5 April, 2019
 Posted by admin

Why startups go public despite heavy losses

Give me some context… Many tech companies or startups have gone public or are preparing to do so. Businesses usually go public to raise capital in hopes of expanding. Thanks to their modern products and millions of users, these startups are worth billions of $. What they lack? Profits.

The billionaire startups already in the stock market: Spotify, Lyft, Dropbox, Snapchat, Pinterest.

The ones preparing to go public: WeWork, Uber, Airbnb.

What do they have in common?

  1. Vast potential markets
  2. Their core business can avoid owning physical assets & staff. For instance:
    • The largest taxi company doesn’t have its own vehicles (Uber).
    • The largest accommodation company has no rooms of its own (Airbnb).
    • The most popular content social network does not create content (Facebook).
  3. They rely on new technologies.
  4. Have a direct relationship with the consumer (B2C).

Why do they lack profits?

Because of their strategy “Get Big Fast”. They are looking to expand at high speed through major funding rounds. This way they reduce their prices to reach more customers & obtain better competitive advantages.

Why are they worth so much?

Profit, in our current landscape, is secondary.When calculating the value of a company, the trend seems to be to focus on its number of users, not profits.

The concern is that these companies can lose customers as well as gain them. Spotify customers can get music from Apple, drivers can toggle between Lyft & Uber & so do passengers…. To counter this concern, firms are expanding their services (i.e. Uber Eats).

A bubble?

There is a fear that these startups (due to the large sums of money invested in them) will help create a stock market bubble, causing them to reach disproportionate levels of valuation with respect to the profits they generate.

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