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How do companies that lose money survive? Uber, Twitter, AirBnb..all these companies   still don’t turn a profit yet are  worth billions of dollars.   In this video about unprofitable companies, we  explore how this is even possible, the secrets   of these companies' success, how you and I might  be getting ripped off and why losing money is   actually sometimes a good thing. First, let’s distinguish   between revenue and profit. Revenue is any money that comes into the   business, from selling a product or providing  a service. If you subtract your expenses,   such as advertising or paying employees,  what you're left with is profit.   Profit is revenue minus all costs associated with  selling the product or providing the service,   such as advertising or paying employees. Some companies like Airbnb, make billions in   revenue per year, but not do they not make profit  they actually lose money. They do this by using   money provided through venture capital. Running an unprofitable business relying on   venture capital is kind of like a kid opening  a lemonade stand. The ingredients are all   funded by the parents, and the kids sell the  lemonade at a rate where it’s fun and easy to   get customers, but never profitable. At first your parents are fine with losing   a little money to get the lemonade stand running  and aren’t really expecting you to make a return   on investment. Imagine if your parents let you  run the lemonade stand instead of just one day,   but for a full year. Then your parents might say,  well the ingredients are expensive, you should   charge more, but when you try, you find nobody  wants to pay for an expensive cup of lemonade.   If your parents become unwilling to  continue funding your lemonade stand,   you go ask your rich uncle to buy out your  parents and give you money to run another   year. The goal is to eventually figure out  a way to make the lemonade stand profitable,   but that’s a problem for the future. So why are these big companies worth so much,   if they don’t make money? It’s all about how  much someone else is willing to pay for ownership   of the company. Let’s use Uber as an example.  Private investors, known as venture capitalists,   took a big risk on uber succeeding by providing  the first rounds of funding in 2011. They raised   11 million dollars, valuing Uber’s total worth as  $47 million. 8 years later, in 2019, the company   IPO’d, meaning anyone could now buy ownership in  Uber. It began trading at $45 dollars a share…or   more accurately…75 billion. At this time many  of the venture capitalists sold their positions   to you and I for billions of dollars in investment  profit. Investors that bought shares of Uber at   the IPO are now clinging on to the hopes that  they can find someone else willing to buy their   shares for more. There’s only two reasons  someone would buy those shares off of them,   the buyer thinks they can find another person who  will buy them for more, or that Uber will figure   out a way to become profitable. Unfortunately,  since the IPO, the stock has been trading at a   lower value. Either way, regardless if the  stock eventually trades higher, the venture   capitalists and Uber executives already got their  money, and now it’s someone else’s problem.   The acceptance of unprofitable companies at  astronomical valuations first became mainstream   in the .com era of the early 2000s. Investors saw  the potential of the internet and were willing to   pay a premium for companies with the assumption  that they would eventually become a success. Sure,   some investors were either lucky or more strategic  buying shares of companies like Amazon and eBay   but the majority of these companies' path  to profitability was based on an assumption   that the internet would eventually evolve enough  for their business to make money. Some of these   companies like pets.com had business plans that  with today’s e-commerce economy works really well,   proven now successful by companies such as  Chewy. So why did Pets.com, a company once   valued at $300 million fail to survive? Most failed to survive due to a lack of time.   While many of these .com companies had correctly  assumed that the internet would connect the   entire world and be a major component of the  economy, thus making their business model work,   most failed to correctly assume how long the time  would take to get there. These companies relied   on their investors to survive. Once the .com boom  crashed in X year, investors couldn’t find someone   else to buy their shares off of them causing their  valuations to plummet, leaving the companies with   little investor money to continue operating. With tech giants such as Uber, these lessons   aren’t learned. While the .com era all focused  on mainly a single catalyst to profitability (the   internet), these new tech companies all have  grand assumptions of how they will one day be   profitable. Despite Uber doing 6.3 billion trips  in 2021, they lose money every year. Usually the   first excuse of a company losing money is that  they are in a growth phase and need to run at   a loss to capture market share. Once they have,  they will raise their prices and promise investors   to bring in hefty profits. Well they’ve captured  that market share and raised costs, but they are   still not profitable. They’ve concluded that under  their current business model they might never be   profitable. So what’s their solution? They assume  in the future driverless cars will be the norm,   and Uber won’t have to employ any drivers, thus  reducing their costs significantly. That very   well might happen, but their assumption of  when that will, could destroy them.   Many of these new business models only work at  scale once they hit a critical mass of users. They   run at a loss to gain customers, and then once  they hit their target amount of users they jack   up the prices to become profitable. On paper it  makes a lot of sense, but in practice it’s turned   out to be a lot harder than it looks. In the short  term, consumers do benefit from cheaper prices,   but long term they could lose, as once  competing companies fail to price match   and eventually close their doors, we are left with  a monopoly free to choose their own prices.   Amazon has one of the most evil examples  of how running at a loss can catapult your   growth to the extreme. By undercutting  market prices for all items, customers   would all go to Amazon instead of regular  stores to get the cheapest price. Famously,   they destroyed diapers.com by selling diapers  so cheap that nobody else online could compete,   forcing online stores to  close shop. Once they did,   they can raise the prices to whatever they want,  now they have no competition. Thanks Bezos.   Besides evil intentions of reverse price  gouging, there are other legitimate reasons   to intentionally not go after profits,  especially when trying to expand a company,   as it often reduces growth. In fact, some  companies such as Facebook in their early days,   even avoided making revenue in fear that  it would make the website less cool.   And while ads certainly are not cool, in  the new wave of silicon valley startups,   some also avoid revenue so that when they  pitch their company to potential investors,   they can let their imagination run free to how  much the company might be worth. Once you start   making profit, you can get a pretty good gauge of  the value of the company. If you want to switch   back to a growth phase and be unprofitable,  that's a really tough sell for investors.   These big companies don’t play fair, if it was you  or me losing money every year, we’d be out on the   street begging for money. When these companies do  it, their begging is called capital raising and as   long as they can find investors willing to believe  in them, they can run forever. Maybe it’s time to   start fighting back by helping support the little  guys, you know, like subscribing to this channel.