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Is there any other industry where a company can go public having lost $500,000,000 over the last 3 years? I get it their “market share” is increasing every yea

Is there any other industry where a company can go public having lost $500,000,000 over the last 3 years? I get it their “market share” is increasing every year and the loses are staying the same...and even that is not the full picture of a path to profit. But if the company could turn a profit, then why not do it privately, show that and then go public? My guess like Uber and Lyft...they can’t turn a profit, and for any hope to turn profit they need this continual growth at a loss, and at some point the investors dump the bag on the public getting a return in a bubble they created and let the public fund the losses. I think to balance the playing field with VC and private investment, companies shouldn’t be able to IPO with loses.

wbl 7y ago
The SEC fundamentally believes it's ok to lose money investing. It's up to you to assess the investments and decide where to put your money.
- will_brown 7y ago
  That’s not the point/issue though. The markets are regulated to protect consumers/investors...private companies can’t just have unregistered public offerings to non accredited investors...so it’s not just “up to you to assess the investments” there are rules and nothing is stopping additional rules to not permit registration of a public offering when the company is operating at a $150,000,000.00 annual loss or more to the point any loss. Obviously not a popular idea here where everyone is trying to get in early and dump the bag on someone else, but that’s kinda the point of protections, some people won’t like them.
  - blantonl 7y ago
    It's not a popular idea here because: Capital is extremely cheap Markets are at record highs FOMO in tech right now is extremely strong I can't wait to see the sentiment in two years.
    - icedchai 7y ago
      The question is... right now, is it more like 1995 or 2001?
      - omarchowdhury 7y ago
        That can only be answered in hindsight.
      - plankers 7y ago
        People said bitcoin was a bubble. Can't wait to see the excuses and rationalizations when this one pops.
        icedchai 7y ago
        Yes, it will pop... but timing the market is impossible. We may have a good 4 to 5 more years of this.
  - ghaff 7y ago
    It's not an unreasonable position. To the annoyance of many here, for example, there are investments that are limited to high net worth individuals. It's not that big of a stretch to imagine additional regulations (whether from the SEC, the major exchanges, or a combination thereof) on which companies are allowed to go public.
  - the_watcher 7y ago
    The rules are about what information is disclosed. The difference is that with public companies, there are rules about what actually gets disclosed and how often. That's why the general public is allowed to invest. It's about how much information is available, not what that information actually is. Investors need to determine whether or not they invest. In no world is the SEC's role to determine whether or not a company's business strategy qualifies them to go public or not. That would be an absolute disaster.
    - will_brown 7y ago
      >In no world is the SEC's role to determine whether or not a company's business strategy qualifies them to go public or not. Profitability is objective...let’s not pretend what I’m suggesting is the SEC subjectively making a decision on a business judgement or business plan. Simply you want to register a security for public offering show a GAAP profit...I understand that’s not “how it works” or I wouldn’t have suggested it “should” be considered, I never said anything about SEC subjectively determining worthiness of an investment.
      - wbl 7y ago
        Why shouldn't public investors be allowed to support ventures that won't show a profit for a while? Think drug discovery oil drilling etc.
      - askafriend 7y ago
        Their business is doing extremely well. They can turn on profitability any time they want. As an investor, I would not want them to turn a profit at this stage with so much headroom left, especially internationally. If they choose to go for profitability this early on, then I take it as a negative signal. Profit is too simple of a number to focus on. It doesn’t tell any kind of story by itself. But it’s a tempting number to latch onto.
      - briandear 7y ago
        So if you want to fundraise, you must be profitable? If that’s the case, what’s the point of fundraising? A lemonade stand is more profitable than Slack, but the upside potential for Slack is vastly greater. So showing a GAAP profit suggests that a lemonade stand is more valuable and worthy of an investment than Slack? Should Tesla be delisted? How about Amazon? They didn’t make a profit for the majority of their existence. GAAP profits as a condition of listing is just ridiculous. Almost all green energy companies lose money, so what you seem to be implying is that the public shouldn’t be allowed to invest in the Teslas of the world because they aren’t profitable? An IPO is a fundraising event. That’s all. If we are to say that no company should be able to fundraise if they have loses, then very, very few companies would ever have access to capital. An IPO isn’t an endorsement by the SEC, not should it be.
  - wbl 7y ago
    The investors see the big number in the first table of the S-1. What more do you want?
dcosson 7y ago
Don’t understand this take at all. The public is free to just not buy the stock if they don’t want. You think the problem is that investors are leaving too much potential for growth on the table when companies IPO? They should wait even longer and keep more of that growth private?
- will_brown 7y ago
  I think a company going public should not operating at $150M losses using VC money...letting them cash out and profit by selling to the public. I also think there are other fundamental benefits to the economy. Yes the public is free not to buy...just as non-accredited investors would be free not to invest in unregistered securities yet regulations are still in place for a reason to protect would be investors. It doesn’t seem unreasonable that is your company operates at a $500,000,000.00 loss over 3 years you can’t avail yourself to the public market and sell your stock to non accredited investors.
  - jdavis703 7y ago
    I know people who are wealthy enough to be accredited investors. However I have way more financial literacy than some of these so-called accredited investors. That I’m forbidden from buying and selling certain assets only because I’m not rich enough (yet) really goes against the whole pull yourself up by your own bootstraps ideology.
    - ska 7y ago
      The pull yourself up by your bootstraps stuff isn't the issue here, it's risk management. Accreditation is not in place to define who is informed and smart enough to make the investments, it is defining who can afford to take the loss, and who at least has the resources to do it properly.
      - dcosson 7y ago
        There are lots of other ways for people with limited money to lose it, and there always will be. Casinos, lottery tickets, credit card debt, frivolous purchases, etc. I can’t think of any reasonable argument why allowing a free-thinking adult to, say, put a bit of savings into a friend or relative’s new startup is so much worse than the rest of these that it needs to be illegal.
raesene9 7y ago
I was with you on the first part, in other industries such a loss making company might have difficulties going public. But lost you on the second part. It's not for the SEC (in my opinion) to police who can and can't go private in terms of how their busines is doing. That's for investors to assess when deciding whether, or not, to buy shares. The SEC's concerns should (again IMO) focus on whether the company seeking to IPO has been truthful in their prospectus. As long as they're not misleading investors, that's fine.
- will_brown 7y ago
  >That's for investors to assess when deciding whether, or not, to buy shares. Yes for a public company...but it’s the SECs job to regulate who can have public offerings to begin with. As I’ve iterated in the thread it’s not legal to publicly offer unregistered private stock to non-accredited investors and let them choose to invest or not. The SEC protects investors and our markets.
rayiner 7y ago
Is there any other industry where developing an instant messaging system can result in $500 million in losses despite $700 million in revenue?
- dd36 7y ago
  My thought as well. What on earth about Slack costs hundreds of millions to operate?
  - dmoy 7y ago
    This is literally described in the S-1. A large plurality of it is sales & marketing. The next biggest chunk is R&D.
    - deleted 7y ago
      [deleted]
    - dd36 7y ago
      Right. What R&D is slack doing that requires hundreds of millions of dollars? Or G&A? No wonder their investors are cashing out. They see that there are limits else they'd keep riding this as a private company.
  - omarchowdhury 7y ago
    SF tech company salaries.
  - geodel 7y ago
    They need to pay about ~2000 employees including multiple hundred engineers who regularly yap about another JS/Electron stunt they pulled today.
  - theWheez 7y ago
    Acquiring more users!
  - mbesto 7y ago
    Guess what? You can actually see in an S-1 what it costs. S&M = $233,191 for 2019 More than half their revenue is spent acquiring new customers...which, with a high likelihood, will net revenue over a N+1 year timeframe. This is an investors wet dream... I pay $1 now and I only need $.15 to operate that $1 every year for the next 7 years...that's a helluva return. In other words...you can turn off the S&M tap and these companies could be profitable almost overnight.
chmod775 7y ago
Look closely at their revenue vs. their losses. They could have been profitable in most years just by not increasing spending - which is entirely possible in their industry. Their expenses aren't really a function of the amount of customers they have. So they consciously chose to not be profitable to grow their business instead (as they stated). It's not like they couldn't be profitable if they wanted to. Their business actually looks to be in an amazing shape.
moorhosj 7y ago
This depends on what you mean by “industry”. If Uber and Lyft are transportation companies, Snapchat is a media company and Tesla is a car company, than there are multiple industries. If you think of all those companies as “tech” than, no.
mbesto 7y ago
> I think to balance the playing field with VC and private investment, companies shouldn’t be able to IPO with loses. If the investing community really thought this was a bad idea then these companies wouldn't IPO. Especially after the lessons learned from 2000. Look, I get that people want to shit on unprofitable tech businesses, but in case you haven't noticed, investors absolutely love the financials on these companies. Why? Because their cashflows generate insanely strong tailwind effects. I strongly urge anyone who likes shitting on to read what Bezos says on his earnings calls about earnings vs cash flow, or read Tren Griffin's blog.[0] Good example...look at FB's FCF - https://www.marketwatch.com/investing/stock/fb/financials/cash-flow https://www.marketwatch.com/investing/stock/fb/financials/ca... [0] - https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-from-jeff-bezos/ https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-fr...
thegranderson 7y ago
There are many industries where this happens. Biotech and drug development is particularly prolific in this regard. Often drug development companies spend tens to hundreds of millions creating a drug, only to have the whole company bought out by a large pharma company once it passes a certain testing/approval milestone. No profits for the company at all. [1] Just because a business doesn't turn a GAAP profit doesn't mean it is not a worthwhile investment opportunity, nor that investors shouldn't have access to it so they can decide for themselves. There are many reasons why investors might want to back an unprofitable company - I won't go into them all here, as it differs dramatically by industry. Keep in mind that a large part of the public market capital is from institutional investors who have just as much experience, if not more, as private investors. No one has to buy shares in these companies. It is all a choice. "The public" is not some block of sorry schmucks who keep getting stuck with toxic investments pawned off by VC funds, and I'm not exactly sure why you seem to think "the public" is getting a bag dumped on them... [1] Endocyte acquisition by Novartis for $2B, December 2018. Endocyte had ~$300m of accumulated losses and zero revenue prior to acquisition [1] Ablynx acquisition by Sanofi for $4.8B, May 2018. Ablynx had ~€370m of accumulated losses prior to acquisition
- cknoxrun 7y ago
  Indeed, I was at a biotech drug conference in Berlin last year and was astonished at how little direct research large pharma are engaged in. They've completely offloaded primary research to drug development companies. Maybe it has always been like that, but for me it was an eye-opener.
  - xenospn 7y ago
    I would assume the smaller companies are much more efficient when it comes to R&D.
    - zymhan 7y ago
      And if they don't have a breakthrough drug, they go bust and investors lose their money and employees lose their jobs.
ummonk 7y ago
>But if the company could turn a profit, then why not do it privately, show that and then go public? Because their investors and employees want liquidity, and public investors want in on the pie. There isn't some rule that says companies can only public once they've stopped growing rapidly.
evrydayhustling 7y ago
Put another way, you're suggesting that "public investors shouldn't have access to loss making companies, regardless of growth". That would eliminate not just tech IPOs, but a majority of publicly traded companies period. Only 2700 (out of about 7500) currently make the cut: https://finviz.com/screener.ashx?v=111&f=fa_netmargin_pos&ft=4 https://finviz.com/screener.ashx?v=111&f=fa_netmargin_pos&ft... Like it or not, tolerating losses (preferably to accomplish growth!) has become a critical part of the capital landscape across industries. At least the tech sector is developing better metrics for comparing healthy and unhealthy growth, and generates enough growth (and later margins) to justify the risk in the first place. You'd be really disadvantaging small investors to not let them make the choice to participate at this stage.
- will_brown 7y ago
  >you're suggesting that "public investors shouldn't have access to loss making companies, regardless of growth". No that’s not what I’m saying...there is a difference between a company that is registering for an IPO and an existing publicly traded company. And let’s not pretend Tech companies IPOing at losses is somehow protection to small investors...I don’t see anyone clamoring to allow these small investor be allowed to get in on unicorns pre IPO.
  - nugget 7y ago
    >I don’t see anyone clamoring to allow these small investor be allowed to get in on unicorns pre IPO Really? This sentiment is blanketed all over HN and other investment forums. One of the major macro changes to the investment landscape is rapidly growing companies staying private longer such that the gains benefit a much smaller pool of investors.
    - yeahitslikethat 7y ago
      Doesn't everyone want the option to get in on these deals before they've been pumped and dumped? WE know the truth. The ipo buyers don't.
ikarandeep 7y ago
a lot of venture funds have a 10 year timeframe
dalbasal 7y ago
..supply and demand. Theres demand for extremely high growth companies, especially if they seem to have a some path to profitability. Private investor demand, and public market/IPO demand too.
veritas20 7y ago
I think that your intentions are good, but approach may be off a bit. I agree that the SEC does protect investors and markets, but I do not agree that a company should be in the black before they IPO. I think that your main concern is the public market funding VC capital returns. If so, then a more reasonable approach to prevent public market exploitation may be to require a lock up period for investors for a certain amount of time (not sure how you would determine this...) similar to how employees are often beholden to lock up periods post IPO.
matchagaucho 7y ago
Investors are warming up to the SaaS/cloud model. They see the losses as an acceptable customer acquisition cost for recurring revenue. Speaking from personal experience, CLV for a Slack customer is 3+ years.
troydavis 7y ago
> they can’t turn a profit, and for any hope to turn profit they need this continual growth at a loss, and at some point the investors dump the bag on the public getting a return in a bubble they created and let the public fund the losses. Could you provide some data to show that companies which, at IPO, have any cumulative loss or a very large cumulative loss (as a percentage of valuation or offering size), perform worse as investments or as going concerns? From your other comments, it seems like the foundation of your proposed change is that going public with significant losses is an attempt to get less-sophisticated investors to compensate more-sophisticated investors. While there are many arguments against your proposed change, the first step seems to be establishing that the problem you’re trying to solve actually exists. I’m not convinced that it does (but don’t have data either way - that’s just anecdotal), and in fact many - maybe most - institutional investors in private companies continue to hold post-IPO shares long after the lockup (and gradually sell over 1-3 years simply to diversify). As you investigate this, it might be worth reading about the “CAC payback period” and how it can lead to significant upfront losses: https://baremetrics.com/academy/cac-payback-period https://baremetrics.com/academy/cac-payback-period, https://kellblog.com/2016/03/17/cac-payback-period-the-most-misunderstood-saas-metric/ https://kellblog.com/2016/03/17/cac-payback-period-the-most-...
- will_brown 7y ago
  >While there are many arguments against your proposed change, the first step seems to be establishing that the problem you’re trying to solve actually exists. It’s clear not many here care to understand the problem, tech generally loves a good pump and dump...look at all the recent tech IPOs... how many of those were boot strapped vs VC backed? And VC backed tech IPOs were in the black? It’s not about investor risk...its About leveling the playing field. Again everyone here is screaming investor risk/their choice/don’t have to buy...I don’t see anyone advocating allowing small investors to get in on unicorn tech cos pre IPO. I’m not sure why everyone is pretending it’s about giving opportunity to the little guy...it’s about the need for VC to liquidate.
baccheion 7y ago
IPOs were historically done by unprofitable companies to raise funds. It's like seeking out VCs for another round of funding, but it's instead the public. Now, it's usually done to give insiders an exit. What future growth would there be for buyers if the company went public already at its peak?
- will_brown 7y ago
  >What future growth would there be for buyers if the company went public already at its peak? I never said anything about peak. I said profit. Certainly a company making profit may want to go public to finance growth to make more profit (ie peak). IPOs/stock companies were not created for companies that were unprofitable.
  - baccheion 7y ago
    If growth rate continues as they project, buyers get a larger future bump/multiplier. What makes you say that? Proof? It was historically used to raise more funding to fuel growth, a function VCs can now fill (ie, then it would be likely to have a VC provide the larger sums required). Though VCs can fill such a gap, IPOs give insiders an exit.
    - will_brown 7y ago
      >Proof? It’s your assertion show me proof IPOs are for “unprofitable companies”.
  - cortesoft 7y ago
    If a company is profitable, but there is a benefit to spending more money to grow faster, why wouldn't that company spend that profit to grow? If you believe growing the business is a good use of investor money, then wouldn't you also believe it is a good use of your profit?
    - baccheion 7y ago
      It makes sense, but people do all sorts of things for many reasons or no reason. New growth would have to be sustainable "indefinitely" or they'd have to worry about replacing it. In addition, even more revenue growth is then required to maintain the higher market cap.
toasterlovin 7y ago
Slack has a huge opportunity in front of them (become the messaging platform for every business that exists). They’re investing a lot of money to acquire all of that business (salespeople, travel, etc.). That is literally one of the main purposes of capital and access to capital is why you would take a company public. And, specifically re: Slack. Unlike, say, Uber or Lyft, Slack has customers who have demonstrated that they are willing to pay what the service actually costs. The ride-sharing companies have not. The entire investment thesis for them is that they will somehow be able to increase prices at some point in the future, but they don’t actually have any indication that this is true. And I agree that they are most likely a bad investment. Slack, on the other hand, has a huge and rapidly growing book of extremely sticky business. To turn on profitability, they turn off their expenditure on sales people. They’re very different models.
- lispm 7y ago
  > Slack has a huge opportunity in front of them (become the messaging platform for every business that exists). How about: being bought by Microsoft.
  - toasterlovin 7y ago
    Yeah, I actually think that’s a likely eventual outcome. I would be shocked if they haven’t already had discussions to that effect. It seems like a natural fit to me.
  - dylanmclark 7y ago
    I don't think Microsoft would buy Slack given the money they've dumped into developing and promoting Teams. Seems they're too far gone at this point. Disclosure: Work at MSFT, not on Teams.
    - lispm 7y ago
      Not because of the software, but because of the customers and the dev team?
    - 7y ago
diminoten 7y ago
Because the company can't turn a profit until/unless it has access to the capital a public offering provides. Think of companies more like hydrofoils on lava than like barges.
aaavl2821 7y ago
In biotech, most companies go public without any prospect of revenue for years. But these tech companies are actually burning more money pre-IPO than biotech companies -- the ~50 biotech startups that went public from 2018-Q1 2019 raised $150-180M in VC pre-IPO However, in biotech these days, an IPO is a funding event, not just an exit. On average biotech companies that IPO do so ~3 years after Series A. Average post-money of recent biotech IPOs is $754M, and 20% see their share price double in the year after IPO. Many of these companies raise additional cash in the public markets before they are acquired. So in biotech, public offerings are analogous to late stage VC / growth rounds in tech, and IPOs in tech are more akin to M&A exits in biotech (although big M&A exits in biotech are actually happening faster than big IPO exits in tech) Source is analysis I did of SEC filings: https://www.baybridgebio.com/blog/ipo_2018_q12019.html https://www.baybridgebio.com/blog/ipo_2018_q12019.html
spullara 7y ago
While you are still explosively growing reducing sales and marketing spend doesn't make a lot of sense. It allows competitors who out spend you to catch up. Instead you should analyze SaaS businesses by the "Rule of 40": https://saasholic.com/the-rule-of-40-for-saas-and-subscription-business-4bc2d7bcd868 https://saasholic.com/the-rule-of-40-for-saas-and-subscripti... For Slack, if they grew 84% and their profit was -35% they are well above a net of 40 with 49. It is pretty easy to see that if Slack stopped spending on sales & marketing and stopped growing engineering they would be massively profitable. Instead, they should get as big as they can as fast as they can as most markets are becoming winner take all.
TheSoftwareGuy 7y ago
It's well known that you have to spend money to make money, as they say. No investor worth their salt simply looks at past profits and decides right then and there whether a company is a good investment, because past performance alone does not predict future performance. You have to look at the business and economic landscape, think about the business model and make a calculation about how compatible they are. This is especially important for companies recently founded.
briandear 7y ago
Public or private ownership has no relevance to profitability. If a VC can invest in a “losing” company, how is that any different than allowing public markets to do the same? The loss is priced into the stock and with a “losing” stock there is opportunity for upside just as much as a “winning” stock — the public ought to be allowed to be allowed to have a piece of that opportunity just as readily as private markets.
pbreit 7y ago
Your question exhibits a lack of understanding of 1) IPOs (they are fundraising events) and 2) software (zero marginal costs = massive leverage). Slack, Uber and Lyft can ==EASILY== turn a profit by slowing growth.
- kgwgk 7y ago
  Note that Slack's "IPO" is not a fundraising event and Uber and Lyft have marginal costs which are far from zero. (I'm not sure Slack is a "software" company, but Uber and Lyft definitely are not.)
  - pbreit 7y ago
    While Slack's IPO is very unique, it is indeed raising money. Uber & Lyft book driver incentives as marginal costs but that's about it. Of course they are all software companies.
    - kgwgk 7y ago
      From the S-1: "USE OF PROCEEDS Registered Stockholders may, or may not, elect to sell shares of our Class A common stock covered by this prospectus. To the extent any Registered Stockholder chooses to sell shares of our Class A common stock covered by this prospectus, we will not receive any proceeds from any such sales of our Class A common stock." From Uber's S1: "Cost of revenue, exclusive of depreciation and amortization, consists primarily of Core Platform insurance expenses, credit card processing fees, hosting and co-located data center expenses, mobile device and service expenses, amounts related to fare chargebacks and other credit card losses, excess Driver incentives, and costs incurred with carriers for Uber Freight transportation. Core Platform insurance expenses include coverage for auto liability, general liability, uninsured and underinsured motorist liability, and auto physical damage related to our Ridesharing products and Uber Eats offering. Excess Driver incentives are primarily related to our Ridesharing products in emerging markets and our Uber Eats offering. [...] As trips increase, we expect related increases for insurance costs, credit card processing fees, hosting and co-located data center expenses, and other cost of revenue, exclusive of depreciation and amortization, categories." Cost of revenue was in 2018 $5.6bn (out of $11.3bn of revenue). The also provide "adjusted net revenue" excluding among other things excess Driver incentives and Driver referrals: in that case the cost of revenue is $4.3bn out of $10bn. Uber's gross margin is below 60%.
azernik 7y ago
Fast growth skews all of those numbers, because there's a lag between marketing/sales spending and the ensuing revenue - especially for SaaS businesses where revenue is subscription-based, and typically trickles in over a period of years. To figure out the long-term sustainability of a business, you therefore have to compare spending, revenue, revenue growth, and churn rate (or a more complicated measure which Slack is using in this filing, Net Dollar Retention Rate) in complicated formulas that I don't know off the top of my head. (Net Dollar Retention Rate over time is one of their three "Key Business Metrics", reflecting its importance in determining steady-state viability.)
akiselev 7y ago
Yes. Biotechnology and pharmaceuticals. It's relatively common for companies to IPO while they're still in clinical trials, which by definition means they can't earn any revenue (unless they sell some IP or research oriented products like biological models/reagents/etc to other pharma/biotech researchers on the side). Tech companies with actual revenue have a step up in that regard.
blobbers 7y ago
I think the bigger question is why they're losing so much money - from an operating perspective I'd expect costs to be really low.
ddebernardy 7y ago
I suspect there aren't many other industries where a company can go from zero to a $1.6Bn exit in a year and a half (YouTube) -- while losing money, no less. Or from zero to a $19Bn exit in 5 years (WhatsApp).
- idlewords 7y ago
  In most industries, after such a financial performance you exit quite rapidly in a different direction.
microdrum 7y ago
There are tons of such industries. Medicine is one.
bryanmgreen 7y ago
Two points: 1) I am 100% in alignment that companies should NOT IPO with losses. With no evidence or education to back on this, I'll just say I feel the opportunity for non-professional investors to put money into such unstable companies is an enormous risk - not just for themselves, but the economy as a whole. Maybe there needs to be a separate market for loss-leader investing. 2) With SAAS companies in particular, adjusting for profit can be easy and it boggles my mind they don't know this or are too egotistical to believe they should. Slack's pricing model is way too expensive and their 1:6 Paid-to-Unpaid user ratio is evidence of that. They could easily merge their two paid tiers so paid accounts have a fuller product offering than the free version AND drop the price. If they convert half of their non-paid users through pricing adjustments they could be making a PROFIT without adding any additional expense.
- rorykoehler 7y ago
  If they did 2)it would muddy their metrics and design feedback loops. The way it is now they can better understand their power users
arcticbull 7y ago
While I'm sympathetic to your argument in general, a Slack-type company is very different from Uber and Lyft because the former is effectively zero marginal cost. It's much more the classic Silicon Valley type software company. Uber and Lyft are very much not zero marginal cost businesses.

wbl 7y ago

The SEC fundamentally believes it's ok to lose money investing. It's up to you to assess the investments and decide where to put your money.

will_brown 7y ago
That’s not the point/issue though. The markets are regulated to protect consumers/investors...private companies can’t just have unregistered public offerings to non accredited investors...so it’s not just “up to you to assess the investments” there are rules and nothing is stopping additional rules to not permit registration of a public offering when the company is operating at a $150,000,000.00 annual loss or more to the point any loss. Obviously not a popular idea here where everyone is trying to get in early and dump the bag on someone else, but that’s kinda the point of protections, some people won’t like them.
- blantonl 7y ago
  It's not a popular idea here because: Capital is extremely cheap Markets are at record highs FOMO in tech right now is extremely strong I can't wait to see the sentiment in two years.
  - icedchai 7y ago
    The question is... right now, is it more like 1995 or 2001?
    - omarchowdhury 7y ago
      That can only be answered in hindsight.
    - plankers 7y ago
      People said bitcoin was a bubble. Can't wait to see the excuses and rationalizations when this one pops.
      - icedchai 7y ago
        Yes, it will pop... but timing the market is impossible. We may have a good 4 to 5 more years of this.
- ghaff 7y ago
  It's not an unreasonable position. To the annoyance of many here, for example, there are investments that are limited to high net worth individuals. It's not that big of a stretch to imagine additional regulations (whether from the SEC, the major exchanges, or a combination thereof) on which companies are allowed to go public.
- the_watcher 7y ago
  The rules are about what information is disclosed. The difference is that with public companies, there are rules about what actually gets disclosed and how often. That's why the general public is allowed to invest. It's about how much information is available, not what that information actually is. Investors need to determine whether or not they invest. In no world is the SEC's role to determine whether or not a company's business strategy qualifies them to go public or not. That would be an absolute disaster.
  - will_brown 7y ago
    >In no world is the SEC's role to determine whether or not a company's business strategy qualifies them to go public or not. Profitability is objective...let’s not pretend what I’m suggesting is the SEC subjectively making a decision on a business judgement or business plan. Simply you want to register a security for public offering show a GAAP profit...I understand that’s not “how it works” or I wouldn’t have suggested it “should” be considered, I never said anything about SEC subjectively determining worthiness of an investment.
    - wbl 7y ago
      Why shouldn't public investors be allowed to support ventures that won't show a profit for a while? Think drug discovery oil drilling etc.
    - askafriend 7y ago
      Their business is doing extremely well. They can turn on profitability any time they want. As an investor, I would not want them to turn a profit at this stage with so much headroom left, especially internationally. If they choose to go for profitability this early on, then I take it as a negative signal. Profit is too simple of a number to focus on. It doesn’t tell any kind of story by itself. But it’s a tempting number to latch onto.
    - briandear 7y ago
      So if you want to fundraise, you must be profitable? If that’s the case, what’s the point of fundraising? A lemonade stand is more profitable than Slack, but the upside potential for Slack is vastly greater. So showing a GAAP profit suggests that a lemonade stand is more valuable and worthy of an investment than Slack? Should Tesla be delisted? How about Amazon? They didn’t make a profit for the majority of their existence. GAAP profits as a condition of listing is just ridiculous. Almost all green energy companies lose money, so what you seem to be implying is that the public shouldn’t be allowed to invest in the Teslas of the world because they aren’t profitable? An IPO is a fundraising event. That’s all. If we are to say that no company should be able to fundraise if they have loses, then very, very few companies would ever have access to capital. An IPO isn’t an endorsement by the SEC, not should it be.
- wbl 7y ago
  The investors see the big number in the first table of the S-1. What more do you want?

dcosson 7y ago

Don’t understand this take at all. The public is free to just not buy the stock if they don’t want. You think the problem is that investors are leaving too much potential for growth on the table when companies IPO? They should wait even longer and keep more of that growth private?

will_brown 7y ago
I think a company going public should not operating at $150M losses using VC money...letting them cash out and profit by selling to the public. I also think there are other fundamental benefits to the economy. Yes the public is free not to buy...just as non-accredited investors would be free not to invest in unregistered securities yet regulations are still in place for a reason to protect would be investors. It doesn’t seem unreasonable that is your company operates at a $500,000,000.00 loss over 3 years you can’t avail yourself to the public market and sell your stock to non accredited investors.
- jdavis703 7y ago
  I know people who are wealthy enough to be accredited investors. However I have way more financial literacy than some of these so-called accredited investors. That I’m forbidden from buying and selling certain assets only because I’m not rich enough (yet) really goes against the whole pull yourself up by your own bootstraps ideology.
  - ska 7y ago
    The pull yourself up by your bootstraps stuff isn't the issue here, it's risk management. Accreditation is not in place to define who is informed and smart enough to make the investments, it is defining who can afford to take the loss, and who at least has the resources to do it properly.
    - dcosson 7y ago
      There are lots of other ways for people with limited money to lose it, and there always will be. Casinos, lottery tickets, credit card debt, frivolous purchases, etc. I can’t think of any reasonable argument why allowing a free-thinking adult to, say, put a bit of savings into a friend or relative’s new startup is so much worse than the rest of these that it needs to be illegal.

raesene9 7y ago

I was with you on the first part, in other industries such a loss making company might have difficulties going public. But lost you on the second part. It's not for the SEC (in my opinion) to police who can and can't go private in terms of how their busines is doing. That's for investors to assess when deciding whether, or not, to buy shares. The SEC's concerns should (again IMO) focus on whether the company seeking to IPO has been truthful in their prospectus. As long as they're not misleading investors, that's fine.

will_brown 7y ago
>That's for investors to assess when deciding whether, or not, to buy shares. Yes for a public company...but it’s the SECs job to regulate who can have public offerings to begin with. As I’ve iterated in the thread it’s not legal to publicly offer unregistered private stock to non-accredited investors and let them choose to invest or not. The SEC protects investors and our markets.

rayiner 7y ago

Is there any other industry where developing an instant messaging system can result in $500 million in losses despite $700 million in revenue?

dd36 7y ago
My thought as well. What on earth about Slack costs hundreds of millions to operate?
- dmoy 7y ago
  This is literally described in the S-1. A large plurality of it is sales & marketing. The next biggest chunk is R&D.
  - deleted 7y ago
    [deleted]
  - dd36 7y ago
    Right. What R&D is slack doing that requires hundreds of millions of dollars? Or G&A? No wonder their investors are cashing out. They see that there are limits else they'd keep riding this as a private company.
- omarchowdhury 7y ago
  SF tech company salaries.
- geodel 7y ago
  They need to pay about ~2000 employees including multiple hundred engineers who regularly yap about another JS/Electron stunt they pulled today.
- theWheez 7y ago
  Acquiring more users!
- mbesto 7y ago
  Guess what? You can actually see in an S-1 what it costs. S&M = $233,191 for 2019 More than half their revenue is spent acquiring new customers...which, with a high likelihood, will net revenue over a N+1 year timeframe. This is an investors wet dream... I pay $1 now and I only need $.15 to operate that $1 every year for the next 7 years...that's a helluva return. In other words...you can turn off the S&M tap and these companies could be profitable almost overnight.

chmod775 7y ago

Look closely at their revenue vs. their losses. They could have been profitable in most years just by not increasing spending - which is entirely possible in their industry. Their expenses aren't really a function of the amount of customers they have. So they consciously chose to not be profitable to grow their business instead (as they stated). It's not like they couldn't be profitable if they wanted to. Their business actually looks to be in an amazing shape.

moorhosj 7y ago

This depends on what you mean by “industry”. If Uber and Lyft are transportation companies, Snapchat is a media company and Tesla is a car company, than there are multiple industries. If you think of all those companies as “tech” than, no.

mbesto 7y ago

> I think to balance the playing field with VC and private investment, companies shouldn’t be able to IPO with loses. If the investing community really thought this was a bad idea then these companies wouldn't IPO. Especially after the lessons learned from 2000. Look, I get that people want to shit on unprofitable tech businesses, but in case you haven't noticed, investors absolutely love the financials on these companies. Why? Because their cashflows generate insanely strong tailwind effects. I strongly urge anyone who likes shitting on to read what Bezos says on his earnings calls about earnings vs cash flow, or read Tren Griffin's blog.[0] Good example...look at FB's FCF - https://www.marketwatch.com/investing/stock/fb/financials/cash-flow https://www.marketwatch.com/investing/stock/fb/financials/ca... [0] - https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-from-jeff-bezos/ https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-fr...

thegranderson 7y ago

There are many industries where this happens. Biotech and drug development is particularly prolific in this regard. Often drug development companies spend tens to hundreds of millions creating a drug, only to have the whole company bought out by a large pharma company once it passes a certain testing/approval milestone. No profits for the company at all. [1] Just because a business doesn't turn a GAAP profit doesn't mean it is not a worthwhile investment opportunity, nor that investors shouldn't have access to it so they can decide for themselves. There are many reasons why investors might want to back an unprofitable company - I won't go into them all here, as it differs dramatically by industry. Keep in mind that a large part of the public market capital is from institutional investors who have just as much experience, if not more, as private investors. No one has to buy shares in these companies. It is all a choice. "The public" is not some block of sorry schmucks who keep getting stuck with toxic investments pawned off by VC funds, and I'm not exactly sure why you seem to think "the public" is getting a bag dumped on them... [1] Endocyte acquisition by Novartis for $2B, December 2018. Endocyte had ~$300m of accumulated losses and zero revenue prior to acquisition [1] Ablynx acquisition by Sanofi for $4.8B, May 2018. Ablynx had ~€370m of accumulated losses prior to acquisition

cknoxrun 7y ago
Indeed, I was at a biotech drug conference in Berlin last year and was astonished at how little direct research large pharma are engaged in. They've completely offloaded primary research to drug development companies. Maybe it has always been like that, but for me it was an eye-opener.
- xenospn 7y ago
  I would assume the smaller companies are much more efficient when it comes to R&D.
  - zymhan 7y ago
    And if they don't have a breakthrough drug, they go bust and investors lose their money and employees lose their jobs.

ummonk 7y ago

>But if the company could turn a profit, then why not do it privately, show that and then go public? Because their investors and employees want liquidity, and public investors want in on the pie. There isn't some rule that says companies can only public once they've stopped growing rapidly.

evrydayhustling 7y ago

Put another way, you're suggesting that "public investors shouldn't have access to loss making companies, regardless of growth". That would eliminate not just tech IPOs, but a majority of publicly traded companies period. Only 2700 (out of about 7500) currently make the cut: https://finviz.com/screener.ashx?v=111&f=fa_netmargin_pos&ft=4 https://finviz.com/screener.ashx?v=111&f=fa_netmargin_pos&ft... Like it or not, tolerating losses (preferably to accomplish growth!) has become a critical part of the capital landscape across industries. At least the tech sector is developing better metrics for comparing healthy and unhealthy growth, and generates enough growth (and later margins) to justify the risk in the first place. You'd be really disadvantaging small investors to not let them make the choice to participate at this stage.

will_brown 7y ago
>you're suggesting that "public investors shouldn't have access to loss making companies, regardless of growth". No that’s not what I’m saying...there is a difference between a company that is registering for an IPO and an existing publicly traded company. And let’s not pretend Tech companies IPOing at losses is somehow protection to small investors...I don’t see anyone clamoring to allow these small investor be allowed to get in on unicorns pre IPO.
- nugget 7y ago
  >I don’t see anyone clamoring to allow these small investor be allowed to get in on unicorns pre IPO Really? This sentiment is blanketed all over HN and other investment forums. One of the major macro changes to the investment landscape is rapidly growing companies staying private longer such that the gains benefit a much smaller pool of investors.
  - yeahitslikethat 7y ago
    Doesn't everyone want the option to get in on these deals before they've been pumped and dumped? WE know the truth. The ipo buyers don't.

ikarandeep 7y ago

a lot of venture funds have a 10 year timeframe

dalbasal 7y ago

..supply and demand. Theres demand for extremely high growth companies, especially if they seem to have a some path to profitability. Private investor demand, and public market/IPO demand too.

veritas20 7y ago

I think that your intentions are good, but approach may be off a bit. I agree that the SEC does protect investors and markets, but I do not agree that a company should be in the black before they IPO. I think that your main concern is the public market funding VC capital returns. If so, then a more reasonable approach to prevent public market exploitation may be to require a lock up period for investors for a certain amount of time (not sure how you would determine this...) similar to how employees are often beholden to lock up periods post IPO.

matchagaucho 7y ago

Investors are warming up to the SaaS/cloud model. They see the losses as an acceptable customer acquisition cost for recurring revenue. Speaking from personal experience, CLV for a Slack customer is 3+ years.

troydavis 7y ago

> they can’t turn a profit, and for any hope to turn profit they need this continual growth at a loss, and at some point the investors dump the bag on the public getting a return in a bubble they created and let the public fund the losses. Could you provide some data to show that companies which, at IPO, have any cumulative loss or a very large cumulative loss (as a percentage of valuation or offering size), perform worse as investments or as going concerns? From your other comments, it seems like the foundation of your proposed change is that going public with significant losses is an attempt to get less-sophisticated investors to compensate more-sophisticated investors. While there are many arguments against your proposed change, the first step seems to be establishing that the problem you’re trying to solve actually exists. I’m not convinced that it does (but don’t have data either way - that’s just anecdotal), and in fact many - maybe most - institutional investors in private companies continue to hold post-IPO shares long after the lockup (and gradually sell over 1-3 years simply to diversify). As you investigate this, it might be worth reading about the “CAC payback period” and how it can lead to significant upfront losses: https://baremetrics.com/academy/cac-payback-period https://baremetrics.com/academy/cac-payback-period, https://kellblog.com/2016/03/17/cac-payback-period-the-most-misunderstood-saas-metric/ https://kellblog.com/2016/03/17/cac-payback-period-the-most-...

will_brown 7y ago
>While there are many arguments against your proposed change, the first step seems to be establishing that the problem you’re trying to solve actually exists. It’s clear not many here care to understand the problem, tech generally loves a good pump and dump...look at all the recent tech IPOs... how many of those were boot strapped vs VC backed? And VC backed tech IPOs were in the black? It’s not about investor risk...its About leveling the playing field. Again everyone here is screaming investor risk/their choice/don’t have to buy...I don’t see anyone advocating allowing small investors to get in on unicorn tech cos pre IPO. I’m not sure why everyone is pretending it’s about giving opportunity to the little guy...it’s about the need for VC to liquidate.

baccheion 7y ago

IPOs were historically done by unprofitable companies to raise funds. It's like seeking out VCs for another round of funding, but it's instead the public. Now, it's usually done to give insiders an exit. What future growth would there be for buyers if the company went public already at its peak?

will_brown 7y ago
>What future growth would there be for buyers if the company went public already at its peak? I never said anything about peak. I said profit. Certainly a company making profit may want to go public to finance growth to make more profit (ie peak). IPOs/stock companies were not created for companies that were unprofitable.
- baccheion 7y ago
  If growth rate continues as they project, buyers get a larger future bump/multiplier. What makes you say that? Proof? It was historically used to raise more funding to fuel growth, a function VCs can now fill (ie, then it would be likely to have a VC provide the larger sums required). Though VCs can fill such a gap, IPOs give insiders an exit.
  - will_brown 7y ago
    >Proof? It’s your assertion show me proof IPOs are for “unprofitable companies”.
- cortesoft 7y ago
  If a company is profitable, but there is a benefit to spending more money to grow faster, why wouldn't that company spend that profit to grow? If you believe growing the business is a good use of investor money, then wouldn't you also believe it is a good use of your profit?
  - baccheion 7y ago
    It makes sense, but people do all sorts of things for many reasons or no reason. New growth would have to be sustainable "indefinitely" or they'd have to worry about replacing it. In addition, even more revenue growth is then required to maintain the higher market cap.

toasterlovin 7y ago

Slack has a huge opportunity in front of them (become the messaging platform for every business that exists). They’re investing a lot of money to acquire all of that business (salespeople, travel, etc.). That is literally one of the main purposes of capital and access to capital is why you would take a company public. And, specifically re: Slack. Unlike, say, Uber or Lyft, Slack has customers who have demonstrated that they are willing to pay what the service actually costs. The ride-sharing companies have not. The entire investment thesis for them is that they will somehow be able to increase prices at some point in the future, but they don’t actually have any indication that this is true. And I agree that they are most likely a bad investment. Slack, on the other hand, has a huge and rapidly growing book of extremely sticky business. To turn on profitability, they turn off their expenditure on sales people. They’re very different models.

lispm 7y ago
> Slack has a huge opportunity in front of them (become the messaging platform for every business that exists). How about: being bought by Microsoft.
- toasterlovin 7y ago
  Yeah, I actually think that’s a likely eventual outcome. I would be shocked if they haven’t already had discussions to that effect. It seems like a natural fit to me.
- dylanmclark 7y ago
  I don't think Microsoft would buy Slack given the money they've dumped into developing and promoting Teams. Seems they're too far gone at this point. Disclosure: Work at MSFT, not on Teams.
  - lispm 7y ago
    Not because of the software, but because of the customers and the dev team?
  - 7y ago

diminoten 7y ago

Because the company can't turn a profit until/unless it has access to the capital a public offering provides. Think of companies more like hydrofoils on lava than like barges.

aaavl2821 7y ago

In biotech, most companies go public without any prospect of revenue for years. But these tech companies are actually burning more money pre-IPO than biotech companies -- the ~50 biotech startups that went public from 2018-Q1 2019 raised $150-180M in VC pre-IPO However, in biotech these days, an IPO is a funding event, not just an exit. On average biotech companies that IPO do so ~3 years after Series A. Average post-money of recent biotech IPOs is $754M, and 20% see their share price double in the year after IPO. Many of these companies raise additional cash in the public markets before they are acquired. So in biotech, public offerings are analogous to late stage VC / growth rounds in tech, and IPOs in tech are more akin to M&A exits in biotech (although big M&A exits in biotech are actually happening faster than big IPO exits in tech) Source is analysis I did of SEC filings: https://www.baybridgebio.com/blog/ipo_2018_q12019.html https://www.baybridgebio.com/blog/ipo_2018_q12019.html

spullara 7y ago

While you are still explosively growing reducing sales and marketing spend doesn't make a lot of sense. It allows competitors who out spend you to catch up. Instead you should analyze SaaS businesses by the "Rule of 40": https://saasholic.com/the-rule-of-40-for-saas-and-subscription-business-4bc2d7bcd868 https://saasholic.com/the-rule-of-40-for-saas-and-subscripti... For Slack, if they grew 84% and their profit was -35% they are well above a net of 40 with 49. It is pretty easy to see that if Slack stopped spending on sales & marketing and stopped growing engineering they would be massively profitable. Instead, they should get as big as they can as fast as they can as most markets are becoming winner take all.

TheSoftwareGuy 7y ago

It's well known that you have to spend money to make money, as they say. No investor worth their salt simply looks at past profits and decides right then and there whether a company is a good investment, because past performance alone does not predict future performance. You have to look at the business and economic landscape, think about the business model and make a calculation about how compatible they are. This is especially important for companies recently founded.

briandear 7y ago

Public or private ownership has no relevance to profitability. If a VC can invest in a “losing” company, how is that any different than allowing public markets to do the same? The loss is priced into the stock and with a “losing” stock there is opportunity for upside just as much as a “winning” stock — the public ought to be allowed to be allowed to have a piece of that opportunity just as readily as private markets.

pbreit 7y ago

Your question exhibits a lack of understanding of 1) IPOs (they are fundraising events) and 2) software (zero marginal costs = massive leverage). Slack, Uber and Lyft can ==EASILY== turn a profit by slowing growth.

kgwgk 7y ago
Note that Slack's "IPO" is not a fundraising event and Uber and Lyft have marginal costs which are far from zero. (I'm not sure Slack is a "software" company, but Uber and Lyft definitely are not.)
- pbreit 7y ago
  While Slack's IPO is very unique, it is indeed raising money. Uber & Lyft book driver incentives as marginal costs but that's about it. Of course they are all software companies.
  - kgwgk 7y ago
    From the S-1: "USE OF PROCEEDS Registered Stockholders may, or may not, elect to sell shares of our Class A common stock covered by this prospectus. To the extent any Registered Stockholder chooses to sell shares of our Class A common stock covered by this prospectus, we will not receive any proceeds from any such sales of our Class A common stock." From Uber's S1: "Cost of revenue, exclusive of depreciation and amortization, consists primarily of Core Platform insurance expenses, credit card processing fees, hosting and co-located data center expenses, mobile device and service expenses, amounts related to fare chargebacks and other credit card losses, excess Driver incentives, and costs incurred with carriers for Uber Freight transportation. Core Platform insurance expenses include coverage for auto liability, general liability, uninsured and underinsured motorist liability, and auto physical damage related to our Ridesharing products and Uber Eats offering. Excess Driver incentives are primarily related to our Ridesharing products in emerging markets and our Uber Eats offering. [...] As trips increase, we expect related increases for insurance costs, credit card processing fees, hosting and co-located data center expenses, and other cost of revenue, exclusive of depreciation and amortization, categories." Cost of revenue was in 2018 $5.6bn (out of $11.3bn of revenue). The also provide "adjusted net revenue" excluding among other things excess Driver incentives and Driver referrals: in that case the cost of revenue is $4.3bn out of $10bn. Uber's gross margin is below 60%.

azernik 7y ago

Fast growth skews all of those numbers, because there's a lag between marketing/sales spending and the ensuing revenue - especially for SaaS businesses where revenue is subscription-based, and typically trickles in over a period of years. To figure out the long-term sustainability of a business, you therefore have to compare spending, revenue, revenue growth, and churn rate (or a more complicated measure which Slack is using in this filing, Net Dollar Retention Rate) in complicated formulas that I don't know off the top of my head. (Net Dollar Retention Rate over time is one of their three "Key Business Metrics", reflecting its importance in determining steady-state viability.)

akiselev 7y ago

Yes. Biotechnology and pharmaceuticals. It's relatively common for companies to IPO while they're still in clinical trials, which by definition means they can't earn any revenue (unless they sell some IP or research oriented products like biological models/reagents/etc to other pharma/biotech researchers on the side). Tech companies with actual revenue have a step up in that regard.

blobbers 7y ago

I think the bigger question is why they're losing so much money - from an operating perspective I'd expect costs to be really low.

ddebernardy 7y ago

I suspect there aren't many other industries where a company can go from zero to a $1.6Bn exit in a year and a half (YouTube) -- while losing money, no less. Or from zero to a $19Bn exit in 5 years (WhatsApp).

idlewords 7y ago
In most industries, after such a financial performance you exit quite rapidly in a different direction.

microdrum 7y ago

There are tons of such industries. Medicine is one.

bryanmgreen 7y ago

Two points: 1) I am 100% in alignment that companies should NOT IPO with losses. With no evidence or education to back on this, I'll just say I feel the opportunity for non-professional investors to put money into such unstable companies is an enormous risk - not just for themselves, but the economy as a whole. Maybe there needs to be a separate market for loss-leader investing. 2) With SAAS companies in particular, adjusting for profit can be easy and it boggles my mind they don't know this or are too egotistical to believe they should. Slack's pricing model is way too expensive and their 1:6 Paid-to-Unpaid user ratio is evidence of that. They could easily merge their two paid tiers so paid accounts have a fuller product offering than the free version AND drop the price. If they convert half of their non-paid users through pricing adjustments they could be making a PROFIT without adding any additional expense.

rorykoehler 7y ago
If they did 2)it would muddy their metrics and design feedback loops. The way it is now they can better understand their power users

arcticbull 7y ago

While I'm sympathetic to your argument in general, a Slack-type company is very different from Uber and Lyft because the former is effectively zero marginal cost. It's much more the classic Silicon Valley type software company. Uber and Lyft are very much not zero marginal cost businesses.