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I think you are caught up in the fact that a company MUST be profitable to IPO. That is simply not true. Just because these companies are not profitable does

I think you are caught up in the fact that a company MUST be profitable to IPO. That is simply not true. Just because these companies are not profitable does not mean they are not stable self sufficient businesses. Amazon pioneered the idea that you do not need to be profitable, in fact you can lose money every single day, month, year, for the sake of growth. We do not know if these "companies have the ability to turn profitable if they want to, but my bet is they probably can. Not to rant, but this is prime example why people like Bezos and Buffet want to get away from the quarterly reporting, it just doesn't do a good job of letting companies lose money in the sake of growth it is WAY to focused on profit over growth.

toomuchtodo 7y ago
You are not a stable self sufficient business if you are not profitable.
- snowwrestler 7y ago
  This isn't true; reporting profits is to a large extent a choice that a stable self-sufficient for-profit business can make every year. If you have some reliability in predicting your revenues, you can time investments or expenditures to offset them and run a for-profit company in a stable way without ever (or rarely) reporting profits. And of course there are a number of stable self-sufficient businesses who never report profits; in fact they are called nonprofits. The Sierra Club was founded in 1892, for example.
  - toomuchtodo 7y ago
    Profitability is having revenues you can predict and time expenses around. Non-profits are out of scope. Call it what you want, revenue, profits, whatever, you are not sustainable if you don't bring in more than you spend.
    - nostrademons 7y ago
      That's not GAAP profitability. R&D and sales appear as operating expenses and get deducted from revenue before net income. This matters a lot for software businesses with recurring revenue (i.e. most SaaS businesses). With software, you build the software once and then you have an asset that you can sell a potentially infinite number of times, for many years into the future. The engineering salaries for building the software count as R&D, and get deducted from the current year's income statement. Then you sell the software, which may take an expensive consultative sales process but signs up a customer who will continue paying monthly for several years. The sales expense is recorded in the current year, but the revenue is booked over several years. The metric you're looking for is unit economic profitability, and specifically for B2B software businesses, LTV - CAC. If this is positive, then you are making more for each customer you sign up than it cost to sign them up, and you have a sustainable business (at least until the competitive landscape changes, which is a risk every business faces). This is not the same thing as GAAP profitability: if you know that you have a product that makes $5 in revenue for every $1 in sales you put in, it makes sense to raise as much capital as possible, hire as many salespeople as possible, and get every possible user using the software before a competitor comes out. That will look like a money-losing business under GAAP, because for every dollar that comes in this year you might be spending $2 in sales. But the part that's missing from the GAAP statement is that next year you have 4x as many customers who will continue paying you money at no additional cost to you. At some point, when the growth curve flattens, you just lay off the salespeople and milk the existing customers for everything they're worth. This is the story of Oracle, Microsoft, Cisco, and now Facebook and Google. VCs know to look for these metrics (along with growth rate, net promoter score, engagement, and churn, which are proxies for CAC and LTV). The general public does not, and they're not required in SEC disclosures or normal accounting statements (which generally predate the SaaS business model).
      - manigandham 7y ago
        The thread seems to be about actual profitability, not accounting metrics. A business is either fundamentally profitable and sustainable, or it isn't.
    - 7y ago
  - perl4ever 7y ago
    If you run a nonprofit, what do you do if you have money left over at the end of the year? Why, you call it a surplus! (I was once told)
kgwgk 7y ago
> Amazon pioneered the idea that you do not need to be profitable, in fact you can lose money every single day, month, year, for the sake of growth. Amazon has reported profits almost every year since 2003 (the only exceptions are 2012 and 2014). The loss accumulated in 1994/2002 was $3bn ($4.3bn adjusted for inflation). Uber has been losing over $3bn per year since 2016 ($15bn so far).
- cosmodisk 7y ago
  Salesforce is a better example of this,that kept going in negative,while at the same time buying companies left and right.I think it took them good 15 years before they showed profit. However,this is a deliberate and I'd say quite smart business decision.
  - kgwgk 7y ago
    Is it? Salesforce reported annual profits starting in 2004, the year of the IPO (it was founded in 1999). Accumulated earnings were already positive in 2008. It had a good run of GAAP profitability (2004-2011) before losing much more than it had earned before in 2012-2016.
- perl4ever 7y ago
  I assume that's true, but you're missing the perspective that 2003 was well after the crash, and to someone who lived through it and generally aware but not an expert, it really seemed like they would never make money, their stock had cratered, and they were just staggering on a bit longer than other dotcom flameouts. I mean, that was the picture you got from the financial press (remember when Apple was always described as "troubled" or "beleaguered"?)

toomuchtodo 7y ago

You are not a stable self sufficient business if you are not profitable.

snowwrestler 7y ago
This isn't true; reporting profits is to a large extent a choice that a stable self-sufficient for-profit business can make every year. If you have some reliability in predicting your revenues, you can time investments or expenditures to offset them and run a for-profit company in a stable way without ever (or rarely) reporting profits. And of course there are a number of stable self-sufficient businesses who never report profits; in fact they are called nonprofits. The Sierra Club was founded in 1892, for example.
- toomuchtodo 7y ago
  Profitability is having revenues you can predict and time expenses around. Non-profits are out of scope. Call it what you want, revenue, profits, whatever, you are not sustainable if you don't bring in more than you spend.
  - nostrademons 7y ago
    That's not GAAP profitability. R&D and sales appear as operating expenses and get deducted from revenue before net income. This matters a lot for software businesses with recurring revenue (i.e. most SaaS businesses). With software, you build the software once and then you have an asset that you can sell a potentially infinite number of times, for many years into the future. The engineering salaries for building the software count as R&D, and get deducted from the current year's income statement. Then you sell the software, which may take an expensive consultative sales process but signs up a customer who will continue paying monthly for several years. The sales expense is recorded in the current year, but the revenue is booked over several years. The metric you're looking for is unit economic profitability, and specifically for B2B software businesses, LTV - CAC. If this is positive, then you are making more for each customer you sign up than it cost to sign them up, and you have a sustainable business (at least until the competitive landscape changes, which is a risk every business faces). This is not the same thing as GAAP profitability: if you know that you have a product that makes $5 in revenue for every $1 in sales you put in, it makes sense to raise as much capital as possible, hire as many salespeople as possible, and get every possible user using the software before a competitor comes out. That will look like a money-losing business under GAAP, because for every dollar that comes in this year you might be spending $2 in sales. But the part that's missing from the GAAP statement is that next year you have 4x as many customers who will continue paying you money at no additional cost to you. At some point, when the growth curve flattens, you just lay off the salespeople and milk the existing customers for everything they're worth. This is the story of Oracle, Microsoft, Cisco, and now Facebook and Google. VCs know to look for these metrics (along with growth rate, net promoter score, engagement, and churn, which are proxies for CAC and LTV). The general public does not, and they're not required in SEC disclosures or normal accounting statements (which generally predate the SaaS business model).
    - manigandham 7y ago
      The thread seems to be about actual profitability, not accounting metrics. A business is either fundamentally profitable and sustainable, or it isn't.
  - 7y ago
- perl4ever 7y ago
  If you run a nonprofit, what do you do if you have money left over at the end of the year? Why, you call it a surplus! (I was once told)

kgwgk 7y ago

> Amazon pioneered the idea that you do not need to be profitable, in fact you can lose money every single day, month, year, for the sake of growth. Amazon has reported profits almost every year since 2003 (the only exceptions are 2012 and 2014). The loss accumulated in 1994/2002 was $3bn ($4.3bn adjusted for inflation). Uber has been losing over $3bn per year since 2016 ($15bn so far).

cosmodisk 7y ago
Salesforce is a better example of this,that kept going in negative,while at the same time buying companies left and right.I think it took them good 15 years before they showed profit. However,this is a deliberate and I'd say quite smart business decision.
- kgwgk 7y ago
  Is it? Salesforce reported annual profits starting in 2004, the year of the IPO (it was founded in 1999). Accumulated earnings were already positive in 2008. It had a good run of GAAP profitability (2004-2011) before losing much more than it had earned before in 2012-2016.
perl4ever 7y ago
I assume that's true, but you're missing the perspective that 2003 was well after the crash, and to someone who lived through it and generally aware but not an expert, it really seemed like they would never make money, their stock had cratered, and they were just staggering on a bit longer than other dotcom flameouts. I mean, that was the picture you got from the financial press (remember when Apple was always described as "troubled" or "beleaguered"?)