How do these tech companies continue operating at a loss every year? Net loss for these companies reach hundreds of millions yet they are still operating till this day
In: Economics
They get money from investors. It is a growing company that claims the losses are part of investments and will lead to larger market share in the future. It’s a tactic that seems to work (Amazon did it for years).
Through 2 ways –
1. These companies have massive investment capital to keep them afloat, basically other companies are dumping billions of dollars into these companies in return for a share future profits at a later date. This obviously doesn’t work if UBER goes out of business but the essential plan is if cab rides *cost* $10 each, current companies sell the rides for $11 and make $1 in profit. Uber will offer the same cab ride for $5, they are losing money but everyone switches over to Uber because it’s cheaper. Then once all the current companies go out of business because they don’t have all this investor money to hold over, Uber will turn around and charge $30 for a cab ride. Now Uber is making a massive profit and passing it along to the investors and no one can compete because Uber put all other companies out of business.
2. They have alternative revenue streams, regardless of their “real product” tech companies are making profit from your behavior. Let’s say Tech Company X tracks cab rides as a whole, they aren’t linking it directly to *you* but they know that there is a 30% increase in cab rides to Neighborhood X as a whole. They can start buying up real estate in Neighborhood X because they realize it’s about to become super popular. Or they can say that people age group X are all flocking to Neighborhood Y and sell that data to other companies who might focus on Age Group X and they’ll putting up their widget stores in Neighborhood Y to capture this emerging market.
Remember, from their business POV, Uber isn’t a cab company, Grab isn’t a food delivery company. They are software developers and the people who use their software are cab drivers, or food deliverers. They keep that distinction because they are profiting from your behavior, not the product or widget you think they are selling you.
Their plan is to become the largest, by doing that they need to undercut the others guys to push them out of the market.
When Uber for example undercut and or buy out their Competition they will be able to charge what they want making more money.
Allison and Microsoft are perfect examples of this.
Edit: no idea who Alison is, was supposed to say Amazon
Rapidly growing companies need to spend lots of money to build up to a scale that can be profitable. Investors have poured billions into Uber, for example, giving it the money it needs to built up. The money is spent on driver bonuses to attract new drivers to the platform, discounts to riders to compel people to install the app and try the service out, incorporate it into their daily lives. And for Uber specfically, there was a TON spent lobbying and litigating to be allowed to operate. Traditionally, taxi services were heavily regulated and driver numbers limited and Uber broke those rules pretty much everywhere. It has had to spend millions getting laws changed and fighting lawsuits. But once those are settled and it can operate legally in the major markets it wants to, when it has a large enough network of drivers and passengers in those markets, it can drastically pull back on the spending and see profitable revenue.
Similarly, Amazon “lost money” for 20 years, but spending 2 decades building out a logistic system and dozens of data centers that now set them apart from the competition mean they can reap the profit rewards from here on out.
Adding on to what others have said. Running at a loss and actually losing money are two different things. A company can be cash-flow positive, meaning their revenues exceed their expenses, but still lose money. Consider a high-tech startup. Doesn’t have a lot of money, so they pay their employees, at least in part, with stock options. A stock option is simply a promise that at some future date you can buy the stock for a price.
For example, suppose I work for a startup and get a zillion options at $1 each. Later, the company does well, goes public, and the stock is worth $50. I decide to exercise options on 1000 shares (i.e. buy those shares for $1 each) and immediately sell the stock for $50. I have a pre-tax profit of $49,000. By generally accepted accounting rules, that $49,000 profit for me is a $49,000 loss for the company. However, what really happened was I gave the company $1,000. So for that transaction the accountants say the company lost $49,000, but if you just look at the cash flow, the company took in $1000.
There are lots of other reasons why a company can lose money while being cash-flow positive (see “deferred revenue” and “depreciation” as examples).
I don’t know about Uber or Grab, but there are plenty of tech companies losing money while remaining either cash-flow neutral or nearly so.
Companies get their money (mostly/partially) from investors, people who are willing to give the company money. Generally investors are essentially betting that the investment will pay off at some point in the future. For example let’s say my neighbor wants to open a restaurant but needs more money, so he comes to me and says “hey, if you give me $10,000 to open my restaurant I will give you 50% of the profits from the restaurant.” I give him the $10,000 because I’m betting that, over time, 50% of the restaurant’s profits will be more than $10,000. I’m not necessarily betting that I’ll make my money back right away, just that I will do so eventually. So you are frequently investing not based on how a business is doing *right now* but how it will do in the future.
Some of these tech companies have really high potential, so people are willing to accept losses because if the company figures out how to turn a profit the investors can make lots of money. As an example if you purchased $100 of Amazon stock on the day it went public in 1997 that stock would now be worth around $120,000. So people are willing to invest in, to keep giving money to, companies like Uber that lose money each year because they are betting that the company will eventually make a lot of money.
You run on investments from others until you make enough money to pay them back. The idea is that as an investor you believe that the company will eventually make a lot of money, giving you a good return on investment.
Amazon was set up like this, it grew rapidly costing way more money than Amazon was making. Investors would pay Amazon so that it could keep growing, believing eventually it will turn over a lot of profit.
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