone public in 2018 lost money in the year leading up to the IPO. In fact 69% of all high-tech and science-based companies currently operating are reporting losses. This is the highest the number has been since the dot-com bubble of the early 2000s.
The crash occurred due to the quick rise of online companies causing investors to desire any dot-come company, no marry the valuation. Suddenly people became willing to overlook price-earnings ratio and trust that a company based on the internet would eventually turn a profit. Then at the turn of the century in 2000, people began to lose faith in these companies when Japan re-entered recession and media started reporting on internet companies running out of cash.
As companies began going bankrupt and losing stock value, investors started pulling out causing many online companies to shut down and others to majorly decline in value. To many, it could seem like we’re following a similar model of trusting in these companies even with their continual losses.
Yet when one starts to investigate the detailed economics of many of these companies, their unit economics still make sense. Tesla, for instance, revealed this year the biggest loss in the company’s history at $717 million. However their spend last year on R&D (research and development) reached $1.378 billion. As the pressure is off to immediately produce income, they can spend and invest in their own future.
If they were to cut costs down and decrease their spending on R&D they could almost immediately turn profitable. Here lies the difference in modern companies and the dot com companies or the 2000s. Many of these companies never stood a chance with investors choosing them simply due to them being on the internet. Whereas, now profit has come to take on new meanings. A company can simply have the potential to be profitable while still producing major losses. It’s still a fine line between a company that may one day be profitable and a company that latches on to new and flashy tech without a substantial plan for the future, like in cases that helped to cause the dot com crash.
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