Behind tech layoffs lay cash flow-negative companies

https://medium.com/@watfly/behind-tech-layoffs-lay-systemic-cash-flow-negative-companies-bd8592110422

by hat_tr1ck • 6 years ago

300 171 6 years ago

hat_tr1ck2• 6 years ago

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

rvz• 6 years 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• 6 years 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_tr1ck2• 6 years 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.

dehrmann2• 6 years 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.

onlyrealcuzzo• 6 years 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.

JJMcJ2• 6 years 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• 6 years 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• 6 years 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/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.

austincheney2• 6 years 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.

Apocryphon14• 6 years 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.

dustingetz• 6 years 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• 6 years 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.

lumost• 6 years 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.

kbenson• 6 years 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.

mikestew2• 6 years 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.

fxtentacle• 6 years 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• 6 years 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.

hogFeast3• 6 years 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• 6 years 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.

stu2b50• 6 years ago

There's no reason to be vague about groups, there's exactly two private tech companies at around 35 billion valuation: Stripe and SpaceX.

Do you have any specific thoughts on them?

thecleaner• 6 years 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• 6 years 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.

dehrmann2• 6 years 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• 6 years ago

Does that actually make sense to you?

hogFeast3• 6 years ago

This site is pure gold. Gold.

mdoms• 6 years ago

No one ever went poor paying tax.

marcosdumay• 6 years 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• 6 years ago

thecleaner is mostly correct.

One of the reasons Amazon spent so much over the years was to reduce the amount paid in taxes. So instead of "inflate expenses" it's really "reinvest".

For example, there are specific tax credits for R&D, which can include software if documented properly.

polote• 6 years 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• 6 years ago

Classic "garbage in, garbage out"

watfly• 6 years ago

Numbers are on par with what Bloomberg is reporting. Maybe comment with source to the millions of layoffs in the tech industry?

mtnGoat2• 6 years 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• 6 years 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.

WrtCdEvrydy3• 6 years 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.

WrtCdEvrydy3• 6 years ago

to even require these staffing numbers do VCs like headcount or something

Bullshit Jobs is a book.

klmadfejno• 6 years ago

Assume that like most things, there's decreasing marginal return in terms of growth for each individual employee. If your goal is grow as much as possible to pump the VC valuation, it makes sense to hire more people to get stuff done. Probably not sustainable. Probably dips into the negative frequently.

momokoko• 6 years ago

Yes. Headcount is a metric just like anything else and is often included in decks as an example of growth.

Most of the jobs are sales people. When trying to scale fast, most VCs expect most of the money to be spent on sales people in a b2b product that has found product market fit.

mtnGoat2• 6 years ago

fair enough. makes sense, in that light.

Sales isn't my thing/department, I'd probably be amazed at how big the sales teams are at some of these places. Is that part of tech a kinda of a turnstile as it is?

eezurr• 6 years ago

I woudln't complain too much. The strength of an economy is determined more by its amperage (flow) than voltage (total dollars). Also, it redistributes wealth to the less well off; obviously, with the potential to earn a higher payout.

naravara2• 6 years ago

Also, it redistributes wealth to the less well off; obviously, with the potential to earn a higher payout.

If the net effect is to outcompete small businesses with unprofitable schemes it seems like what we're actually doing is shrinking the overall pie and just redistributing the share of what's left.

Nextgrid• 6 years ago

Founders build better credentials (resume and reputation) if they run a bigger company.

Managers build better credentials if they manage more people.

Developers build better credentials (at least according to the job market) by using complex tools like Kubernetes even when the problem doesn’t justify it.

ksj21142• 6 years 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.

sillysaurusx• 6 years 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?

tylerhou5• 6 years 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

Apocryphon14• 6 years ago

On a purely emotional level, people are not happy about the layoffs (among other things going on in the tech industry) and this validates conceptions of this tech bubble being built on creative accounting, revealing hyper-growth hype to be nothing but lies. There is schadenfreude in calling out the emperor for having no clothes.

hn_throwaway_99• 6 years ago

This shows a fundamental misunderstanding of how public markets work.

I disagree. Most importantly, what we are seeing with so many companies being unprofitable is historically unusual. Now, I guess in 2020 everything feels "historically unusual", but it's kind of BS to denigrate someone by saying "they fundamentally misunderstand how public markets work" when the public markets didn't work this way until quite recently.

See https://markets.businessinsider.com/news/stocks/ipos-for-unp...

pwdisswordfish22• 6 years ago

Oh, we can see how they work. That is the problem. What you mean is there is a fundamental disagreement over how they should work.

ksj21142• 6 years ago

No, saying how did we "allow" these companies to IPO shows a misunderstanding of how markets work

tarsinge2• 6 years 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.

mshenfield• 6 years 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• 6 years 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-... [2] https://ycharts.com/companies/YELP/stock_buyback

gresrun• 6 years 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... [1]https://www.apple.com/newsroom/pdfs/FY20_Q2_Consolidated_Fin...

Apocryphon14• 6 years ago

One wonders if that activist investor will ever receive repercussions, even just the slightest loss in credibility, for the repercussions.

crazygringo2• 6 years 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• 6 years 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.

tylerhou5• 6 years 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• 6 years ago

That's, like, the whole point of near-zero or zero interest rates, though. It's to encourage exactly this.

kortilla• 6 years ago

These aren’t the businesses that have access to 0% interest. Look at Uber bond yields.

nightowl_games• 6 years ago

It is a well established phenomenon of our time that the financial system has deviated very far from real measurements of value, like GDP.

Nobody would be investing money in these companies if they didn't think there was a good chance of them becoming sustainable long term.

This is an idealistic view of the stock market.

People invest in companies because they hope to make a return on those investments. They believe that the stock will do well, not necessarily that the company will become sustainable long term.

It is believed that those two things should be linked, but this article and the commenter are making the assertion that that fundamental link (between real value and stock market value) has been broken.

That stock price is no longer indicative of a company's long term sustainability.

You've constructed a straw man regarding policy "why shouldn't you allow an unprofitable company" and are arguing against no one.

We aren't talking about policy or regulation at this point, we are simply laying out the context of reality. We are simply getting our facts straight.

The fact in discussion is simple: is the stock market still linked to economic sustainability? Or has it's fundamental vision and purpose been distorted over the past few decades?

crazygringo2• 6 years ago

It is a well established phenomenon of our time that the financial system has deviated very far from real measurements of value, like GDP.

That sentence doesn't even make sense. How are you defining "financial system"? What makes GDP more "real" than other metrics? How are you defining a deviation between the two?

This is an idealistic view of the stock market.

Of course it's not, it's literally the definition of how stocks are valued. Of course different people come to different conclusions about a stock's value, and supply and demand sets the final price. If you want to prove that day traders are massively distorting prices over the long term, the burden of proof is on you, friend.

That stock price is no longer indicative of a company's long term sustainability.

You're the one constructing a straw man, a stock price isn't supposed to indicate sustainability, it indicates the summed probabilities of net present value of future profits.

What has the stock market got to do with sustainability? And why do you think the stock market had some "fundamental vision and purpose" of sustainability?

The whole premise of a vibrant economy is that investors take risks, that companies try for success, and many (most) fail along the way. But that the successes more than make up for it in the end. If every company had to prove (to who?) that it was perfectly "sustainable" economic improvement would slow to a crawl, since business it about risks.

You've constructed a straw man regarding policy "why shouldn't you allow an unprofitable company" and are arguing against no one.

The article explicitly said "we did we allow". I'm not arguing against a strawman. I'm arguing against an actual sentence from the article.

There are all these people who claim (without any evidence whatsoever) that stocks are untethered to reality, that it's all a pyramid scheme, that valuations are obviously wrong. Well, go ahead, put your money where your mouth is and short it all. See if you know better than banks with entire teams of financial researchers and analysts.

omgbobbyg• 6 years 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?

naravara2• 6 years 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• 6 years 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

MattGaiser2• 6 years 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?

MangoCoffee• 6 years ago

why did we allow so many unprofitable companies IPO?

the Amazon business model? VC/Public's money to gain market shares.

saltedonion• 6 years ago

This is like saying most people who died are old.

ddmma• 6 years ago

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

vchak1• 6 years ago

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

tgs4• 6 years ago

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

cryptozeus• 6 years 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.

ben7799• 6 years 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.

vmception2• 6 years 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).

Apocryphon14• 6 years 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.

rjtavares2• 6 years ago

I really can't understand how some people see that but don't think capitalism is broken. I really hope we can fix it, because the alternative is worse, but I'm becoming more pessimistic as time goes on...

achillesheels5• 6 years ago

Correct, it wasn't always this way. Too much "dumb" money that is eager for returns, trying to chase the "if you build it they will come" mantra. But that worked 20 years ago for a nascent web.

I think these investors are all praying the "proprietary" data that is being acquired has some tangible value in some indefinite future that can be acquired - or if they can go public, in which case they can liquidate their positions through a hand-off to some mindless robo funds. See: SVMK

jpm_sd• 6 years 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/

As the market is currently discovering, what goes up, must come down. A principle that applies to flying cars as well.

nixass• 6 years 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• 6 years 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.

achillesheels5• 6 years ago

By your reasoning Intel would have never been created. QED.

Apocryphon14• 6 years 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?

jtdev• 6 years ago

...and loads of ML/AI hype.

gregdoesit• 6 years 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• 6 years ago

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

7leafer• 6 years 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• 6 years 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.

Behind tech layoffs lay cash flow-negative companies

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