how owners/investors of non profitable companies make money?

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Companies like Uber for example have claimed to have never made a profit, and have been in the hole this entire time they’ve been in business, burning money each year (this is just from what I’ve heard, I’m not sure if this is entirely true or not). Yet the owners and investors of the company have made a lot of money as far as I know. A few shark tank guests were early investors in Uber and they have made a good chunk of money from it but how does that happen if the company has never made a profit?

In: Economics

4 Answers

Anonymous 0 Comments

There’s a couple ways.

1. They convince more people that the company will *become* profitable. Those people then invest in the company so current investors could maybe sell their shares in the company for more than they paid for those shares. If that sounds like a scam… well as long as you aren’t outright lying about the company and it’s finances, products and how its *supposed* to make money that’s perfectly legal.
2. They can get “hired” by the company and paid money as part of the contract. That is effectively a wage. Profits are revenue (the actually money coming in) minus the operating costs. One of those costs is…wages. So a company could be unprofitable in part because the big wigs running it are getting paid a lot. This also sounds a bit scummy, but *ideally* they are actually doing work.

Anonymous 0 Comments

Companies can be not profitable but growing and thriving, choosing to invest more in to the business than it earns in the name of growth. Eventually it hits a point where they dial back the investment and the profits are that much huger. Amazon, for example, didn’t make a profit for 20 years because it spent billions into building out its vast networks of warehouses, building out a logistics system, building massive data centers that run AWS, etc. Now, the company is gigantic and massively profitable because investing more than it made for two decades fueled that growth. Same thing for a company like Uber now… spend money to lobby and litigate to be allowed to break up taxis’ monopolies; spend money to attract enough drivers, subsidize enough rides for customers that use becomes second nature, and eventually they have a legal operation with a critical mass to generate profits.

Such companies could probably be profitable sooner, but at a smaller scale… so is it better to become profitable in 5 years and make $1b in profits, or take 10 years and make $10B in profits? That’s the gamble often being taken.

Investors see that potential, that path to scaling and being way more profitable and are willing to invest now to be a part of that future. That allows founders, early investors to pull some investment off the table and make some of their stake liquid, and it allows more capital to come in and sustain the growth further.

Anonymous 0 Comments

A company’s stock value is not based on the profit it made, but the profit it’s *going to* make. At some undetermined point in the future, the company will pay out dividends or maybe it will be purchased and you can cash out your stocks then.

Investors use a formula (time value of money) to determine if a company is going to pay out $X in ten years, what that’s worth to them today. They figure out what the company is going to pay out in ten years based on metrics, formulas and probably more wild guesses than they would like to admit.

So they look at a company that isn’t profitable but they believe is going to be profitable at some point in the future. Like Uber: they’re burning off a lot of money today, but they’re not doing it just for funsies. They’re making moves to ensure that they’ll be an uber-profitable (see what I did there?) company in the decades to come. Using their fancy math they figure out what they think the company will be worth in the future (or in some cases what they think other people will think) and calculate what one share of the company should be worth today. Then they look at the current stock price: if it’s worth more than its current value, they’ll buy, if it’s worth less, they sell.

The sum total of all the investors going through this exercise all the time is the market, and this activity is what drives the price up or down.

Anonymous 0 Comments

Just look at bitcoin. Billions of dollars in ‘value’ for an imaginary (even by fiat standards) currency, nothing was created, no value provided and yet so long as someone is willing to buy it for a higher price then someone is making money. Non-profitable companies are no different, so long as someone is willing to buy/sell them then there will be someone making money off of them.

That’s the “how” you asked, perhaps the better question would be ‘why.’ In the case of most publicly traded companies the answer is simply because *someone* thinks they can sell it for higher in the future. They don’t care about the business, they may not even believe in it at all (ie sin stocks), it’s pure trading. Others buy for the long hold, they think Uber is a good concept and might become profitable in the future. If they wait until it’s a proven concept, paying out dividends and all that fancy jazz then there won’t be nearly as much profit to be had. Some bigger fish (corporate raiders) buy nonprofitable companies if they feel it’s at less than scrap value with the intention of parting them out.

Tldr; as long as someone is willing to buy something then it has value.