đ° How Unprofitable Companies Stay In Business
How to Survive Without Profits: Lessons from Unprofitable Companies
You may have heard the saying âcash is kingâ in the business world. But what if you donât have enough cash to cover your expenses? What if your company is losing money every year and still struggling to grow? Does that mean you should give up and declare bankruptcy?
Not necessarily. There are many examples of successful companies that have managed to stay in business despite being unprofitable for a long time. Some are even household names, such as Amazon, Tesla, Spotify, and Uber. How do they do it? And what can you learn from them?
In this edition of the Episode of the Week, I will share with you some insights from the YouTube channel CNBCâs episode How Unprofitable Companies Stay In Business, which explains how some firms sustain their businesses by taking on more debt that they likely could never repay. Economists call them zombie companies. When compared to their profitable peers, zombie companies tend to invest less, grow slower, and hire fewer workers. However, they also have some advantages that allow them to survive and sometimes thrive in the market.
Here are some of the key takeaways from the episode:
Investors have an appetite for unprofitable companies. One of the main reasons why unprofitable companies can stay in business is because they can attract investors who are willing to bet on their future potential. Investors are not put off by unprofitable companies. The proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000. Last year, 76 percent of the companies that were listed were unprofitable in the year before their initial public offerings. Investors are looking for growth opportunities, especially in the tech sector, where many shareholders value growth and tend to be more comfortable even if firms arenât making huge margins. For example, Amazon is the worldâs second most valuable company by market cap, despite being light on profits for most of its history. Investors love Amazonâs stocks, but the companyâs total profit for the past two decades pales in comparison to other highly valued companies in the U.S.
Unprofitable companies have a new business model. Another reason why unprofitable companies can stay in business is because they have a different approach to running their businesses than traditional profit-oriented firms. Unprofitable companies often focus on building a loyal customer base, expanding their market share, and disrupting existing industries with innovative products or services. They also reinvest most of their revenues back into their businesses, rather than paying dividends or buying back shares. This way, they can achieve economies of scale, network effects, and competitive advantages that will eventually lead to profitability in the long run. For example, Tesla has been losing money for years, but it has also been investing heavily in research and development, production capacity, and customer service. Teslaâs goal is to become the leader in electric vehicles and renewable energy, which are expected to be huge markets in the future.
Unprofitable companies can take advantage of government programs. A third reason why unprofitable companies can stay in business is because they can benefit from various government programs that are designed to support small businesses and stimulate the economy. For instance, during the coronavirus pandemic, many unprofitable companies were able to apply for loans through the Paycheck Protection Program (PPP), which was instituted in the Coronavirus Aid, Relief and Economic Security (CARES) Act. The PPP provided forgivable loans to businesses with fewer than 500 employees affected by the crisis. The loans could be used to cover payroll costs, rent, utilities, and other expenses. The PPP helped many unprofitable companies stay afloat and retain their employees during the lockdowns.
As you can see, being unprofitable does not necessarily mean being unsuccessful. There are many ways that unprofitable companies can stay in business and even outperform their profitable counterparts. However, there are also some risks and challenges that unprofitable companies face.
Here are some of the pitfalls that you should avoid as an unprofitable entrepreneur:
Donât rely too much on debt. While debt can be a useful tool to finance your growth and innovation, it can also be a double-edged sword that can harm your financial health. Debt increases your interest expenses, reduces your cash flow, and limits your flexibility. If you borrow too much money that you cannot repay or refinance, you may end up defaulting on your obligations and losing your assets. Moreover, if the market conditions change or the investor sentiment shifts, you may find it harder to raise more capital or sell your shares at a favorable price. Therefore, you should be careful about how much debt you take on and how you use it. You should also have a clear plan to achieve profitability and positive cash flow in the foreseeable future.
Donât ignore your competitors. While unprofitable companies may have a first-mover advantage or a unique value proposition, they may also face fierce competition from other players in the market. Some of your competitors may be more profitable, more efficient, or more innovative than you. They may also have more resources, more customers, or more patents than you. If you donât keep up with your competitors, you may lose your market share, your brand recognition, or your competitive edge. Therefore, you should constantly monitor your competitors and their strategies. You should also constantly improve your products or services, lower your costs, and increase your customer satisfaction.
Donât neglect your stakeholders. While unprofitable companies may have a loyal fan base or a visionary leader, they may also alienate some of their stakeholders if they donât deliver on their promises or expectations. Some of your stakeholders may be your employees, your customers, your suppliers, your creditors, or your regulators. If you donât treat them well, you may face lawsuits, boycotts, strikes, or fines. Moreover, if you donât communicate with them effectively, you may create confusion, mistrust, or resentment. Therefore, you should always respect and engage with your stakeholders. It would help if you also were transparent and honest about your performance, your goals, and your challenges.
In conclusion, while unprofitability may not spell immediate doom for a company, itâs not a sustainable state of affairs. As an entrepreneur, you strive for profitability while being mindful of the risks associated with debt and over-reliance on valuations.
If you have any questions or feedback, please feel free to reply to this email. Thank you for reading!