Back in the day, if you wanted to keep your business running, you needed to make money. If your business broke even or made a profit, you kept it running and all was well. If you lost money and your debts became unmanageable, you would eventually close your business and move on with your life.
These days, you don’t need to make money to keep your business alive. If you can get venture capitalists and angel investors to believe in your company, they’ll continuously give you money to keep it afloat, even if it’s not profitable. While this might sound like a bad idea (which it totally is at times), this method of investment has succeeded for some of the world’s largest brands. Google, PayPal, and Facebook all started this way before they became multi-billion-dollar companies. Uber, Airbnb, and Slack still operate this way, relying on income from users and investments in their companies to keep the lights on.
Why would anyone give companies Uber and Lyft billions of dollars when they might not make it back? Thanks to Vice News, we now have an answer about tech “unicorns” and how they keep staying afloat. But is this trend of billion-dollar startup valuations sustainable for the future? Let’s take a look.
Startups are never guaranteed to be successful or profitable. In fact, the overwhelming majority of them close up shop or are acquired for far less than they were valued. Investors and venture capitalists know this when they invest in a company. They also know that they stand to make a whole lot more than their original investment. This is why they keep throwing money at companies who don’t have a leg to stand on.