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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 ca

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.
  - jasode 6y ago
    > Amazon is an online retailer but only achieved profitability due to AWS. Amazon was profitable in 2002 to 2006 before introduction of AWS services of S3 and EC2 in 2006: https://dazeinfo.com/2019/11/06/amazon-net-income-by-year-graphfarm/ https://dazeinfo.com/2019/11/06/amazon-net-income-by-year-gr... Amazon's retail operation is profitable on its own. They just have lower profit margins than AWS.
    - JJMcJ 6y ago
      > lower profit margins than AWS Which is exactly what you would expect. Retail is notoriously low margin.
    - austincheney 6y ago
      Net income is not profit. https://www.investopedia.com/ask/answers/122414/operating-profit-same-net-income.asp https://www.investopedia.com/ask/answers/122414/operating-pr... Judging by the numbers you provided it appears Amazon was barely cash flow positive during your specified time frame.
      - jasode 6y ago
        >Net income is not profit. A positive +net income is net profit. The "net profit" has more expenses subtracted than "operating profit" but "net income" _is_ profit. [fyi I wasn't the one that downvoted your comments.]
      - codegeek 6y ago
        If net income > 0, it is profit. If net income < 0, it is loss. That's what my accountant taught me.
- Apocryphon 6y ago
  Can't Amazon simply be the one major exception that proves the rule? What other tech company reached profitability after years of not, post-IPO? Using an industry giant as an example seems to be suggesting that such a case can be replicated, let alone replicated multiple times.
  - sokoloff 6y ago
    Twitter Netflix
    - dharmon 6y ago
      I don't have any dog in this fight, but listing Netflix is not correct. They went public in 2002, and were profitable in 2003, so not in the same camp as Amazon and Twitter at all. (If you want to be pedantic, they were unprofitable for "year", not "years" after IPO)
      - sokoloff 6y ago
        There’s a parsing ambiguity I think. Is it “(reached profitability after years of not) && (reached profitability post-IPO)” or “reached profitability after (years of not, all of which were post-IPO)? Ebiester’s initial comment on becoming profitable after IPOing with losses allows for either as a follow-up. We seem to have taken opposite readings without ill intent on either side.
      - treis 6y ago
        Netflix is an interesting example. Every time they've approached profitability the market shifted and most of their investment was for naught. Now they look profitable because they can play with depreciation to book a profit. Cash flow is still negative and it remains to be seen if it every becomes positive. In their 20 years they've managed to burn 10s of billions of dollars and they're still burning cash. Best case scenario they are still a decade away from generating more cash than they've consumed.
        6y ago
- dustingetz 6y ago
  companies like Amazon are not being built today nor does there appear to be any room for more companies like that Edit: Ah yes I forgot Airbnb
- belly_joe 6y ago
  Amazon is also the apotheosis of the growth model tech companies build on. I was working in finance in the early 2010s, and it was then fashionable for analysts to point out that Amazon's classic profitability metrics were flashing red. However, the Amazon model (and to a lesser extent the Uber model, etc.) was to continue penetration pricing as well as plowing every dime made over costs into growth. It made the company look overvalued but the share price was in retrospect justified.
  - Swizec 6y ago
    > plowing every dime made over costs into growth Key difference! A lot of these grow fast companies don’t even cover costs.
    - N1H1L 6y ago
      Exactly. The difference between Amazon and Uber is immense. Amazon's core business has been comfortably profitable for over a decade now. They invest those profits to diversify their business. However, Uber's core business has never been profitable.
    - acheron9383 6y ago
      Yeah, the key is the Amazon still _makes money_ on the services it provides, it just spends it all on some project. Contrast that with even Uber which has some very unhealthy indicators even in mature offerings. It is actually kind of amazing that Uber can't or doesn't make money even while taking a 20% cut of every ride sold. (I assume they must make money in some cities and not in others) That is a substantial margin for a middleman, especially one in a market with only one other real player.
    - gbasin 6y ago
      Unit Economics.
  - vishnugupta 6y ago
    > plowing every dime made over costs into growth I've been trying to build a mental model around this i.e., what options do companies have to utilize profit? 1. Distribute to shareholders -- dividends. 2. Distribute amongst employees -- salary increase, bonuses. 3. Add it to their pile of cash. 4. Invest in growing the business. 5. Something else!? Perhaps a combination of all four? I guess Apple does mostly #3 which is how they are now sitting on a huge pile of cash. Perhaps it's a signal that they don't need cash to grow their business or maybe they don't see how to grow either. Whereas Amazon genuinely believe that investing in growth is the best return the cash from profit can earn. I guess it makes sense, e-commerce is still about 10% of retail in US alone. So there's a big room for growth.
- lumost 6y ago
  honest question, why don't the funding partners agree to buy-back shares on a schedule while the company is private? it would be an effective mechanic for providing deferred compensation while also providing employees liquidity and methods for VCs, PEs, and other funding partners to increase holdings.
  - knz42 6y ago
    They do - sometimes.
- kbenson 6y ago
  > At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. Well, one of the reasons we throw around the "fake it until you make it" term is that some companies don't "make it", and if they're big enough it's a big deal (e.g. Theranos). That an extremely changed market causes a lot of these companies to start having problems sooner isn't really a surprise.
- mikestew 6y ago
  At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. Summary: exception proves the rule? A lot of these companies are probably run by assholes, too. But just like being an asshole doesn't make you a Steve-Jobs-like-company-savior, being unprofitable doesn't make you Amazon. All it means is that you work for an asshole, and your options won't likely ever be worth anything.
  - sukilot 6y ago
    "exception proves the rule" means "exception tests the rule" and calls for clarification of the rule. So what is the clarification that explains Amazon? (It's that Amazon was always profitable at margin, and invested profits into real growth not bribing customers.)
    - mikestew 6y ago
      "exception proves the rule" means "exception tests the rule" That is very debatable. Regardless, it's the not the meaning I was using.
    - LudwigNagasena 6y ago
      I personally think that the only meaningful use of "exception proves the rule" is in its original meaning: spelling out a specific rule means that there exists a general opposite rule, i.e. "parking prohibited on Sundays" implies that parking is not prohibited on other days. Every other use of this phrase sounds to me bizarre and nonsencial, contradicting the basics of logic.
      - novok 6y ago
        It's because the exception is 'exceptional' or low probability that the rarity of the exception proves the general trend that everyone is expecting. Otherwise it wouldn't be called an exception, correct? "If there wasn't a rule, then you wouldn't call that an exception."
- fxtentacle 6y ago
  I believe you underestimate the constraints that come with VC money. VCs tend to expect a high ROI so that one good investment can make up for multiple bad ones. That, naturally, leads to a go big or go home attitude. A business model that yields a reliable 10% profit margin, but with a low overall volume and low growth is not suitable for any VC-backed company. So that's a space where bootstrappers only have to compete against other bootstrappers.
jaggederest 6y ago
I think the ultimate answer to "not needing money" is a direct listing ala spotify, and most companies with significant enough employment bases receiving stock options will be forced public by the number of shareholders eventually. Though we may see more companies choosing RSUs or equivalent to provide cash compensation in proportion to stock value increases, instead of increasing their shareholder base, which might be an interesting development.
draw_down 6y ago
That's true. The only forcing function I know is that if these companies grant RSUs to employees, they end up in a situation where they either sell/go public, or the employees with RSUs start going a very long time with no liquidity. Now, you can definitely choose option B but then you've got a talent and morale problem on your hands. The RSUs don't disappear after employees quit like options do, so the golden handcuffs aren't as tight. (This isn't quite true for options, because companies can issue tender offers or allow the shares from exercised options to be traded on a secondary market. This can allow for employee liquidity without the company going public. RSUs have a double-trigger vesting structure so they don't vest until IPO or liquidity event.)
hogFeast 6y ago
Almost none of these private companies are worth $35bn. I saw this in raise after raise...same VC funds that invested in previous rounds and needed to mark their book higher so they could get juicy bonuses. It is amazing anyone buys this nonsense. The reason you need public markets is because if you are actually worth $35bn, you can't get liquidity anywhere else...$35bn is an oddly specific number but it is far larger than most people in tech understand (just for scale, Koch Industries is probably the most valuable private company in the US...it is valued at what ~$75bn, Mars is another one...that is is around ~$50bn...if you have a tech company at $35bn, some VC somewhere has just lost a fuck ton of money). The reason a private company that is "worth $35bn" doesn't come to market is obvious...it isn't worth $35bn. Amazon, Google, Microsoft, Salesforce, Oracle...need I go on?
- Grimm1 6y ago
  If I navigated a business correctly and maintained control of my company through bootstrapping and not otherwise taking VC money with the good faith intent of a liquidity event (though there have been a few that did VC funding and then told their investors to piss off and stayed private, YMMV), why would I ever want to take a company public? If I'm more interested in running a business in the direction I see fit and don't need the liquidity or the payout then that seems like a pretty big hurdle. Understandably though maybe you need the liquidity public markets can provide for a giant undertaking, thinking of Tesla here, then look at all the hoops Elon has had to jump through to maintain some semblance of his control. My point is, I'm sure there are private tech companies worth some multitude of billions but the powers that run them value their control and don't need the liquidity of the public market and so taking the company public would just complicate their interests. A super quick search shows me there are at least 26 private tech companies valued at greater than 1bn not sure how many of those don't ever intend to go public but I'd guess a few.
  - nickv 6y ago
    That's a good question, it's why, for example, Bloomberg Media is still private. The only two reasons I can think of are: It gives your employees a cash out plan if you used RSUs/Options/Ownership in the company as an incentive for hiring. Some businesses benefit from going public by it adding credibility (and open financial books). Some very large enterprises (Fortune 100, major governments) tend to look more preferably to publicly traded companies so it makes sense for the business to go public to go after these customers. There are also ways to defend against "public involvement" in publicly traded companies that have been around forever. Look at Facebook and the NYT's stock class structure, for example. It's also finally easier to get liquidity when you aren't desperate for it, and the public markets position you for it in a good way.

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.
- jasode 6y ago
  > Amazon is an online retailer but only achieved profitability due to AWS. Amazon was profitable in 2002 to 2006 before introduction of AWS services of S3 and EC2 in 2006: https://dazeinfo.com/2019/11/06/amazon-net-income-by-year-graphfarm/ https://dazeinfo.com/2019/11/06/amazon-net-income-by-year-gr... Amazon's retail operation is profitable on its own. They just have lower profit margins than AWS.
  - JJMcJ 6y ago
    > lower profit margins than AWS Which is exactly what you would expect. Retail is notoriously low margin.
  - austincheney 6y ago
    Net income is not profit. https://www.investopedia.com/ask/answers/122414/operating-profit-same-net-income.asp https://www.investopedia.com/ask/answers/122414/operating-pr... Judging by the numbers you provided it appears Amazon was barely cash flow positive during your specified time frame.
    - jasode 6y ago
      >Net income is not profit. A positive +net income is net profit. The "net profit" has more expenses subtracted than "operating profit" but "net income" _is_ profit. [fyi I wasn't the one that downvoted your comments.]
    - codegeek 6y ago
      If net income > 0, it is profit. If net income < 0, it is loss. That's what my accountant taught me.
Apocryphon 6y ago
Can't Amazon simply be the one major exception that proves the rule? What other tech company reached profitability after years of not, post-IPO? Using an industry giant as an example seems to be suggesting that such a case can be replicated, let alone replicated multiple times.
- sokoloff 6y ago
  Twitter Netflix
  - dharmon 6y ago
    I don't have any dog in this fight, but listing Netflix is not correct. They went public in 2002, and were profitable in 2003, so not in the same camp as Amazon and Twitter at all. (If you want to be pedantic, they were unprofitable for "year", not "years" after IPO)
    - sokoloff 6y ago
      There’s a parsing ambiguity I think. Is it “(reached profitability after years of not) && (reached profitability post-IPO)” or “reached profitability after (years of not, all of which were post-IPO)? Ebiester’s initial comment on becoming profitable after IPOing with losses allows for either as a follow-up. We seem to have taken opposite readings without ill intent on either side.
    - treis 6y ago
      Netflix is an interesting example. Every time they've approached profitability the market shifted and most of their investment was for naught. Now they look profitable because they can play with depreciation to book a profit. Cash flow is still negative and it remains to be seen if it every becomes positive. In their 20 years they've managed to burn 10s of billions of dollars and they're still burning cash. Best case scenario they are still a decade away from generating more cash than they've consumed.
      - 6y ago
dustingetz 6y ago
companies like Amazon are not being built today nor does there appear to be any room for more companies like that Edit: Ah yes I forgot Airbnb
belly_joe 6y ago
Amazon is also the apotheosis of the growth model tech companies build on. I was working in finance in the early 2010s, and it was then fashionable for analysts to point out that Amazon's classic profitability metrics were flashing red. However, the Amazon model (and to a lesser extent the Uber model, etc.) was to continue penetration pricing as well as plowing every dime made over costs into growth. It made the company look overvalued but the share price was in retrospect justified.
- Swizec 6y ago
  > plowing every dime made over costs into growth Key difference! A lot of these grow fast companies don’t even cover costs.
  - N1H1L 6y ago
    Exactly. The difference between Amazon and Uber is immense. Amazon's core business has been comfortably profitable for over a decade now. They invest those profits to diversify their business. However, Uber's core business has never been profitable.
  - acheron9383 6y ago
    Yeah, the key is the Amazon still _makes money_ on the services it provides, it just spends it all on some project. Contrast that with even Uber which has some very unhealthy indicators even in mature offerings. It is actually kind of amazing that Uber can't or doesn't make money even while taking a 20% cut of every ride sold. (I assume they must make money in some cities and not in others) That is a substantial margin for a middleman, especially one in a market with only one other real player.
  - gbasin 6y ago
    Unit Economics.
- vishnugupta 6y ago
  > plowing every dime made over costs into growth I've been trying to build a mental model around this i.e., what options do companies have to utilize profit? 1. Distribute to shareholders -- dividends. 2. Distribute amongst employees -- salary increase, bonuses. 3. Add it to their pile of cash. 4. Invest in growing the business. 5. Something else!? Perhaps a combination of all four? I guess Apple does mostly #3 which is how they are now sitting on a huge pile of cash. Perhaps it's a signal that they don't need cash to grow their business or maybe they don't see how to grow either. Whereas Amazon genuinely believe that investing in growth is the best return the cash from profit can earn. I guess it makes sense, e-commerce is still about 10% of retail in US alone. So there's a big room for growth.
lumost 6y ago
honest question, why don't the funding partners agree to buy-back shares on a schedule while the company is private? it would be an effective mechanic for providing deferred compensation while also providing employees liquidity and methods for VCs, PEs, and other funding partners to increase holdings.
- knz42 6y ago
  They do - sometimes.
kbenson 6y ago
> At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. Well, one of the reasons we throw around the "fake it until you make it" term is that some companies don't "make it", and if they're big enough it's a big deal (e.g. Theranos). That an extremely changed market causes a lot of these companies to start having problems sooner isn't really a surprise.
mikestew 6y ago
At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. Summary: exception proves the rule? A lot of these companies are probably run by assholes, too. But just like being an asshole doesn't make you a Steve-Jobs-like-company-savior, being unprofitable doesn't make you Amazon. All it means is that you work for an asshole, and your options won't likely ever be worth anything.
- sukilot 6y ago
  "exception proves the rule" means "exception tests the rule" and calls for clarification of the rule. So what is the clarification that explains Amazon? (It's that Amazon was always profitable at margin, and invested profits into real growth not bribing customers.)
  - mikestew 6y ago
    "exception proves the rule" means "exception tests the rule" That is very debatable. Regardless, it's the not the meaning I was using.
  - LudwigNagasena 6y ago
    I personally think that the only meaningful use of "exception proves the rule" is in its original meaning: spelling out a specific rule means that there exists a general opposite rule, i.e. "parking prohibited on Sundays" implies that parking is not prohibited on other days. Every other use of this phrase sounds to me bizarre and nonsencial, contradicting the basics of logic.
    - novok 6y ago
      It's because the exception is 'exceptional' or low probability that the rarity of the exception proves the general trend that everyone is expecting. Otherwise it wouldn't be called an exception, correct? "If there wasn't a rule, then you wouldn't call that an exception."
fxtentacle 6y ago
I believe you underestimate the constraints that come with VC money. VCs tend to expect a high ROI so that one good investment can make up for multiple bad ones. That, naturally, leads to a go big or go home attitude. A business model that yields a reliable 10% profit margin, but with a low overall volume and low growth is not suitable for any VC-backed company. So that's a space where bootstrappers only have to compete against other bootstrappers.

jaggederest 6y ago

I think the ultimate answer to "not needing money" is a direct listing ala spotify, and most companies with significant enough employment bases receiving stock options will be forced public by the number of shareholders eventually. Though we may see more companies choosing RSUs or equivalent to provide cash compensation in proportion to stock value increases, instead of increasing their shareholder base, which might be an interesting development.

draw_down 6y ago

That's true. The only forcing function I know is that if these companies grant RSUs to employees, they end up in a situation where they either sell/go public, or the employees with RSUs start going a very long time with no liquidity. Now, you can definitely choose option B but then you've got a talent and morale problem on your hands. The RSUs don't disappear after employees quit like options do, so the golden handcuffs aren't as tight. (This isn't quite true for options, because companies can issue tender offers or allow the shares from exercised options to be traded on a secondary market. This can allow for employee liquidity without the company going public. RSUs have a double-trigger vesting structure so they don't vest until IPO or liquidity event.)

hogFeast 6y ago

Almost none of these private companies are worth $35bn. I saw this in raise after raise...same VC funds that invested in previous rounds and needed to mark their book higher so they could get juicy bonuses. It is amazing anyone buys this nonsense. The reason you need public markets is because if you are actually worth $35bn, you can't get liquidity anywhere else...$35bn is an oddly specific number but it is far larger than most people in tech understand (just for scale, Koch Industries is probably the most valuable private company in the US...it is valued at what ~$75bn, Mars is another one...that is is around ~$50bn...if you have a tech company at $35bn, some VC somewhere has just lost a fuck ton of money). The reason a private company that is "worth $35bn" doesn't come to market is obvious...it isn't worth $35bn. Amazon, Google, Microsoft, Salesforce, Oracle...need I go on?

Grimm1 6y ago
If I navigated a business correctly and maintained control of my company through bootstrapping and not otherwise taking VC money with the good faith intent of a liquidity event (though there have been a few that did VC funding and then told their investors to piss off and stayed private, YMMV), why would I ever want to take a company public? If I'm more interested in running a business in the direction I see fit and don't need the liquidity or the payout then that seems like a pretty big hurdle. Understandably though maybe you need the liquidity public markets can provide for a giant undertaking, thinking of Tesla here, then look at all the hoops Elon has had to jump through to maintain some semblance of his control. My point is, I'm sure there are private tech companies worth some multitude of billions but the powers that run them value their control and don't need the liquidity of the public market and so taking the company public would just complicate their interests. A super quick search shows me there are at least 26 private tech companies valued at greater than 1bn not sure how many of those don't ever intend to go public but I'd guess a few.
- nickv 6y ago
  That's a good question, it's why, for example, Bloomberg Media is still private. The only two reasons I can think of are: It gives your employees a cash out plan if you used RSUs/Options/Ownership in the company as an incentive for hiring. Some businesses benefit from going public by it adding credibility (and open financial books). Some very large enterprises (Fortune 100, major governments) tend to look more preferably to publicly traded companies so it makes sense for the business to go public to go after these customers. There are also ways to defend against "public involvement" in publicly traded companies that have been around forever. Look at Facebook and the NYT's stock class structure, for example. It's also finally easier to get liquidity when you aren't desperate for it, and the public markets position you for it in a good way.