35 ms·

Behind tech layoffs lay cash flow-negative companies

300 points by hat_tr1ck 6y ago

hat_tr1ck 6y ago
Allegedly, most public tech companies that have fired staff, are largely unprofitable.
- rvz 6y ago
  One thing that is obvious in this observation is those high growth companies who have an all time high burn rate, headcount, little revenue and once the pandemic hit the tech industry, those found in that category are hardest hit and are operating in an unsustainable fashion.
byoung2 6y ago
The unit economics of some of these companies may have worked during the good times, but these are unique times. Uber and Lyft are notable examples that barely made a profit even during the good times. Yelp was already in decline long before COVID-19 and having mass business closures didn't help. These layoffs exposed the fact that many companies are like most Americans who live check to check.
- hat_tr1ck 6y ago
  Article goes to show that even during good times, Uber and Lyft were losing money. To me it looks more like a case of flawed unit economics.
  - dehrmann 6y ago
    I think it's more of a story about marketing, consumer habits, driver churn (for Uber and Lyft), and competition. Breaking into an industry is expensive.
    - rachelbythebay 6y ago
      And terrible waste and graft. Can't forget that.
- deleted 6y ago
  [deleted]
- onlyrealcuzzo 6y ago
  There's a ton of speculative cash-flow negative rental properties. Probably much more money is invested in this space than VC companies. I wonder how these landlords will fare in this and which will cause a bigger long-term problem.
  - deleted 6y ago
    [deleted]
  - JJMcJ 6y ago
    > speculative cash-flow negative rental properties Usually that means rents aren't enough to cover the mortgages. Example: Buy a house for $2 million. Mortgage, taxes, upkeep, insurance, pushing toward 100K a year. But there is no chance at all you are going to be able to get $8K/month rent to cover that. Long term rental property owners, on the other hand, are doing very very well even if they don't sell.
nostrademons 6y ago
There's an adverse selection problem with today's public markets. If you're profitable, in a solid and sustainable business, you a.) usually don't need more cash b.) if you do need more cash, there are plenty of private investors that will give it to you, c.) don't want to disclose your profitability to attract competitors and d.) don't want to spend the multi-millions per year for SOX compliance. So the only reason you have for going public is to unload your shares in an unsustainable business before the rest of the world realizes it's unsustainable. Hence, that's what we get on the public markets. There are definitely profitable tech companies out there which are still hiring, but they are largely private. Some may have $35B valuations and a few thousand employees, but don't find it worthwhile to go public.
- ebiester 6y ago
  At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. Further, SOX makes this a lot more complicated. If you give out stock (say, an employee stock ownership plan or options), you are already subject to SOX. https://www.bradley.com/insights/publications/2004/03/sarbanesoxley-what-it-means-for-private-companie__ https://www.bradley.com/insights/publications/2004/03/sarban... shows an older article about some of the other reasons you might be subject to SOX. Further, if you give out options, your employees might expect to be able to sell those. So, once you normalize options, you have set yourself on the path to either acquisition or IPO. Once you take venture capital, they will want a way to sell their shares at the highest price, which means acquision or IPO. So, while you can point to ESRI or Basecamp or any number of private companies, they are in the minority. If you can bootstrap a company (or rely on alternative funding sources to VC), and you can make it profitable enough to hire employees at market rate without the lure of options, and you can fend off any VC-backed competitors who can undercut you on cost and hire a larger team, then you're golden. However, there's more than an adverse selection problem going on here.
  - austincheney 6y ago
    > At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. That’s not a fair statement. Amazon is an online retailer but only achieved profitability due to AWS. I don’t think their retail business is even profitable now if you slice it out.
thecleaner 6y ago
Isn't this also because of tax considerations ? If you make a profit you have to pay taxes, so its better to inflate expenses as much as possible. However this argument gives some credibility to the business models of these companies.
- exclusiv 6y ago
  Spending a dollar to save 21 cents isn't very wise. The only case for not showing a profit is to invest in R&D, expansion, etc for the long term. In addition, if they were merely inflating expenses, then they'd be able to adjust and have plenty cash. This doesn't seem to be the case.
- dehrmann 6y ago
  That's like saying "would you rather get $10 and pay $3 in taxes, or would you rather lose $1?" I think the option investors want is $200 in 5 years, and spending gross margin on growth might get you there faster.
- mrlala 6y ago
  Does that actually make sense to you?
- hogFeast 6y ago
  This site is pure gold. Gold.
- mdoms 6y ago
  No one ever went poor paying tax.
  - marcosdumay 6y ago
    I'm out on a tangent, but that is too broad a statement. There exist constant taxes over non-liquid assets. I am pretty sure we'll people that have been bankrupt over then if we look. They just aren't a problem for people with money (top of middle class or above).
- redis_mlc 6y ago
polote 6y ago
Since when making points with dirty data is actually relevant ? We don't even know if the data is representative of anything, there have been millions of layoff, and this db contains 60k of them, and this guy even decided to consider 30 % of it
- 293984j29384 6y ago
  Classic "garbage in, garbage out"
- watfly 6y ago
  Numbers are on par with what Bloomberg is reporting. Maybe comment with source to the millions of layoffs in the tech industry?
mtnGoat 6y ago
To me this just illustrates the excess some companies have. Frankly I wonder what some of these companies are doing to even require these staffing numbers do VCs like headcount or something?
- cosmodisk 6y ago
  Remember interviewing a guy who worked for Uber( non technical side of things). If that's the level of candidates they hire,I'm afraid they need 5 people just to change a lightbulb.
  - WrtCdEvrydy 6y ago
    The issue is that when you hire someone good and realize it took 30+ interviews you realize it will take about 6 months to fill a full office. At that point, the 'minimum requirements' will fall off a cliff.
    - toast0 6y ago
      If you're having trouble filling your office with qualified people, get a smaller office. Hiring people below your requirements to be done with hiring often results in less productivity than simply not hiring.
      - snovv_crash 6y ago
        Absolutely. Many people provide negative productivity.
      - TeMPOraL 6y ago
        I think this is an underappreciated aspect of rapid growth. Hiring competent people retards growth. If you grow organically, you can afford to spend the time hiring and keeping competent people. If you need to field 200-people office next month, you'll have to drop the bar.
      - WrtCdEvrydy 6y ago
ksj2114 6y ago
How is this article on the front page of HN? It conflates cash flow with net income, and shows a lack of understanding of the business models of these companies. Also... "why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?" This shows a fundamental misunderstanding of how public markets work.
- tarsinge 6y ago
  I agree that mixing cash flow and profits is confusing. But that doesn't change the point: not turning a profit means you lose money on every sale (which was not the case of Amazon, the profits were just small compared to the sales volume), it's by definition unsustainable unless there is a very strong plan mid-term (like not "self-driving cars" for example). The question is legitimate, though the word "allow" is maybe not the best choice.
- sillysaurusx 6y ago
  Your comment isn't really saying anything, though. It can be summed up as "Nu uh." Could you go into detail about why there's a lack of understanding of the business model, or how public markets work?
  - tylerhou 6y ago
    Because many of the businesses are profitable, but spend money to grow. Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1]. The original author says that these companies "dump" stocks at IPO, but fails to recognize that (1) institutional investors who purchase most of the supply of stock at IPO are highly sophisticated and (2) there is a lot of regulation around proper disclosure of financials of public offerings. Hell, the one recent tech company which tried to "dump" stock at IPO got laughed out of the public markets (WeWork). I agree with the above poster that this article is nonsense and shows a complete misunderstanding of how markets and valuations work. Of course you would expect companies that are not profitable because they are investing in growth to lay off employees in tough times! [1] http://paulgraham.com/aord.html http://paulgraham.com/aord.html
mshenfield 6y ago
Many of these businesses are also predictably linked to the broader economy - ticketing at Eventbrite, reservations/shopping for Yelp. It would be prudent to keep a cash stockpile for the inevitable cyclic downturns. Full disclosure, I worked at Eventbrite two years ago.
- carlineng 6y ago
  Until recently, Yelp had a giant stockpile of cash, but an activist investor successfully launched a campaign to get Yelp management to return much of that cash via buybacks [1]. By the end of 2018, Yelp had a cash balance of ~$837 million and proceeded to return almost $500 million in cash to stockholders via buybacks in 2019 [2]. Hoarding cash may seem like a good idea in hindsight, but public market investors will often raise a huge stink if you try. [1] https://sqnletters.com/content/uploads/2019/01/Yelp-A-Fresh-Perspective-SQN-Investors-01.16.2019.pdf https://sqnletters.com/content/uploads/2019/01/Yelp-A-Fresh-... [2] https://ycharts.com/companies/YELP/stock_buyback https://ycharts.com/companies/YELP/stock_buyback
  - gresrun 6y ago
    GOOG[0] & AAPL[1] each have stockpiles of cash & securities in excess of $100B. If thier investors are raising a stink, their CFOs don't seem to care. Disclosure: Google employee [0]https://abc.xyz/investor/static/pdf/2020Q1_alphabet_earnings_release.pdf?cache=4690b9f https://abc.xyz/investor/static/pdf/2020Q1_alphabet_earnings... [1]https://www.apple.com/newsroom/pdfs/FY20_Q2_Consolidated_Financial_Statements.pdf https://www.apple.com/newsroom/pdfs/FY20_Q2_Consolidated_Fin...
    - deleted 6y ago
      [deleted]
    - MattGaiser 6y ago
      Yelp is a stagnating stock. As long as Apple and Google stock prices keep rising, the activist types will go bother somebody else.
    - 6y ago
crazygringo 6y ago
> ...why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies? Huh? In a market nobody's "allowing" things or not, people simply choose to purchase/invest or not. Losing money has always been acceptable in every business ever because businesses require investment and investment takes time (months, years, decades) to pay off. Why shouldn't you allow an unprofitable company to IPO? He's arguing that I should be prevented from buying shares in Uber or Yelp no matter how badly I want to? That's incredibly presumptuous of him to think he knows better how I ought to invest my money than I do. > Here’s to a new generation of entrepreneurs who prioritize building sustainable businesses. Nobody would be investing money in these companies if they didn't think there was a good chance of them becoming sustainable long term. Obviously, the board of Uber is doing their best to make it a sustainable business. (You may disagree that it's sustainable, but that's business -- you can disagree about everything.) Essentially, the author appears to be anti-investment, which is basically anti-economic growth broadly. Bizarre.
- legolas2412 6y ago
  Well, zero interest rates from federal reserve definitely allow such businesses to flourish. Where you try to corner a market with infinite money for a monopolistic position.
  - tylerhou 6y ago
    Startups don't get 0% loans from the federal reserve. Banks "do", but interest rates for unsecured, high-risk startups is well above 0%. Startups get investments from investors, but investors have an opportunity cost. A lower bound on opportunity cost is market index growth, around 7% per year.
  - arbitrage 6y ago
    That's, like, the whole point of near-zero or zero interest rates, though. It's to encourage exactly this.
  - kortilla 6y ago
    These aren’t the businesses that have access to 0% interest. Look at Uber bond yields.
omgbobbyg 6y ago
I am surprised at the poor economics behind Eventbrite. In 2019, they lost a cool $26 million with a -21% margin. What are their major unit cost items? At the risk of sounding ignorant, isn't it just a website?
- naravara 6y ago
  >At the risk of sounding ignorant, isn't it just a website? A website with a gigantic sales and account management apparatus behind it. The costs are centered around acquiring and retaining users/customers, including a big customer support footprint.
- redisman 6y ago
  I’m pretty sure 99% of the companies people on this website work for could be described as “just a website” if you want to be snarky
  - MattGaiser 6y ago
    Yeah, but there is physical and people infrastructure behind many websites. Uber/DoorDash/Lyft have drivers and cars. My organization has large parking garages. GoPro makes hardware. Zoom has horrendous bandwidth costs and requires a ton of servers. They all have some element of their business which doesn't meaningfully scale exponentially. What does EventBrite have that would be like that?
    - jankassens 6y ago
      - Sales staff to get event organizers to use their platform and help with setup. - Customer support to deal with issues. - Maybe loss and employees to deal with fraud of some kind (since payments are involved).
MangoCoffee 6y ago
>why did we allow so many unprofitable companies IPO? the Amazon business model? VC/Public's money to gain market shares.
saltedonion 6y ago
This is like saying most people who died are old.
ddmma 6y ago
Most of these are sustained by investment funds that are interested also in the consumer data
vchak1 6y ago
I believe they are trying to make it up in volume.
tgs4 6y ago
This topic is best explained by Russ: https://www.youtube.com/watch?v=BzAdXyPYKQo https://www.youtube.com/watch?v=BzAdXyPYKQo
cryptozeus 6y ago
Op of the article assumes that you have to be cash flow positive to operate or even IPO. This is false on so many levels. Just look around so many companies exist today which were not cash flow positive at the IPO or even after IPO...Amazon, Tesla to name a few.
foobar_ 6y ago
This is like a friend taking a loan promising to payback later but that time never comes. There's always something new on the horizon and another loan.
ben7799 6y ago
Interesting to see some of the comments from people who are so buried in the bubble that they can't see how bad these companies often are. I feel like this insanity started in SV and has grown out to the other tech hubs over the past 10-12 years. Whatever the case it's made me glad I never managed to move out to SV. I've tried to navigate my career around not ending up at this kind of company. The common things IMO: - Not profitable - Keep getting more rounds - Likely B2C - Likely involved web marketing, ads, etc.. - Likely involvement in "social". They're all a gamble.. if you're young/single and have little to risk and you go to one of these and it hits you might win big.. but they've never been safe/responsible companies. I did work for 1 year at one place that I quickly realized was super messed up. It was amazing to me when they IPOed with accelerating losses. It wasn't always this way.. you used to have to make solid product with a business model that clearly showed growth AND profitability.
- vmception 6y ago
  > It wasn't always this way.. you used to have to make solid product with a business model that clearly showed growth AND profitability. Its because there isn't anywhere to put cash. The market tolerance has expanded because the market was desperate for things to invest in. So whether it is non-voting shares, profitless companies and bigger issuance sizes, it is all a symptom where there is no predilection for a cure. The government's growth targets cannot be met without giving money to the credit worthy. Money is free for them and they have make more from that money. It doesn't "trickle down" very far, but it does still lack a place to go where a return beats inflation (the speed at which the government gives other organizations cheap money).
  - Apocryphon 6y ago
    And yet, these investors still aren't putting a lot of money in companies working on the stereotypical moonshot "big problem" ideas that Silicon Valley is derided for not caring about- curing cancer, fixing climate change, fighting poverty, inventing fusion power, etc.
    - 6y ago
jpm_sd 6y ago
I'm pretty amused by the byline on this piece. "Here’s to a new generation of entrepreneurs who prioritize building sustainable businesses," says the guy whose job title is apparently "Flying cars salesman" at a company that has mostly produced CG renderings of their future product. https://www.watfly.ca/ https://www.watfly.ca/ As the market is currently discovering, what goes up, must come down. A principle that applies to flying cars as well.
nixass 6y ago
Many of these are gig companies, middle man companies who add no value to the market. Maybe it's time for them to go to the history.
olefoo 6y ago
And once again the tech workforce wakes up in the gutter wearing clown makeup and wondering what happened. In a functioning economic regulatory environment the whole "Spend big money upfront to Capture & Control $MARKET" game would have been illegal from the get go. We would have had a much greater variety of companies and a much greater variety of size of companies. But, hey. Here we are. In the gutter. Covered in slapstick.
- achillesheels 6y ago
  By your reasoning Intel would have never been created. QED.
  - Apocryphon 6y ago
    Who's to say that wouldn't have been a better world, technologically speaking? Who's to say Intel's market dominance was a good thing? I thought it was a truism in tech that monocultures are a bad thing?
    - achillesheels 6y ago
      I think the more pertinent focus is to ask: was Intel created naturally or artificially? To that, we must look at its effects on human civilization, including the compounding network effects on the Valley. I see its merits as natural and therefore, per Aristotle, necessary. So I can't consider a parallel universe where Intel is not a wealth creation signal which causes the venture capital industry to grow to the point where now every cosmopolis has some sort of VC Fund.
      - Apocryphon 6y ago
        It's easy to get sucked into counterfactuals, which are fun hypotheticals but sort of useless in debate. Yet one has to consider- if Intel was never created, wouldn't someone else simply have invented the microprocessor technologies they created? Were there not competitors? It seems inevitable.
jtdev 6y ago
...and loads of ML/AI hype.
gregdoesit 6y ago
“Why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?” First off, the SEC “allows” companies to go public in the US. Any company can do so, assuming you meet the regulatory requirements. Being profitable is not one of them. Being transparent enough on their business and their outlook _is_ one of them. Now, when you go public, you take on a bunch of additional constraints - like having to report regularly to shareholders, that private companies don’t have to do. So now, the question should be “why did investors invest their own cash into unprofitable companies IPO’ing?” The answer partially lies into how profitable companies typically do not IPO, as they do not need capital. Want to be a part of IKEA? Not a public company? The Mars Group, who sell most candies worldwide? They are also doing great. LEGO? Nope. Okay, so you have investors - pensions funds, private individuals and many others - who want to invest, and gain returns on their money. So why do they invest in no -profitable companies? Because they think it’s an investment that they are comfortable with. And they usually believe that short- or long-term, their stock value will go up, thanks to the performance of the company. Welcome to how publicly traded markets work.
papito 6y ago
"We are burning money like hay but we need these 20 people to be maintaining our Kubernetes clusters. THIS IS THE WAY."
7leafer 6y ago
> When did losing money become acceptable and the new normal for publicly traded companies? It's when big investors decided they'd better keep a selected few companies on life support while they kill fair competition with their suicidal price dumping, and then milk the monopolies they inevitably become. They don't lay off because they're on their deathbeds, they do so because of automation and optimization. No need for that many mechanical turks.
kjgkjhfkjf 6y ago
Companies such as Uber tend to be biased towards growth rather than profitability, even at the time of their IPOs. Uber's layoffs are in part due to the coronavirus situation, but perhaps also due to their transitioning towards a profit bias. It may seem counter-intuitive to invest in companies that are not biased towards profitability, as they tend to be risky and volatile, but portfolio management theory predicts that including some volatile assets in a portfolio makes it perform better. See e.g. https://www.investopedia.com/terms/c/capm.asp https://www.investopedia.com/terms/c/capm.asp.

300 points by hat_tr1ck 6y ago

hat_tr1ck 6y ago

Allegedly, most public tech companies that have fired staff, are largely unprofitable.

rvz 6y ago
One thing that is obvious in this observation is those high growth companies who have an all time high burn rate, headcount, little revenue and once the pandemic hit the tech industry, those found in that category are hardest hit and are operating in an unsustainable fashion.

byoung2 6y ago

The unit economics of some of these companies may have worked during the good times, but these are unique times. Uber and Lyft are notable examples that barely made a profit even during the good times. Yelp was already in decline long before COVID-19 and having mass business closures didn't help. These layoffs exposed the fact that many companies are like most Americans who live check to check.

hat_tr1ck 6y ago
Article goes to show that even during good times, Uber and Lyft were losing money. To me it looks more like a case of flawed unit economics.
- dehrmann 6y ago
  I think it's more of a story about marketing, consumer habits, driver churn (for Uber and Lyft), and competition. Breaking into an industry is expensive.
  - rachelbythebay 6y ago
    And terrible waste and graft. Can't forget that.
deleted 6y ago
[deleted]
onlyrealcuzzo 6y ago
There's a ton of speculative cash-flow negative rental properties. Probably much more money is invested in this space than VC companies. I wonder how these landlords will fare in this and which will cause a bigger long-term problem.
- deleted 6y ago
  [deleted]
- JJMcJ 6y ago
  > speculative cash-flow negative rental properties Usually that means rents aren't enough to cover the mortgages. Example: Buy a house for $2 million. Mortgage, taxes, upkeep, insurance, pushing toward 100K a year. But there is no chance at all you are going to be able to get $8K/month rent to cover that. Long term rental property owners, on the other hand, are doing very very well even if they don't sell.

nostrademons 6y ago

There's an adverse selection problem with today's public markets. If you're profitable, in a solid and sustainable business, you a.) usually don't need more cash b.) if you do need more cash, there are plenty of private investors that will give it to you, c.) don't want to disclose your profitability to attract competitors and d.) don't want to spend the multi-millions per year for SOX compliance. So the only reason you have for going public is to unload your shares in an unsustainable business before the rest of the world realizes it's unsustainable. Hence, that's what we get on the public markets. There are definitely profitable tech companies out there which are still hiring, but they are largely private. Some may have $35B valuations and a few thousand employees, but don't find it worthwhile to go public.

ebiester 6y ago
At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. Further, SOX makes this a lot more complicated. If you give out stock (say, an employee stock ownership plan or options), you are already subject to SOX. https://www.bradley.com/insights/publications/2004/03/sarbanesoxley-what-it-means-for-private-companie__ https://www.bradley.com/insights/publications/2004/03/sarban... shows an older article about some of the other reasons you might be subject to SOX. Further, if you give out options, your employees might expect to be able to sell those. So, once you normalize options, you have set yourself on the path to either acquisition or IPO. Once you take venture capital, they will want a way to sell their shares at the highest price, which means acquision or IPO. So, while you can point to ESRI or Basecamp or any number of private companies, they are in the minority. If you can bootstrap a company (or rely on alternative funding sources to VC), and you can make it profitable enough to hire employees at market rate without the lure of options, and you can fend off any VC-backed competitors who can undercut you on cost and hire a larger team, then you're golden. However, there's more than an adverse selection problem going on here.
- austincheney 6y ago
  > At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. That’s not a fair statement. Amazon is an online retailer but only achieved profitability due to AWS. I don’t think their retail business is even profitable now if you slice it out.

thecleaner 6y ago

Isn't this also because of tax considerations ? If you make a profit you have to pay taxes, so its better to inflate expenses as much as possible. However this argument gives some credibility to the business models of these companies.

exclusiv 6y ago
Spending a dollar to save 21 cents isn't very wise. The only case for not showing a profit is to invest in R&D, expansion, etc for the long term. In addition, if they were merely inflating expenses, then they'd be able to adjust and have plenty cash. This doesn't seem to be the case.
dehrmann 6y ago
That's like saying "would you rather get $10 and pay $3 in taxes, or would you rather lose $1?" I think the option investors want is $200 in 5 years, and spending gross margin on growth might get you there faster.
mrlala 6y ago
Does that actually make sense to you?
hogFeast 6y ago
This site is pure gold. Gold.
mdoms 6y ago
No one ever went poor paying tax.
- marcosdumay 6y ago
  I'm out on a tangent, but that is too broad a statement. There exist constant taxes over non-liquid assets. I am pretty sure we'll people that have been bankrupt over then if we look. They just aren't a problem for people with money (top of middle class or above).
redis_mlc 6y ago

polote 6y ago

Since when making points with dirty data is actually relevant ? We don't even know if the data is representative of anything, there have been millions of layoff, and this db contains 60k of them, and this guy even decided to consider 30 % of it

293984j29384 6y ago
Classic "garbage in, garbage out"
watfly 6y ago
Numbers are on par with what Bloomberg is reporting. Maybe comment with source to the millions of layoffs in the tech industry?

mtnGoat 6y ago

To me this just illustrates the excess some companies have. Frankly I wonder what some of these companies are doing to even require these staffing numbers do VCs like headcount or something?

cosmodisk 6y ago
Remember interviewing a guy who worked for Uber( non technical side of things). If that's the level of candidates they hire,I'm afraid they need 5 people just to change a lightbulb.
- WrtCdEvrydy 6y ago
  The issue is that when you hire someone good and realize it took 30+ interviews you realize it will take about 6 months to fill a full office. At that point, the 'minimum requirements' will fall off a cliff.
  - toast0 6y ago
    If you're having trouble filling your office with qualified people, get a smaller office. Hiring people below your requirements to be done with hiring often results in less productivity than simply not hiring.
    - snovv_crash 6y ago
      Absolutely. Many people provide negative productivity.
    - TeMPOraL 6y ago
      I think this is an underappreciated aspect of rapid growth. Hiring competent people retards growth. If you grow organically, you can afford to spend the time hiring and keeping competent people. If you need to field 200-people office next month, you'll have to drop the bar.
    - WrtCdEvrydy 6y ago

ksj2114 6y ago

How is this article on the front page of HN? It conflates cash flow with net income, and shows a lack of understanding of the business models of these companies. Also... "why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?" This shows a fundamental misunderstanding of how public markets work.

tarsinge 6y ago
I agree that mixing cash flow and profits is confusing. But that doesn't change the point: not turning a profit means you lose money on every sale (which was not the case of Amazon, the profits were just small compared to the sales volume), it's by definition unsustainable unless there is a very strong plan mid-term (like not "self-driving cars" for example). The question is legitimate, though the word "allow" is maybe not the best choice.
sillysaurusx 6y ago
Your comment isn't really saying anything, though. It can be summed up as "Nu uh." Could you go into detail about why there's a lack of understanding of the business model, or how public markets work?
- tylerhou 6y ago
  Because many of the businesses are profitable, but spend money to grow. Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1]. The original author says that these companies "dump" stocks at IPO, but fails to recognize that (1) institutional investors who purchase most of the supply of stock at IPO are highly sophisticated and (2) there is a lot of regulation around proper disclosure of financials of public offerings. Hell, the one recent tech company which tried to "dump" stock at IPO got laughed out of the public markets (WeWork). I agree with the above poster that this article is nonsense and shows a complete misunderstanding of how markets and valuations work. Of course you would expect companies that are not profitable because they are investing in growth to lay off employees in tough times! [1] http://paulgraham.com/aord.html http://paulgraham.com/aord.html

mshenfield 6y ago

Many of these businesses are also predictably linked to the broader economy - ticketing at Eventbrite, reservations/shopping for Yelp. It would be prudent to keep a cash stockpile for the inevitable cyclic downturns. Full disclosure, I worked at Eventbrite two years ago.

carlineng 6y ago
Until recently, Yelp had a giant stockpile of cash, but an activist investor successfully launched a campaign to get Yelp management to return much of that cash via buybacks [1]. By the end of 2018, Yelp had a cash balance of ~$837 million and proceeded to return almost $500 million in cash to stockholders via buybacks in 2019 [2]. Hoarding cash may seem like a good idea in hindsight, but public market investors will often raise a huge stink if you try. [1] https://sqnletters.com/content/uploads/2019/01/Yelp-A-Fresh-Perspective-SQN-Investors-01.16.2019.pdf https://sqnletters.com/content/uploads/2019/01/Yelp-A-Fresh-... [2] https://ycharts.com/companies/YELP/stock_buyback https://ycharts.com/companies/YELP/stock_buyback
- gresrun 6y ago
  GOOG[0] & AAPL[1] each have stockpiles of cash & securities in excess of $100B. If thier investors are raising a stink, their CFOs don't seem to care. Disclosure: Google employee [0]https://abc.xyz/investor/static/pdf/2020Q1_alphabet_earnings_release.pdf?cache=4690b9f https://abc.xyz/investor/static/pdf/2020Q1_alphabet_earnings... [1]https://www.apple.com/newsroom/pdfs/FY20_Q2_Consolidated_Financial_Statements.pdf https://www.apple.com/newsroom/pdfs/FY20_Q2_Consolidated_Fin...
  - deleted 6y ago
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  - MattGaiser 6y ago
    Yelp is a stagnating stock. As long as Apple and Google stock prices keep rising, the activist types will go bother somebody else.
  - 6y ago

crazygringo 6y ago

> ...why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies? Huh? In a market nobody's "allowing" things or not, people simply choose to purchase/invest or not. Losing money has always been acceptable in every business ever because businesses require investment and investment takes time (months, years, decades) to pay off. Why shouldn't you allow an unprofitable company to IPO? He's arguing that I should be prevented from buying shares in Uber or Yelp no matter how badly I want to? That's incredibly presumptuous of him to think he knows better how I ought to invest my money than I do. > Here’s to a new generation of entrepreneurs who prioritize building sustainable businesses. Nobody would be investing money in these companies if they didn't think there was a good chance of them becoming sustainable long term. Obviously, the board of Uber is doing their best to make it a sustainable business. (You may disagree that it's sustainable, but that's business -- you can disagree about everything.) Essentially, the author appears to be anti-investment, which is basically anti-economic growth broadly. Bizarre.

legolas2412 6y ago
Well, zero interest rates from federal reserve definitely allow such businesses to flourish. Where you try to corner a market with infinite money for a monopolistic position.
- tylerhou 6y ago
  Startups don't get 0% loans from the federal reserve. Banks "do", but interest rates for unsecured, high-risk startups is well above 0%. Startups get investments from investors, but investors have an opportunity cost. A lower bound on opportunity cost is market index growth, around 7% per year.
- arbitrage 6y ago
  That's, like, the whole point of near-zero or zero interest rates, though. It's to encourage exactly this.
- kortilla 6y ago
  These aren’t the businesses that have access to 0% interest. Look at Uber bond yields.

omgbobbyg 6y ago

I am surprised at the poor economics behind Eventbrite. In 2019, they lost a cool $26 million with a -21% margin. What are their major unit cost items? At the risk of sounding ignorant, isn't it just a website?

naravara 6y ago
>At the risk of sounding ignorant, isn't it just a website? A website with a gigantic sales and account management apparatus behind it. The costs are centered around acquiring and retaining users/customers, including a big customer support footprint.
redisman 6y ago
I’m pretty sure 99% of the companies people on this website work for could be described as “just a website” if you want to be snarky
- MattGaiser 6y ago
  Yeah, but there is physical and people infrastructure behind many websites. Uber/DoorDash/Lyft have drivers and cars. My organization has large parking garages. GoPro makes hardware. Zoom has horrendous bandwidth costs and requires a ton of servers. They all have some element of their business which doesn't meaningfully scale exponentially. What does EventBrite have that would be like that?
  - jankassens 6y ago
    - Sales staff to get event organizers to use their platform and help with setup. - Customer support to deal with issues. - Maybe loss and employees to deal with fraud of some kind (since payments are involved).

MangoCoffee 6y ago

>why did we allow so many unprofitable companies IPO? the Amazon business model? VC/Public's money to gain market shares.

saltedonion 6y ago

This is like saying most people who died are old.

ddmma 6y ago

Most of these are sustained by investment funds that are interested also in the consumer data

vchak1 6y ago

I believe they are trying to make it up in volume.

tgs4 6y ago

This topic is best explained by Russ: https://www.youtube.com/watch?v=BzAdXyPYKQo https://www.youtube.com/watch?v=BzAdXyPYKQo

cryptozeus 6y ago

Op of the article assumes that you have to be cash flow positive to operate or even IPO. This is false on so many levels. Just look around so many companies exist today which were not cash flow positive at the IPO or even after IPO...Amazon, Tesla to name a few.

foobar_ 6y ago

This is like a friend taking a loan promising to payback later but that time never comes. There's always something new on the horizon and another loan.

ben7799 6y ago

Interesting to see some of the comments from people who are so buried in the bubble that they can't see how bad these companies often are. I feel like this insanity started in SV and has grown out to the other tech hubs over the past 10-12 years. Whatever the case it's made me glad I never managed to move out to SV. I've tried to navigate my career around not ending up at this kind of company. The common things IMO: - Not profitable - Keep getting more rounds - Likely B2C - Likely involved web marketing, ads, etc.. - Likely involvement in "social". They're all a gamble.. if you're young/single and have little to risk and you go to one of these and it hits you might win big.. but they've never been safe/responsible companies. I did work for 1 year at one place that I quickly realized was super messed up. It was amazing to me when they IPOed with accelerating losses. It wasn't always this way.. you used to have to make solid product with a business model that clearly showed growth AND profitability.

vmception 6y ago
> It wasn't always this way.. you used to have to make solid product with a business model that clearly showed growth AND profitability. Its because there isn't anywhere to put cash. The market tolerance has expanded because the market was desperate for things to invest in. So whether it is non-voting shares, profitless companies and bigger issuance sizes, it is all a symptom where there is no predilection for a cure. The government's growth targets cannot be met without giving money to the credit worthy. Money is free for them and they have make more from that money. It doesn't "trickle down" very far, but it does still lack a place to go where a return beats inflation (the speed at which the government gives other organizations cheap money).
- Apocryphon 6y ago
  And yet, these investors still aren't putting a lot of money in companies working on the stereotypical moonshot "big problem" ideas that Silicon Valley is derided for not caring about- curing cancer, fixing climate change, fighting poverty, inventing fusion power, etc.
  - 6y ago

jpm_sd 6y ago

I'm pretty amused by the byline on this piece. "Here’s to a new generation of entrepreneurs who prioritize building sustainable businesses," says the guy whose job title is apparently "Flying cars salesman" at a company that has mostly produced CG renderings of their future product. https://www.watfly.ca/ https://www.watfly.ca/ As the market is currently discovering, what goes up, must come down. A principle that applies to flying cars as well.

nixass 6y ago

Many of these are gig companies, middle man companies who add no value to the market. Maybe it's time for them to go to the history.

olefoo 6y ago

And once again the tech workforce wakes up in the gutter wearing clown makeup and wondering what happened. In a functioning economic regulatory environment the whole "Spend big money upfront to Capture & Control $MARKET" game would have been illegal from the get go. We would have had a much greater variety of companies and a much greater variety of size of companies. But, hey. Here we are. In the gutter. Covered in slapstick.

achillesheels 6y ago
By your reasoning Intel would have never been created. QED.
- Apocryphon 6y ago
  Who's to say that wouldn't have been a better world, technologically speaking? Who's to say Intel's market dominance was a good thing? I thought it was a truism in tech that monocultures are a bad thing?
  - achillesheels 6y ago
    I think the more pertinent focus is to ask: was Intel created naturally or artificially? To that, we must look at its effects on human civilization, including the compounding network effects on the Valley. I see its merits as natural and therefore, per Aristotle, necessary. So I can't consider a parallel universe where Intel is not a wealth creation signal which causes the venture capital industry to grow to the point where now every cosmopolis has some sort of VC Fund.
    - Apocryphon 6y ago
      It's easy to get sucked into counterfactuals, which are fun hypotheticals but sort of useless in debate. Yet one has to consider- if Intel was never created, wouldn't someone else simply have invented the microprocessor technologies they created? Were there not competitors? It seems inevitable.

jtdev 6y ago

...and loads of ML/AI hype.

gregdoesit 6y ago

“Why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?” First off, the SEC “allows” companies to go public in the US. Any company can do so, assuming you meet the regulatory requirements. Being profitable is not one of them. Being transparent enough on their business and their outlook _is_ one of them. Now, when you go public, you take on a bunch of additional constraints - like having to report regularly to shareholders, that private companies don’t have to do. So now, the question should be “why did investors invest their own cash into unprofitable companies IPO’ing?” The answer partially lies into how profitable companies typically do not IPO, as they do not need capital. Want to be a part of IKEA? Not a public company? The Mars Group, who sell most candies worldwide? They are also doing great. LEGO? Nope. Okay, so you have investors - pensions funds, private individuals and many others - who want to invest, and gain returns on their money. So why do they invest in no -profitable companies? Because they think it’s an investment that they are comfortable with. And they usually believe that short- or long-term, their stock value will go up, thanks to the performance of the company. Welcome to how publicly traded markets work.

papito 6y ago

"We are burning money like hay but we need these 20 people to be maintaining our Kubernetes clusters. THIS IS THE WAY."

7leafer 6y ago

> When did losing money become acceptable and the new normal for publicly traded companies? It's when big investors decided they'd better keep a selected few companies on life support while they kill fair competition with their suicidal price dumping, and then milk the monopolies they inevitably become. They don't lay off because they're on their deathbeds, they do so because of automation and optimization. No need for that many mechanical turks.

kjgkjhfkjf 6y ago

Companies such as Uber tend to be biased towards growth rather than profitability, even at the time of their IPOs. Uber's layoffs are in part due to the coronavirus situation, but perhaps also due to their transitioning towards a profit bias. It may seem counter-intuitive to invest in companies that are not biased towards profitability, as they tend to be risky and volatile, but portfolio management theory predicts that including some volatile assets in a portfolio makes it perform better. See e.g. https://www.investopedia.com/terms/c/capm.asp https://www.investopedia.com/terms/c/capm.asp.