Enjoy it while you can
I’ve got a great idea for a start-up. Want to hear the pitch?
It’s called the 75 Cent Dollar Store. We’re going to sell dollar bills for 75 cents — no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It’ll be huge.
You’re probably thinking: Wait, won’t your store go out of business? Nope. I’ve got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we’ll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we’ve got plenty of options.
If you’re still skeptical, I don’t blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road.
Over all, 76 percent of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to data compiled by Jay Ritter, a professor at the University of Florida’s Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81 percent of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only three had positive earnings per share in the preceding year, according to Mr. Ritter.
Silicon Valley wrote the playbook for spending money in pursuit of growth, and the tech industry remains a hotbed of fast-growing yet unprofitable companies. Uber, which is expected to go public next year, reportedly lost $4.5 billion last year as it sought to expand internationally and fought price wars with competitors including Lyft. Snap lost $3.4 billion last year, its first as a public company. Airbnb just had its first profitable year after a decade of investor-backed losses. (...)
The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development, Mr. Ritter said. But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential “winner-take-all” market. Today’s public tech companies generally earn more revenue than their dot-com era counterparts, and could find it easier to flip the profit switch once they’ve reached a sufficient size.
“The fact that Google and Facebook were able to generate such enormous profits and growth does give hope to some companies,” Mr. Ritter said. If start-ups can figure out to convert a large user base into paying customers, he added, “it can be enormously profitable.”
Perhaps the buzziest money-loser of the year is MoviePass, which has upended the film industry by essentially giving away millions of free movie tickets. Until recently, MoviePass members could pay $9.95 for a monthly subscription that allowed them to watch up to one movie per day in theaters, with MoviePass paying the face value of the ticket on a preloaded debit card. Since the average cost of a movie ticket in the United States is around $9, going to just two movies per month resulted in a good deal for the customer, and a loss for the company. (MoviePass has started placing more restrictions on which films its customers can see, perhaps in an effort to trim costs.)
MoviePass’s business model — which Slate described as “creatively lighting money aflame in order to subsidize the movie-going habits of some 3 million customers” — has turbocharged its growth. And the company maintains that it can make money by striking revenue-sharing deals with theater chains, or charging movie studios to advertise inside its app.
But investors aren’t convinced. Shares of MoviePass’s parent company, Helios and Matheson Analytics, have fallen more than 90 percent since October, and the company recently reported that it has been burning through its cash reserves, spending an average of $21.7 million per month with just $15.5 million left in the bank at the end of April. On Tuesday, Helios reported that MoviePass lost $98.3 million in the first quarter, despite adding more than a million net subscribers. (...)
Ultimately, companies like MoviePass illustrate the perilous tightrope many growing businesses must walk. Spend too little on acquiring new customers and drawing business away from your competitors, and you won’t make it off the ground. Give too many freebies away, and you risk running out of cash before you’re big enough to cash in.
by Kevin Roose, NY Times | Read more:
I’ve got a great idea for a start-up. Want to hear the pitch?
It’s called the 75 Cent Dollar Store. We’re going to sell dollar bills for 75 cents — no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It’ll be huge.
You’re probably thinking: Wait, won’t your store go out of business? Nope. I’ve got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we’ll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we’ve got plenty of options.
If you’re still skeptical, I don’t blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road.Over all, 76 percent of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to data compiled by Jay Ritter, a professor at the University of Florida’s Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81 percent of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only three had positive earnings per share in the preceding year, according to Mr. Ritter.
Silicon Valley wrote the playbook for spending money in pursuit of growth, and the tech industry remains a hotbed of fast-growing yet unprofitable companies. Uber, which is expected to go public next year, reportedly lost $4.5 billion last year as it sought to expand internationally and fought price wars with competitors including Lyft. Snap lost $3.4 billion last year, its first as a public company. Airbnb just had its first profitable year after a decade of investor-backed losses. (...)
The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development, Mr. Ritter said. But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential “winner-take-all” market. Today’s public tech companies generally earn more revenue than their dot-com era counterparts, and could find it easier to flip the profit switch once they’ve reached a sufficient size.
“The fact that Google and Facebook were able to generate such enormous profits and growth does give hope to some companies,” Mr. Ritter said. If start-ups can figure out to convert a large user base into paying customers, he added, “it can be enormously profitable.”
Perhaps the buzziest money-loser of the year is MoviePass, which has upended the film industry by essentially giving away millions of free movie tickets. Until recently, MoviePass members could pay $9.95 for a monthly subscription that allowed them to watch up to one movie per day in theaters, with MoviePass paying the face value of the ticket on a preloaded debit card. Since the average cost of a movie ticket in the United States is around $9, going to just two movies per month resulted in a good deal for the customer, and a loss for the company. (MoviePass has started placing more restrictions on which films its customers can see, perhaps in an effort to trim costs.)
MoviePass’s business model — which Slate described as “creatively lighting money aflame in order to subsidize the movie-going habits of some 3 million customers” — has turbocharged its growth. And the company maintains that it can make money by striking revenue-sharing deals with theater chains, or charging movie studios to advertise inside its app.
But investors aren’t convinced. Shares of MoviePass’s parent company, Helios and Matheson Analytics, have fallen more than 90 percent since October, and the company recently reported that it has been burning through its cash reserves, spending an average of $21.7 million per month with just $15.5 million left in the bank at the end of April. On Tuesday, Helios reported that MoviePass lost $98.3 million in the first quarter, despite adding more than a million net subscribers. (...)
Ultimately, companies like MoviePass illustrate the perilous tightrope many growing businesses must walk. Spend too little on acquiring new customers and drawing business away from your competitors, and you won’t make it off the ground. Give too many freebies away, and you risk running out of cash before you’re big enough to cash in.
by Kevin Roose, NY Times | Read more:
Image: Glenn Harvey
