NO MORE FUNDING: Traditionally, the number
one goal for any company is to maximize profit for shareholders. But, for quite some time now,
we’ve seen a new breed of companies who don’t care at all about profit. In fact, profit isn’t
even part of the equation. It’s all about growth. If these companies are able to show large enough
user growth figures, nothing else matters. And I’m not just talking about random background startups.
Many of the most recognizable startups in the world have never made a single penny. Zillow,
for example, loses around $200 million per year. Snapchat loses $1.3 billion per year. Lyft also
loses $1.3 billion per year. But no one is as bad as Uber who till just 6 months ago was losing $9
billion per year. One of the main reasons for this is the insane growth is everything perspective
of modern investors. They’re willing to stomach insane losses for not just a year or two but 5,
10, 15 years. But, it seems that things are changing and they’re changing fast. In fact,
funding has fallen off a cliff across the board. In Q1 of 2023, global funding had fallen to $76
billion which is a 53% decline from the $162 billion that it was the year prior. And this
was despite two massive deals with OpenAI and Stripe who raised $10 billion and $6.5 billion
respectively. Without those deals, funding would’ve been down to $60 billion or over a
$100 billion less than 2022. You would think that think that the startups that are affected the most
are the early stage ones that are just getting started as the risk with these companies are the
highest. But, it turns out that the startups that are being affected the most are actually the late
stage startups with a chronic money burning problem. As such, most of these companies
are scrambling to get their act together. Uber, for example has been magically able reduce their
losses from $9 billion per year to just $300 million per year. But, not all startups are
having such an easy time as they’re realizing that becoming profitable isn’t as easy as they
originally thought. So, join me as we take a look back at how this new breed of companies even came
to be and what this funding cut means for some of the most well known startups in the world.
GROWTH INVESTING: Seeing all of these massive companies
constantly burn money, it’s easy to think that that’s just how tech works, but that’s completely
false. Companies like Apple, Google, and Microsoft pull in tens of billions if not hundreds of
billions in profits every single year. If you’d like to flip the script on these companies and
have them pay you for a change, then you may wanna consider investing in bonds through our upcoming
bond investing platform Silo. With Silo, you can lend money to the largest corporations in the
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efforts, research and development, and growth. And in return for helping them grow, they’ll
pay you back your money with interest of currently 4-7%. If you’d like to do that with no markups and
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checking out Silo in the description below. But anyway, if you wanna build a massive tech company,
it seems that you have to be willing to burn money for atleast the first 5 or 10 years but
this is completely false. In fact, this was never a thing with traditional tech companies. Intel,
for example, became profitable just 3 years after being founded. Apple became profitable just 2
years after being founded. And even Google, a more modern tech company only took 3 years to
reach profitability. Also, it wasn’t like these companies were burning money on user acquisition
or marketing or insane amounts of overhead. Rather, they were just investing in getting
their first product to market, and as soon as they were able to release their first product, they
were able to become profitable. But all of this would change with a company called Amazon. Unlike
the tech entrepreneurs that came before him, Jeff had a different perspective. Instead of trying to
sell a superior product for a premium price which makes it easy to achieve profitability,
Jeff wanted to center Amazon around killing margins. His catch phrase was literally “Your
margin is my opportunity.” But, while this sounds nice on paper, it’s not as clean in application as
this usually just turns into a race to the bottom. And that’s exactly what happened. Most of us only
remember Amazon and eBay but that’s not to say that they were the only players in the e commerce
market. They were simply the only ones who survived. The reality was that dozens of players
entered the e commerce market strapped with dotcom funding. This included companies like boo.com,
Webvan, eToys, and pets.com. To their credit, many of these companies actually become quite large.
Webvan, for example, was a grocery delivery business that’s eerily similar to Instacart.
Thanks to dotcom funding, they were able to expand to 26 cities, hire 3,500 employees, and even have
a billion dollar IPO. But, scale wasn’t the only thing that these companies had in common. All
of them were also burning ridiculous amounts of money. Boo.com was burning through $135 million
within 18 months. Pets.com was burning through $300 million within 2 years. And as for Webvan,
they were actually pulling in a good amount of revenue: $178 million, but their expenses
were wait for it $525 million. This meant that for every dollar they pulled in, they spent 3 dollars.
And it wasn’t on building out the product or expansion or anything like that. Almost,
all of the expenses of all of these companies was just marketing. In fact, Boo.com spent $25
million on advertising before they even opened. The cost of the product itself was miniscule for
these companies compared to their other expenses. One of Boo.com’s main technologies for example
only cost $6 million to develop but $135 million to market. With these sort of economies, it’s no
wonder why things eventually came crumbling down with the dotcom bust when all of these companies
went under. After this disaster though, it seemed like investors had finally learned their lesson.
Economics don’t work differently just because it’s a shiny tech company. But somehow, 20 years later,
we would end up in the exact same position once again. So, what in the world happened?
EXCEPTIONS MAKE A CASE: Likely the number one culprit that normalized
money losing tech endeavors once again is big tech starting with of course Amazon. After the
dotcom bubble burst, Amazon was feeling the pain just like every other dotcom company but had a
rather unique solution. Instead of just trying to focus on profitability with their retail business,
they decided to just open a whole new business called AWS to pay for the unprofitabilty of their
retail business. So, essentially, they became their own funders and I think we all know how this
played out. Amazon would end up growing 500x and become synonymous with online retail despite the
fact that they were never able to consistently turn a profit to this day. Seeing this,
many investors many investors started feeling a bit of FOMO. Maybe, they were right about the
dotcom companies all along. Maybe all they needed was more time and funding to succeed. After all,
it took 20-30 years for Amazon to reach their stride. If Amazon was the only instance, things
wouldn’t have gotten so out of hand but they weren’t which brings us into our next culprit:
Google. Ever since Google became profitable, they’ve built a career out of building no
margin/negative margin products. This includes Gmail, YouTube, Maps, Android, Google Cloud,
the Pixel and basically anything else that comes out of Google. Their strategy is to simply reach
as many people as possible with these products and monetize all of them using Google search and
Google ads. Once again, this ended up playing out extraordinarily well as Google would end
up growing 50X as they grew multiple ubiquitous platforms with billions of users each. But all of
this was nothing in comparison to what Zuckerberg would do. Amazon and Google were simply subsidzing
inhouse products with other in house products. Zuckerberg, however, would go out of his way
to buy money pits just for the users. This of course included Instagram for $1 billion and
WhatsApp for $19 billion. While Facebook got a lot of flack for these acquisitions back in the day,
these ended up becoming cash cows. Instagram is now valued at over a $100 billion and WhatsApp
is likely worth even more. These big tech companies were clearly making a strong case
for pursuing money burning endeavors but the factor that pushed investors over the edge was
the exponential startups of the late 2000s. This of course starts with Uber. Uber was founded in
March of 2009 and is still not profitable but it’s worth $90 billion. Lyft was founded in
2012 and is still not profitable but it’s worth $4 billion even after falling 90%. Doordash was
founded in 2013 and is still not profitable but it’s worth $30 billion even after falling
50%. Stripe was founded in 2010, and is only now becoming profitable but it’s already worth a $100
billion. I can go on forever. Robinhood, Coinbase, GrubHub, AirBnB, MongoDB, Zoom, Affirm, Carvana,
Twilio, SnapChat, Octa, Rivian, Palantir, Peloton. Basically any startup that you recognize and was
founded within the past 15 years likely falls within the category as dozens if not hundreds
of money burning startups were founded in the late 2000s and early 2010s and went on to be phenoemnal
investments despite never turning a profit. With each and every passing year, investors and VCs
were becoming just a little bit more tolerant of losses leading us straight into the pandemic.
DOTCOM BUBBLE 2.0: When the pandemic hit,
investor FOMO went into overdrive. Tech companies seemed like a gold mine as everyone was sitting
at home spending all of their time on phones, computers, or TVs. All of the big tech companies
started hiring like crazy as they thought this was it, this was the new frontier,
the new era of tech domination. Meta nearly doubled their employee count from 44,000 to
nearly 90,000. Google also nearly doubled their employee count from just over a 100,000 to nearly
200,000. Big tech stocks and pandemic stocks woud go insane and VCs couldn’t help but feel that
they had missed. And that’s when they decided, they may have missed out on this last run up,
but they sure as hell weren’t gonna miss out on the next run up. And with that,
they started pummeling money into basically any startup that come through the door with insane
valuations out of the date. And I think this graph really showcases the essence of what was going on.
Back in 2012, there were a healthy 5-10 unicorns every quarter. This increased to 20 to 40 in the
mid 2010s before rising to 50 to 100 in the late 2010s. And then finally, it would explode to 220
unicorns per quarter in 2021. That’s the same as over 2 unicorns every single day and keep
in mind the stock market is only open 252 days per year. So really, 3 companies were reaching
unicorn status on any given day in 2021. And make no mistake, this has nothing to do with rising
innovation or more opportunity. The only thing this has to do with is VC funding and investor
greed. I mean, just look at this graph. Funding literally grew 10X between 2011 and 2021. But, the
good news is that this madness is finally coming to an end which just leaves the question: what
happens next? Well, it’s really simple honestly. A large number of money burning startups will simply
go bankrupt. And thi shas already started to playout. Within just the first half of 2023,
338 US companies filed for bankruptcy. 54 of these companies had VC or private equity backing meaning
that if this trend keeps up, over 100 startups will go bankrupt by the end of this year alone.
And as interest rates continue to stay high, the economic pain for these startups will simply get
worse and worse. Most of the startups that manage to fend off bankruptcy for another year or two
will likely be bought out by larger companies for rock bottom valuations. If things play out
similar to the dotcom crash, only half of them will make it past this initial purge. And most of
the companies that make it through will be a shell of their former selves with no way back to their
all time highs. If we look back at their stock graph in 20 years, it’ll probably look something
like this. Of course, a select few companies will defy the odds and not only return to their former
highs but make new highs. These companies will become the Googles, Facebooks, and Amazons of
the next generation. But for everyone else though, this is pretty much the end of the road as the VC
money printer has finally stopped. Google is definitely feeling a lot of this pain but it
seems like they’ve got a pretty good strategy to pivot. Check out this video to learn more.