But if we're to believe these companies are businesses that make money and put food on the table, that's hogwash.
How young they are? That is a criteria for whether a company should be making money or not? The point of any company really is to make money. These "startups" aren't filing as non-profits right? So they should be making money. If after the first couple months of being open you aren't figuring out how to make money you've done something wrong.
EDIT: Let me edit this to make it more clear. They should be self-sustaining. They should be able to pay their bills and employees. Whether they make a profit or not isn't the point. But if a company doesn't get funding and that alone causes them to disappear then they've done something wrong.
Yes the purpose of a company is to make money, but not making money in the short term doesn't mean it's not a company.
Not all business are inherently self-sustaining in a short time period, many small business (including shop, restaurants, etc) will operate at a loss in their first year.
There's plenty of business that take a while to return a profit, that doesn't make them any less businesses just because they're not the type of business that you'd like to run.
Instead, I'm suggesting that you should be interested in (and actively working toward) making money.
Any company needs to decide where their focus should be, Tumblr may well have done the analysis and decided that rather than take their focus away from their core product and focus on monetization (which may only generate a few hundred million in revenue at this stage) it's better for them to focus on their core product now in order to have a chance of monetizing at the billion dollar range in the future.
It's a perfectly rational economic decision.
At what point in their "Humble Beginnings" do you suggest they start thinking about making some money and becoming self-sustaining?
Somewhere along the way they need to focus on being able to provide for themselves. Otherwise it's a giant ponzi scheme where all you get are investors investing in a product that won't return their investment.
Number one rule of business: make a profit, any profit.
Officers in a business do not have a fiduciary duty to "make money" at any given point in time, they have a duty to increase the value of the property they are responsible for managing. As a shareholder, that is absolutely what you would want someone managing your property to do.
Taking an investment in order to increase the value of the company over the long term, even at the expense of making money today, can be the rational thing to do. And it's certainly more rational than without exception focusing on "making money" today.
(Just thinking out loud)
It's extremely risky but perfectly acceptable to grow an unprofitable business to the point where it becomes an attractive acquisition target for a company that can monetize it effectively.
It's also extremely risky but perfectly acceptable to sacrifice profitability in favor of extremely rapid expansion in a new market, and then achieve profitability later.
Venture capitalists naturally like businesses (and yes, they are businesses) with strategies like this because they require lots of capital.
Just because you and I have a different appetite for risk and wouldn't build a business using these strategies doesn't mean the businesses themselves are 'neat little side projects'.
"For only 30¢ per day you can make a difference in the life of a young adult who wants to reblog naked girls from other Tumblr sites and tweet about animated GIFs."
Consider: a post gets reblogged by a users and seen by their b followers, who reblog to their c followers etc. Thus, the average post has:
a + b^a + c^b + ...
total views. Set a += 1. Then
b += b, c += c * b ...
How many new page views will Tumblr get? Hundreds? Thousands?
What happens once Tumblr decides to advertise, even with AdSense? What if they use these $85m to build a data team and target ads? Because that's what they're doing with part of the money. [0]
I'm not a fan of funding companies solely on potential, but Tumblr could be big.
[0] http://tumblr.theresumator.com/apply/Ro2TZk/Data-Engineering...
Reminds me of ra-ra coverage celebrating the 'success' of Digg.
It's easy to forget that Google didn't have a revenue stream for a long time. If you're solving a problem for users then there's going to be a way to monetize it, the bigger question is if the revenue per user is higher than the cost per user. Given Tumblr's costs per user is relatively low that shouldn't be a problem.
If they chose to switch on ads tomorrow even using remaindered ad suppliers they would have $100m+ in annual revenues.
It is a fallacy to say that because just because Google did not make money right away that it is acceptable for any business to flounder along for years with no identifiable monetization in sight. Amazon didn't make money right away either, but just because Google and Amazon started making money doesn't mean that every internet startup will become Google or Amazon. Twitter should have been making money for some time now; it's absolutely ludicrous that they aren't.
If Tumblr is really getting 10 billion page views, what are they waiting for? I don't understand where the money comes from to throw into these projects that have no track record of profitability.
To put it another way, would investors pour $85 million of new investment into Burger King tomorrow? How about Sears? These are companies with massive revenue and decades of profit and investors would be hard pressed to just hand them millions - when companies like Burger King get money, it's with terms, i.e., loans to build new locations.
Juxtaposed against handing Tumblr $85 million just so they can afford to keep their servers going is incredibly silly.
Color raised $41 million on basically nothing. Many, including myself, criticized the concept. All the defenders had was "we don't really know where this is going".
The second example--and this is going to be somewhat controversial--is Twitter. Twitter is now at the point where they need to start figuring out the monetization problem. They've established a site where third-party access is a huge part of the user base. The 140 character message format limits in-stream options (and people have thus far railed against inserting ads into tweet streams).
Plus (IMHO) Twitter has become a tool for following celebrities. The TMZ of the Internet if you will. Not that there isn't a market for that but it's not as large as the vision of people in general sharing status updates. I'm far from convinced that Twitter will make that transition to mainstream.
The third is Groupon. Many, including myself, have been critical of Groupon's shady practices for awhile. What's happened in the last few months is that this Ponzi scheme has started to unravel. Better now than after the IPO. And not before taking over $1 billion in VC, most of that coming from DST who seems to be willing to throw money around with impunity. Better them than American consumers who Congress might feel some need to jump to the defense of.
But, in general, this isn't a celebration of businesses that make no money. It's allowing businesses to scale and grow quickly rather. Many Internet businesses couldn't be profitable if small. Or organic growth would simply take too long and a VC-backed rival could well supplant them.
In Tumblr's case, growing from 2B views/month to 13B/month is nothing less than impressive. The "blog" format has (IMHO) lots of monetization potential. In the short to medium term Tumblr seems destined for more growth or a big exit on buyout.
I'd say just the opposite: I think most internet businesses could be profitable if they were smaller.