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
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.
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