The bottom line, the most important part of
any functioning business.
Profit after costs, expenses, and taxes.
The money that the founders and investors
Sounds like business 101 right? And it kind
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
So what is going on here?
Why would anybody invest in a business that
What impacts does this apparent misallocation
of resources have on the economy?
Will the economic fallout of 2020 show these
businesses for what they really are?
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
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
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
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
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
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