Why unprofitable companies are winning in 2020

The bottom line, the most important part of
any functioning business.

Profit after costs, expenses, and taxes.

The money that the founders and investors
business.

Sounds like business 101 right? And it kind
of is.

A business that doesn’t turn a profit is
like a freezer that kind of make ice, it’s

more or less pointless.

And sure there are things like non-profit
charity organizations out there but most businesses

exist to make money!

in the world are not turning profits? Why

is it that they don’t even plan to?

The rise of so-called zombie companies or
companies that have not and have never run

in the investing world.

These businesses are getting too big to ignore
as by some estimates over 10% of the s&p500

(an index of the largest companies in America),
is now made up of these companies that
endemic to a particular industry, dozens of

major companies and countless smaller businesses
in every sector of the economy from energy,

retail, medical, telecommunications and of
course technology are in this profitless boat

together.

So what is going on here?

Why would anybody invest in a business that
is unprofitable?

What impacts does this apparent misallocation
of resources have on the economy?

And finally,

Will the economic fallout of 2020 show these
businesses for what they really are?

Now
before we start ripping into these businesses

as blatant ripoffs it’s first important to
give credit where credit is due. So why are

these businesses looking to speculators like
A solid investment

Almost every business in the world starts
out as an unprofitable endeavor. Everything

from a corner store to Microsoft had to operate
for a period of time where they were developing

a product, building out infrastructure, and
growing a customer base.

This is normally expected as part of a regular
business life cycle, but the big distinction

is that most businesses will desperately try
to get to a point where they break even.

Breaking even simply means that the business
is self-sufficient and can cover all of its

own costs and expenses and make exactly zero
dollars in profit or loss.

For people starting their own business, this
is a really important milestone because it

represents a point where the new business
owner does not need to contribute their own

money to keep the lights on.

After the break-even point the next step is
of course turning a profit by continuing to

grow revenue and minimizing expenses, and
for most businesses out there that can get

to this point, that is where they live happily
after.

But of course, some businesses want to continuously
grow because their business model suits a

scale slightly more grandiose than a corner
store, or a cafe.

To do this these types of businesses will
need to attract investors that extend beyond

themselves plus their friends and family.

That’s because unless these hypothetical
founders are extraordinary wealthy already,

to develop the infrastructure for yet another

new Uber rival or oil fracking operation

These funding rounds are normally taken out
periodically when one of two things happens.

Either the business grows and achieves a new
goal like let’s say taking 50% of market share

in a new city or the business runs out of
cash from the last investment rounds.

Now investors are much more likely to invest
in a business that has hit a growth goal than

they are to invest in a company that is running
low on cash, so these businesses develop a

growth at all costs mindset.

Now all of this is still actually fine, some
businesses naturally take longer to turn a

profit than others and need cash to keep the
lights on in the meantime. Medical research firms for example can takes
through FDA approval, but once they do they

Nobody has any major issues with these types
of businesses because they have a plan for

profitability. Sure the drug may not be made,

equity risk of investing.

What does cause concern is companies that
have no plan for profitability. Famous examples

the
rollout of some revolutionary product, and

they have all the market share they could
possibly ask for so what gives? How is anybody

supposed to make money off this?

Well this is Uber co-founder Garret Camp’s
house which was reportedly purchased for 72.5

million dollars so obviously someone is making
money, and they are.

That’s because different rounds of funding
tend to attract different types of investors.

Let’s say two engineering friends develop
a new system for extracting oil more efficiently.

The first pot of cash a company has to get
started with normally comes from these founders.

They will use this money to develop a business
plan, a name for the business, some functional

technology demonstrations, and perhaps most
importantly a campaign to attract further

investment.

After this comes the Angel Investor. These
are investors that are normally ex entrepreneurs

themselves that will seek out good ideas that
need an infusion of cash.

This money will be given for a portion of
ownership in the company by selling shares

to that angel investor. This cash can then
be utilized to do the same thing on a larger

scale. Maybe now an actual product is rolled
This market test is very unlikely to make
that much money but it will show slightly

more conservative investors that this is possible.
Which is where the big guns will come out.

At this point the founders can look to raise
the next round of funding with other companies

in the industry and Venture Capital firms
(which are basically investment vehicles for

rich people).
the company and that cash will not go towards

business operations but will instead go into
their own personal bank accounts.

Normally this is encouraged for 2 reasons.
company without diluting the ownership as
much. And two: it’s kind of important for

the founders of a now potentially billion
dollar company to look successful.

More investors will need to be attracted in
the future and if the founders are still living

at home with their parents it doesn’t send
a great sign to the less sophisticated public.

Now this company may repeat this whole process
many many times over, and while doing so that

angel investor will probably cash out their
shares as well, this is money that they can

use on the next company all over again.

Eventually, though these rounds are all shooting
for the holy grail of business funding, an

initial public offering where the business
will be listed on a public stock exchange

are regular mere mortal investors will have

historically, companies have been profitable
when they are listed to the public. In 2019

only one-quarter of American IPO’s were
for companies that ever turned a profit.

None the less, IPO’s of non-profitable companies
have become more palatable to regular investors

because they have seen the monumental success
of companies like amazon which famously did

Outside of being palatable, they are kind
of essential.

Public offerings are where these venture capital
firms will cash out their shares take their

profits and get ready to do the whole thing
all over again with a new company.

But hold up…

Investors getting rich by attracting more
investors who only make money by attracting

more investors… you might be thinking hand
on, isn’t that a ponzi scheme?

Technically the funds given to these businesses
are being used to develop and grow the operations

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