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.
> 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.
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.
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.
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.
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.
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?
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.
"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.
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?
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.
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.
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.
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.
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.
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.
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.
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?
>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.
“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.
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.
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.
> 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.
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.
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
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.
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.
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.
[+] [-] ksj2114|5 years ago|reply
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|5 years ago|reply
Could you go into detail about why there's a lack of understanding of the business model, or how public markets work?
[+] [-] hn_throwaway_99|5 years ago|reply
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...
[+] [-] tarsinge|5 years ago|reply
[+] [-] Apocryphon|5 years ago|reply
[+] [-] pwdisswordfish2|5 years ago|reply
[+] [-] nostrademons|5 years ago|reply
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|5 years ago|reply
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.
[+] [-] hogFeast|5 years ago|reply
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?
[+] [-] jaggederest|5 years ago|reply
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.
[+] [-] draw_down|5 years ago|reply
[deleted]
[+] [-] jpm_sd|5 years ago|reply
"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.
[+] [-] mtnGoat|5 years ago|reply
[+] [-] Nextgrid|5 years ago|reply
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.
[+] [-] momokoko|5 years ago|reply
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.
[+] [-] eezurr|5 years ago|reply
[+] [-] cosmodisk|5 years ago|reply
[+] [-] klmadfejno|5 years ago|reply
[+] [-] WrtCdEvrydy|5 years ago|reply
Bullshit Jobs is a book.
[+] [-] mshenfield|5 years ago|reply
Full disclosure, I worked at Eventbrite two years ago.
[+] [-] carlineng|5 years ago|reply
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
[+] [-] omgbobbyg|5 years ago|reply
[+] [-] naravara|5 years ago|reply
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|5 years ago|reply
[+] [-] gregdoesit|5 years ago|reply
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.
[+] [-] olefoo|5 years ago|reply
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.
[+] [-] achillesheels|5 years ago|reply
[+] [-] kjgkjhfkjf|5 years ago|reply
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.
[+] [-] 7leafer|5 years ago|reply
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.
[+] [-] nixass|5 years ago|reply
[+] [-] saltedonion|5 years ago|reply
[+] [-] MangoCoffee|5 years ago|reply
the Amazon business model? VC/Public's money to gain market shares.
[+] [-] cryptozeus|5 years ago|reply
[+] [-] polote|5 years ago|reply
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
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