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Comment by olivermarks | Hacker News Reader

As Reid Hoffman of Greylock Partners, a venture-capital firm, and the co-author of a book about blitzscaling, puts it: “In a connected world, someone will build an Amazon. The only question is who and how.”

'...what they also lack, in 11 cases out of 12, are profits. Today, according to Jay Ritter of the University of Florida, 84% of companies pursuing ipos have no profits. That is remarkably high. Ten years ago, the proportion was just 33%. To see profitlessness as rampant as today’s you have to go back to the peak of the dotcom boom in 2000.'

I'm in the Bay Area and this late stage of the tech business cycle reminds me a lot of the build up to the dot com bust. for Enron see Theranos (and possibly even Tesla), along with lots of mega deals over basically profitless platform companies posturing around dominance of future markets...

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I see the profit angle brought out often in these discussions, and as someone that has worked at one of these unicorns with a recent IPO, I'd like to point out that profitability is not a black-and-white consideration. A company has many financial dials and switches, and ours specifically could have easily been profitable if they had chosen to do so. It was a very intentional decision to funnel money towards further growth, which frankly I had/have no issues with. I suspect that is the case with many B2B unicorns; not sure the B2C ones could make a similar transition as easily if circumstances called for it.

Not sure the dotcom crash is comparable - those were the days of companies getting millions without so much as a business plan, and going public months after being born. Sure, the companies without solid fundamentals are not going to survive in the long run, but as an industry, I don't think we're anywhere close to the crazy old days.

> It was a very intentional decision to funnel money towards further growth, which frankly I had/have no issues with.

This is the nature of swelling debt. This is most immediately exemplified in ponzi schemes.

Financially this only makes sense if the greater growth unlocks revenue sufficient to pay back earlier investors without a leveraged need for further investment at the same rate/scale. Otherwise the earlier investors might be paid back for their investment, but the later investors certainly won't. There is no way to predict that without first taking on the extra debt burden. Uggghh.

In that vein this is very much like the dot com crash. The dot com crash occurred for two reasons: over speculation and the investment in question was purely financial without any regard for the end product/service.

How does a profitability dial work for companies like uber, which don't have the network effect monopoly that the Amazon's, Facebook's etc have?

Hike prices for passengers -> passengers leave platform & switch to local/regional alternatives

Cut wages for drivers -> drivers move to do more shifts for better paying competitors

B2B vs B2C?

> not sure the B2C ones could make a similar transition as easily if circumstances called for it.

One potential issue in the B2B space is how dependent (or not) these companies are on other non-profitable companies for their revenue. If all of these yet-to-be-profitable unicorns are selling to other profit-challenged vc funded startups, than that could cause some problems if VC's pull back.

I think interest rates play a key role here. I was expecting rates to rise more, but it seems like the Fed is getting nervous and pausing rate hikes. So we may end up in a semi-permanent low interest rate environment, which should keep the VC money flowing for now. So at this point, I am not really sure what to expect.

This was exactly the problem during dot.com. I worked in optical networks and we all scoffed at Web business as vapor ware. But when dots went bust demand for bandwidth plummeted and optical networking cratered soon after.

Global Crossing still owes my company money for work I did for them!

> I'd like to point out that profitability is not a black-and-white consideration. A company has many financial dials and switches, and ours specifically could have easily been profitable if they had chosen to do so. It was a very intentional decision to funnel money towards further growth, which frankly I had/have no issues with.

I am unsure what you mean exactly but if the company is making a choice between being profitable and growth it is a black-and-white (or a binary) consideration.

> A company has many financial dials and switches

What are these financial dial and switches?

It is one thing to opine whether a company might be profitable if they chose to and other to look at practical implications of this choice. An example, Uber might be chose to be profitable by raising ride prices or charging higher commissions to drivers or other means but it might lead to many drivers jumping ship or users booking less rides etc.

It's really not. You gamble with your margins -- it's a continuous variable. You could be profitable by a cent or millions of dollars, or not at all. Each of these decisions yields a very different growth and risk trajectory.

The label of "profitable" itself is pretty meaningless, given that you are at battle over many many years against competitors. One quarter of profitability might yield doom 3 quarters down the line due to lack of investment.

> The label of "profitable" itself is pretty meaningless, given that you are at battle over many many years against competitors.

Good God, that's a terrifying statement.

When business stops being about "making money", I don't know what we're doing anymore.

The point of battling the competition is to make money. It's not about crushing them, beating them, or even being more profitable than them. It's about making money.

Yes, it's absolutely valid to choose to sacrifice a period of profitability in order to strategically set yourself up for better profits later. And if crushing the competition is how we do that, great.

But this game of never making profits is a fools game. If I invest my money in your company, it's because I expect you to make me money.

If the only way you make me money is by raising the value of the stock, then we're in a game of Dutch tulips, and the only question is whether I can time selling my stock properly to not be the greater fool.

But if you make me money by running a profitable company and disbursing the dividends, I'll hold onto that stock forever.

One of those approaches is ethical. The other is a scam.

Consider this.

* Revenue > OPEX, but all the difference is put into expanding to new areas, maybe even topped with some debt. If needed, the expansion can be curbed, and profits will show. This is the Amazon case.

* Revenue < OPEX, and no matter what other expenses you cut, you make a loss on every sale. You cannot show a profit however you try. This is the case of WeWork and maybe Uber, AFAICT.

The amount of other expenses that you can cut to turn profitable, and the amount of profit surfaced this way, is indeed a kind of a spectrum, from near zero to a quite healthy ROI. But it does not apply for companies that are fundamentally in the red.

You could make it binary and label everything as improving profit or investing in the growth of the company but I think we should define "growth" in this case as the relatively short-term investment made to grow. That's immediately what I thought of when I read and re-read the parent comment.

Reading what was said, I imagine rolling out new markets, testing new customer acquisition methods, and hiring to focus on new features would all fit in this label as growth.

Things like R&D might not. If Uber has been investing in self-driving vehicles, it may not pay off in the short-term, and therefore wouldn't fit in this set as it's quite speculative. Technical debt might fit here too. Or marketing debt: perhaps they want to establish brand guidelines and everything that comes with it. Great investment but not what directly helps you grow. A more direct "financial dial" might be restructuring your company from a legal perspective and forming new entities.

Just sharing how I read "black-and-white consideration". Maybe the parent can clear up what they meant.

> ours specifically could have easily been profitable if they had chosen to do so

There is a big difference between e.g. Amazon, which is unit profitable and could be more profitable at any time, Uber, which is unit profitable in some markets but not so in other markets, and something like WeWork, which is not unit profitable.

"These companies' newly public shares are far less likely to melt down as occurred with the class of 2000. For one, companies in the class of 2019 are far older, bigger in size and more sturdy as far as finances and management skills. The median age of today's tech IPOs is 12 years, which is two to three times the age of tech IPOs in 1999 and 2000, at four to five years, according to IPO expert Jay Ritter. Meanwhile, the median sales of the latest class of IPOs is nearly $174 million, more than 14 times bigger than the median $12 million in sales for the years 1999 and 2000."

Source: https://www.investopedia.com/why-ipos-of-2019-won-t-crash-li...

I don't disagree, but it's been 10 years that we keep hearing that "<insert something> are now showing that the dot com burst is coming again"

Bubble bursts are entirely speculative. When people think the bubble have burst or are about to burst, that's when it will burst.

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