The Highly Valued But Unprofitable Tech Unicorns

like a contradiction. You know, I mean, if a company is not making a profit, it is either breaking even so you know, things are just staying afloat, or it's losing money. So you would think that a company that was not making a profit couldn't be valuable. It would at best be neutral, and worst, it would be an ever growing cost to operate and require you know, consistent

investment to just keep going. And yet in the tech world, we have plenty of examples of companies that are not profitable and yet consistently reach crazy valuations and the billions of dollars. So we're going to talk about a few of those today, some of which I have covered in other episodes, And I thought we would start off with a company that actually has become profitable but only relatively recently, and that is Twitter for those of you who are

blissfully unaware. Twitter is a social network platform upon which people can post short messages called tweets to followers, and originally Twitter limited these two characters in length because the service was largely reliant on SMS, or Short Messaging Service a k a. Old Ashen text messaging, and because SMS has a limit to the number of characters it can support, which is a hundred sixty characters. Twitter also had a limit had a little buffer built in there so that

your user name could fit in. For example, in two thousand seventeen, Twitter would actually increase that character limit to two eight characters, so suddenly you could be twice as wordy, and for people like me, that was glorious. But here's the thing. While Twitter launched in two thousand six and eleven years later expanded that character limit throughout that entire time, it had never had a profitable year. So let's take

a quick look at the trajectory of Twitter. Back in two thousand six, a company called Odeo created Twitter as kind of a side project. Some folks at Odeo kind of got together to make it, but by the following year, it was ready to kind of stand as its own thing, particularly after having a big debut to the world at large at south By Southwest in two thousand seven. South By as you know, cool people call it. I just call it south By Southwest because I am aware I

am not cool anyway. It's a big event in Austin, Texas, and it includes multiple tracks of content programming. So there's a music track in which hundreds of bands come to Austin and they play live gigs around the city. There's a film track in which the theaters around town will exhibit films from both new and unknown artists and famous filmmakers, and whole discussions and things like that as well. And then there's the interactive track, which includes all the computers

and apps and text stuff. Folks at the event adopted Twitter pretty quickly, and that buzz really helped propel the app and gave it a reputation as being this cool, hip way to stay touch with friends, and later on it became kind of seen as this tool in order to send communications out too large numbers of people. So it was relatively cool and hip. I mean, I would

say it was part of the interactive track. That gives a cap on how cool and hip it can be, because I would argue that the tech track still wishes it was as cool as the music and film tracks are,

and I say that as a tech guy anyway. Over the past few years, Twitter would hold various rounds of funding in order to attract investors to supporting the platform, and the general thought was, let's grow this thing as much as we can and then we'll figure out how to monetize it later, which, honestly, I mean that might sound crazy, but it's probably the only route that you

can take with some of these tech companies. You know, if you're launching a new app, it's hard to convince people to jump on an untested, unproven app unless it is free to use. Most folks are not super eager to spend money on something that hasn't had a proven use case, and so finding a way to scale up and then monetize, you know, your large user base was probably the most logical approach. Twitter co founder Jack Dorsey led the company for a few years before handing the

control as CEO over to Evan Williams Now. In this phase of Twitter's growth, which would be around two thousand eight, two thousand ten, the company began exploring ways to use promoted tweets as a type of advertising, so advertisers could pay to promote a specific message a tweet so that it would show up in the timelines of folks, even if those folks weren't following that particular account. So I guess, for you know, those who don't use Twitter, I should clarify.

The way it generally works is that you make an account, assuming that you're making an account that can post publicly. You can make a private account and then you can dictate which people can actually see your tweets, but most people have a public account. Then you end up following accounts you want to follow. So maybe there's some notable people, maybe there's some brands, maybe they're friends of yours that

are on Twitter. You go and you follow those and you click a little button to follow them, and now whenever someone posting on those accounts posts a public tweet, that tweet shows up in your little Twitter feed and you can read them. So let's take an example of Sally, June and Bob. So Sally follows June, but she doesn't follow Bob. So whenever June sends out a public tweet, Sally sees it. Now, June follows Bob, so June can

see all of Bob's public tweets. If June were to start a tweet with at Bob, so sending a Twitter message to Bob, not a direct message, but at reply message, Sally would not see that tweet automatically because Sally is not following Bob. Now Twitter didn't always work like this, but over the years the service institute these rules where you have to follow both parties in order to see these at replies on the face of them. Now, if again, if Sally had followed both Bob and June, she would

see June's at at Bob. But now, let's say that Bob is running a business and he wants to promote his business. So he goes and he purchases a promoted tweet on Twitter, and he crafts a short message urging people to you know, follow a link to his business, and he pays Twitter and the message posts. Now Sally logs in, she looks at her Twitter feed, and now she sees at the top of that Twitter feed or near the top, Bob's message, even though she does not

follow Bob. Because that tweet has been promoted into her timeline. Now, as you might imagine, a lot of Twitter users were not super keen on promoted tweets, as they were often left wondering why am I seeing this? Mean? I don't even follow this account? But it was one of the ways that Twitter could make money, and it did make money. It just wasn't making enough money to offset the cost of operating the company, so it remained operating at a loss.

In two thousand thirteen, Twitter announced it was going to go public. It was going to become a publicly traded company and hold an I p O or initial public offering, so that would mean that Twitter stock would be publicly traded on stock exchanges. Now, keep in mind that this was still several years from Twitter actually having a profitable year, but this also meant the company could get a fresh injection of investment money, as folks would buy up shares

of stock. So everyone recognized that Twitter was providing a valuable service, even if the company itself hadn't found a way to leverage that to make the company profitable. Heck, back in two thousand eleven, Twitter had a valuation of eight billion dollars, but it was still seven years away from a profitable year. In it launched a targeted advertising campaign, a more focused approach to promoted tweets, and the following year, the company held a round of layoffs, eliminating around nine

percent of its workforce. In the last quarter of Twitter posted a quarterly profit of ninety one million dollars. The company had been in operations since two thousand and six, and this was the first profitable quarter for the company. So three months Twitter followed that up with a string of profitable quarters, and so two thousand eighteen became the first profitable year in the company's history. Now, to be clear, the company still had about one point five billion dollars

in debt at that point. Two thousand nineteen was another good year for Twitter, but then saw a step back. The company made larger expenditures in and despite bringing in three point seven to billion dollars in revenue, it ended the year with an operating loss of one point one four billion dollars. Still, Twitter is a company that has gone from start up to one that actually generated enough revenue to at least sometimes cover all the costs of operation and then some. But let's move on to a

slightly younger company. One that's perhaps on the cusp of having its first profitable year by the end of That company is snap Incorporated, which of course is known for its popular video social platform Snapchat. I should say video and photo platform Snapchat. Snapchat launched back in two thousand eleven, meaning this company is actually a decade old, which feels

weird to say. Uh and uh, And in my mind it's always like that thing that just came out a couple of years ago, like I have such a bad way of placing wind tech things launched to me, like anything pre Twitter was only around a few years. But anyway, three Stanford University students named Reggie Brown, Evan Spiegel, and Bobby Murphy created the app way back in the day. Now.

The story goes that Brown had come up with this idea of a platform that would allow users to post photos and videos that would have a limited shelf life, so after a given amount of time, the content would disappear, meaning you had to be actively engaged with the app

frequently or you'd end up missing out on stuff. Also, I should add that at least some of the stories of the early days of this idea, In fact, a lot of the stories I should argue really revolved around the very things that concerned critics have raised about Snapchat, that being that the fact that you're you're talking about video and photos that only stay active for a certain amount of time and then they go away forever or

apparently forever, meant that folks would take photos and videos of, say, less socially acceptable subjects. So, in other words, at least in one recounting of this idea, the primary use case for the disappearing photos was that it might encourage people to send racy pictures and videos to one another. Reading some of the accounts about this is pretty disturbing in some cases, like it. It feels gross. Not that people

shouldn't send whatever they want to whomever they want. I don't mean that if they are consenting adults and and it is welcomed. I have no issues with what people send to one another, but rather that it was a means of encouraging this behavior from people who might otherwise resist it. You start getting into some territory that I

find pretty ski vy. However, there are lots of other ways of using the app that don't involve, you know, skivie related topics and worlds are turned on such thoughts I suppose now, Honestly, if I dived into the background of the founders and some of the emails that they were sending to one another, back with them each other and with their fraternity mates, I would quickly need to

slap an explicit tag on this episode. It is not a good luck, is all I'm gonna say, or rather like some of it is like really reprehensible, but let's just move on. I've been soap boxing long enough. So this was an app that was partly built on the premise of fomo, you know, the fear of missing out, which was kind of brilliant because that kind of design encourages ongoing and increased engagement, and that is something that can be monetized if it's treated properly. It's the thing

that every platform is out for. It's why the Facebook algorithm works the way it does. It's why the YouTube algorithm works the way it does. It's designed to encourage you to stay there for as long as possible. In fact, just to backtrack a little bit, while Twitter turned a profit in two thousand and eighteen, the company also saw

a drop in active users. In fact, that drop of active users was bad enough that Twitter essentially said it wasn't going to report on the number of active users anymore and instead focus on profitability as a metric, possibly because the company was also kind of saying that it's long term profitability strategy hinged on building out a larger community of active users, and it could be pretty upsetting to investors to hear that the long term success of

a company is dependent upon something that is currently in decline. Anyway, the story of snapchat then gets really rough. Originally the idea was for a website, but the trio soon learned that a mobile app would be far more useful and popular, and the app that the you originally created with Bobby Murphy actually doing the coding was called Peka boo p I c A b o O. And then well, a decision was reached, and that decision was to exercise Reggie

Brown from the group to kick him out. So out of the three, Brown had apparently made the fewest contributions to actually building the product, though according to you know the original story, it was his actual idea to make this thing. He didn't do a whole lot of work to build it. He did do some work with filing patents, but even by his own admission, he said he didn't do quite as much as as a Spiegel or Um

or Murphy had done. So he later would sue Snapchat, which was essentially not even acknowledging his existence, and the company would ultimately reach a one fifty seven point five million dollar settlement with him, which is, you know, not that's not a bad amount of cash to take with you to say, like, yeah, I came up with the idea, and then you could go and do whatever you wanted with it. By the way, these guys were not like struggling college students either, I just want to point that

out anyway. Brown and Spiegel then founded a company on September six, two thousand eleven that would be Snapchat, which was essentially a relaunch of Peekaboo, but with some you know, changes to the look of it. The company Snap Incorporated would follow a few years later as a sort of parent company for the purposes you like organizing and handling finance and things like that. The app, at first was an iOS exclusive. It came to Android a year later

in two thousand twelve. In ten, Mark Zuckerberg reportedly made an offer that the Snapchat founders actually could refuse, but that offer was allegedly for three billion dollars and they turned it down. Wowser's In two thousand seventeen, the company held an I p O and got a massive cash injection and that created a company valuation of twenty four billion dollars and had introduced advertising, So it was generating revenue.

It was making cash, It just wasn't making enough to cover all the costs in order to turn a profit. But the app appeared to be on a rocket ship to the moon. But then a couple of things ended up causing the company some grief. One was that a spurned Mark Zuckerberg decided he would build out his own Snapchat by having the Facebook owned business of Instagram introduced features that were let's just call it directly lifted off of Snapchats feature list and so calling it something that

resembled Snapchats features as being kind Snapchats. Growth trailed off weekly it dropped by so the company was actually still growing, it was just growing at a much slower rate than it had been. Then there was the ultimate betrayal. Snapchat redesigned its user interface, and then Kylie Jenner sent out a tweet saying she didn't even use it anymore, and that was the unkindest cut of all. Honestly, I'm still goggling at a billion dollar company that is unable to

turn a profit. I really just you know, business is beyond me. Obviously, I am not any sort of business genius. Anyway, snap was going through some internal turmoil. The company lost to chief financial officers and the head of its human resources department in short succession, and Instagram was eating into Snapchat's growth, and then the double whammy of TikTok's emergence began to be an issue, and then the pandemic of

really threw wrenches into the various works. The company wasn't falling apart, not by any means, but things were pretty tense. In The Financial Times declared that Snapchat had about three years to reach a cash flow neutral status or else it would need to find a new way to raise money in order to stay in business. Its losses in

twenty eight amounted to one point three billion dollars. Now, the good news for snap is that while the company lost money in the years since, it was losing less money per year in losses amounted to around nine hut

five million dollars. That's not great, I get it. The Motley Fool reported in January of one that Snap might actually turn a profit this year, though I glanced at the company's quarterly earnings reports, which the company has to file publicly because it's a publicly traded company, and it continues to operate at a net loss this year. The company continues to add revenue streams frequently in the four of serving more ads per experience. But yeah, no profitable

year yet. When we come back, we'll talk about some other famous companies that have yet to turn a profit, at least on an annual basis. But first, well, I gotta have some profit. Let's take a quick break before we get into our next company. Let me hit you with a little fun tidbit that I came across while researching this episode. Business Insider has a two thousand nineteen article that served as some of the inspiration for this episode. Although a lot of the things in that list are

you know, have turned a profit since then. But in that article they cite a report from pitch Book, and that report says that out of one startups that had a valuation of at least one billion dollars, that is the Unicorn valuation only uh less than had become profitable. In fact, sixty were unprofitable more than half. And the article also cites a stat from Recode that says unprofitable companies that went public actually performed better than profitable companies did.

The market loves a highly valued underdog. I guess I mean I still don't understand business honestly. But let's move on. Let's talk about a company that's not actually a tech company but was treated like one. And of course I'm talking about we Work, a company that had the business model of securing office space in various markets and then

essentially sub letting that space out to customers. And those were typically smaller companies or sometimes companies that wanted to open up, say a small branch office in the city where they did not already have a presence. We Work has had a phenomenal journey, complete with drama and theatrics, and one of the strangest attempted I p O s

I have ever researched. Like Its bonkers, y'all. Now. The founder of the company was Adam Newman, and Israeli born entrepreneur who moved to the United States in two thousand one and got his start running a company called Crawlers with a K and that specialized in clothing for babies. In two thousand eight, he created a new startup called Green Desk, which was sort of a predecessor to we Work, and the idea was to create office space that folks

like freelancers could rent out. So maybe you're a freelancing writer and you need a dedicated workspace, so you could rent out like a desk in a shared coworking environment with lots of other people. So that was the idea, and it was called Green Desk because the focus was on sustainability, So the office space had recycled furniture in it, and the idea was that the electricity was going to

come from wind power, that kind of thing. Newman and his Green Desk co founder Miguel mcklvey sold off the company for a few million dollars and around twenty or an eleven because accounts very they launched a new company based around the idea of shared workspaces, and this was we Work. And again, despite the fact that you know, it was really a real estate company, the media was treating it like it was a tech startup, and it was operating a lot like a tech startup, so I

guess that was the reason for the media coverage. We Work expanded rapidly, securing office space in various cities around the world and then renting it out to their customers. And this meant we Work was signing these really expensive long term leases with lots of different office buildings, and

that made some investors nervous because this was a guaranteed expense. Right, You're doing a long term lease, that's a guaranteed cost to your company, and we Works business of renting out space to customers was not necessarily going to follow the demand that would match the supply. In other words, there might be years where fewer customers actually need that shared office space, and yet you would still be saddled with this long term lease agreement. The company grew very quickly.

The Newman developed a reputation for having a bit of a lavish and some might say hedonistic lifestyle. He also made some choices that made him a bit of a

target in the business space. Now, I would argue that targeting Newman based on those choices was sometimes unfair and disingenuous, like you know, placing weird kind of moral uh decisions based upon some of his behavior, but he was also known for spending a lot of money, both in the company and outside of it, so it was kind of hard to to not criticize his behaviors in some cases. In two thousand nineteen, things came to a head. The company was planning a public offering to go on to

the stock market. It had recently rebranded and became the Wee Company. This is something that's since been essentially abandoned, but the idea was that it would have three divisions. There was the we Work division, that's the one with the office space. There was we Grow, which was going to or which was running an elementary school in New York City. And there was we Live, which operated a

couple of apartment buildings. Now in the i p O filing, the company revealed it had lost two point nine billion dollars over the course of three years leading up to the i p O, so nearly three billion dollars lost. At one point, the company was seeking evaluation of around forty seven billion dollars. That would drop down to around ten billion as they were still attempting to hold an IPO.

By September of two thousand nineteen. We Work had delayed the I p O T October, and an executive named Wendy Silverstein, who was part of the real estate investment leadership team quit like she was an high ranking executive who walks out, and the board of directors was staring to have actual discussions about the possibility of removing Newman as the CEO of the company, seeing him as something

of a liability. Newman and his wife both had gained notoriety for unconventional behavior that is unconventional for, you know, leaders of a business valuing itself in the billions of dollars. Some things were kind of skiezy, like he trademarked the term WE for WE Work just w E and then pushed the company to purchase the trademark from him for five point nine million dollars, which kind of looks like, you know, using the company you run to fund your

personal life directly. It's not a good look. Another issue is that Newman apparently purchased properties and then would lease them back to WE Work, turning his purchases into revenue

generators with the company he was running. This was, to put it mildly, a conflict of interests and something that would not fly for a publicly traded company, so that presented a potential problem for the I p O. Now, this IBO struggle meant that we works largest investor, the mega corporation, soft Bank, would end up stepping into kind

of acquire the company. This would largely be abandoned a few months later, and part of that process involved extending a one point seven billion dollar golden parachute deal to Newman to vacate his position. So imagine being paid more than a billion and a half dollars not to work somewhere. Please pay me not to work for you. I will cut you a much better deal than one point five

billion dollars to not work for you. Under the ownership of soft Bank, we work downsized, laying off some two thousand, four hundred employees initially with more to follow. But then we get to twenty twenty and the other shoe drops super hard. So we work was already kind of in our choppy sees going into twenty right like, things were

not looking good for the company. The pandemic hits, and that necessitates many cities to initiate stay at home orders, so work from home policies go into effect, and for a company that focuses on subletting office space. It was a true catastrophe. According to the Guardian, the company saw a thirty percent decline in customers and losses of two point one billion dollars in the first quarter of one.

It's losses in the first quarter of twenty or fifty six million, so when the pandemic starts, they lose a little more than half a billion dollars in the first quarter this year, first quarter losses of two point one billion dollars. Now, the company still has plans to go public, but not through an I p O. Rather, the plan was to use a spack s p a C. That's a special purpose acquisition company, also known as a blank check company. So these are companies that don't actually do anything.

They just go public. So you get a bunch of investors to pour a whole bunch of money into a company which just kind of exists in name and on paper, and you then take this company that just kind of exists on paper to go public. There's nothing wrong about that. And then once you go public, you use this company to acquire some other private company and then through the transitive property of acquisition, that private company becomes a publicly traded company, so it is a way to sidestep the

I p O process. So if it's a company like we Work, which has lost all confidence in in the market as far as you know, holding an I p O is concerned, it would be a way to become a publicly traded company without having to go through the I p OH. It sounds shady, but it's Tod's legal. Meanwhile, the new executive team that we Work has both reined in the cash burn practices of the past as well

as cut back on operating expenses. So there is a possibility that the company will have a profitable fourth quarter

this year, assuming occupancy rates improve. But then we're also in a stage of the pandemic that has become kind of unpredictable and questionable again with the rise of the delta variant UH, it has a lot of people concerned, so we'll have to see how that plays apart, even with a profitable fourth quarter is going to end in a loss for we Work, But if the company can build momentum, it might see an operating profit by the end of two which it can put toward its considerable debt.

We've got some more companies to talk about. But before I get into those, let's take another quick break. Oh okay, y'all. For this next one, I have to give you all a disclaimer. See I work for I Heart Radio, say it at the beginning of every single episode, and one of our competitors in the digital space at least is Spotify.

Now I'm gonna talk about Spotify and the fact that it has never posted an annual profit, but I'm gonna try to do my best to remove myself from comparing it to the company I work for, because that would just be tacky and biased, and it's not apples to apples, right. I Heart Radio is a huge company that includes hundreds of radio stations across the United States terrestrial radio stations. The digital part of I Heart Radio is just one part of a much larger company, so you can't really

compare apples to apples here. Spotify is a different beast. Plus, I should acknowledge right out of the gate that while Spotify has never posted an annual profit, the company has had profitable quarters and trust me, that ain't nothing, it's something.

In other words, here's the super summarized story. Because I have actually done episodes about Spotify in the past, But in two thousand and six a pair of developers named Daniel Elk and Martin Lawrenson came up with this idea for Spotify, and the idea was to create a streaming music platform, a service that would give music companies away to reach listeners a customers, and make it so easy to listen to their music that people would stop pirating all the ding bang music. Because this was in the

wake of really a big era of digital piracy. You had the giant peer to peer networks like Napster and Kazam, which were largely used to pirate music, and you also had the rise of the torrent index site, the pirate Bay, and like the Pirate Bay, Spotify also calls Sweden Home. So you know, piracy was something that was really on the minds of people in Sweden who who were connected to either you know, the entertainment industry or the tech

world that would facilitate this sort of stuff. So the concept actually had a really good use case, a platform where music companies could generate revenue from digital music rather than see rampant piracy. Now people might end up listening to streaming music even if they weren't the type to download, you know, to pay for a download of the song, and the landscape at that point was really fragmented. In the mid two thousand's, there was Apple with the iTunes store,

which launched in two thousand one. But you purchased songs on iTunes, right, You weren't streaming from iTunes back then. You would just make a purchase, download it to your device, and you would have it. And then you would have a bunch of proprietary approaches from the various music labels that were trying to operate their own digital store fronts. But again, it just meant that it was a fractured

experience for users and not very satisfying. Spotify would launch in two thousand eight, two years after they first came up with the idea, and users could either opt for a free account that would include advertising between a certain number of songs and that would generate revenue right it was just your their classic ads supported revenue generation, or users could opt to go with an ad free experience

in return for a monthly subscription fee. Other streaming platforms would follow competing with Spotify, and some markets like the United States, would not get access to Spotify for a few years. The US finally got Spotify in July two thou eleven, so we had been hearing about it for, you know, nearly three years by the time we finally got access to it. The company mostly operated at a loss,

except for the asional profitable quarter over the years. In Music Business World reported that Spotify's losses over its decade of existence at that point amounted to about two point eight billion dollars. The company has spent a great deal of money on scaling and on purchasing content, including landing exclusive deals with some podcasters. People interested in those shows can only get them through Spotify. It's kind of the

opposite of how we do things. So for example, the video game discussion show The Besties, which by the way, it's not one of our shows. I genuinely really love the Besties, so shout out to those guys. They do a great show about video games. Anyway, for about for a year, the Bestie's was a Spotify exclusive, uh, and that agreement eventually expired, but for a year, in order to get new episodes you needed a Spotify account, and those episodes are now available on other platforms because that

exclusivity deal expired. Spotify did not renew it um, so it's a different story now. But at a time you can only get them through Spotify. There are some that are Spotify exclusives and they are pay for podcasts. You have to pay a subscription fee in order to get them. Um. I don't know the success rate of that, because in my experience, the paid for model is one that's really shaky for podcasts. But I'm curious. I'll have to look

into that. Maybe I'll do an episode about it. Anyway, Spotify spent more than half a billion dollars acquiring podcast related companies like Anchor FM, gimblet Media, Podcast and more. Elkas said that the company is still focused largely on growth and will switch to a profit based strategy at

some point, presumably when the company has grown enough. And this gets back to that thing I was saying earlier that sometimes concentrating on growth is the most important strategy, because if you try and monetize too early, not only will you not make enough money to cover costs, but you might inhibit the growth of your company. And in the company posted a profitable first quarter. Now, according to Spotify, it posted a fourteen million euro profit for quarter one

of one. That's about sixteen point six million dollars US, and recently the company posted a twelve million euro operating profit for the second quarter. That's about fourteen point to five million dollars US. So if the rest of the year follows, Spotify could actually see its first annual profit by the end of twenty one, though of course it still has a mountain of debt that it has to address. It's not like it's completely out of the woods, but it could be that's turned a very important corner by

the end of this year. And and next I think we're gonna talk about a company that posted its first annual profit in twenty twenty, but only if you put a big old asterisk next to that. And this company is Tesla. Now. The co founders of Tesla and yes Elon Musk is one of them, launched the company in two thousand three. And a startup automobile company is obviously a huge undertaking. As you might imagine, the startup costs are considerable. So think of like a company that just

you know, is not like a manufacturing company. You have all your basic expenses, right, you have to have a corporate headquarters, and you've got all the different departments that you would expect to have, like sales and marketing, and

so you have operating costs associated with them. But with Tesla, you also have an auto manufacturing side of the business that's enormously expensive to build out, and so the company was making huge investments in itself year after year, which meant that despite the high cost of the company's frequently highly desired cars, the company as a whole was operating at a loss. And for some people like me, I'm counting myself in here, it can be confusing, right, because

you think cars are expensive. Clearly, if you're selling enough cars, you're gonna be making tons of money. But making cars is also expensive, especially when you're building out the manufacturing capabilities of your company. So for a lot of you, I'm sure that's not a big surprise, right, And a

Tesla vehicle does cost a lot. So, for example, the least expensive Tesla model is the Model three, which has a base standard price of forty one one dollars, with one two hundred of that being a destination fee to

get the car to wherever you are buying it. But hey, actually, right now, because of the crazy, screwed up world we live in, because of the pandemic, because of the semiconductor shortage, and thus because of a car shortage, that actually is not that much more expensive than the average car price in the United States. As of June one, the average car price here in the US was forty two hundred

six dollars. So because of those issues, Tesla's prices, at least for its you know, most inexpensive car are actually pretty competitive compared to the average price in the United States. So I guess I have to eat my words on that one, although to be fair, the other Tesla models are much more expensive. Now usually we do think of Tesla's cars as being on the price e side. And even so, that wasn't enough to push the company into profitability.

And again it's no wonder because the company was building out new factories and all that kind of thing. But then there's the other source of revenue that Tesla enjoys, and it's a big one. In fact, it's a bigger revenue source than what it generates from our sales, and

that revenue comes from regulatory credits. See some states here in the United States, eleven of them, in fact, have regulations that require automakers to sell a certain percentage of their cars as zero emission vehicles by so, in other words, if you want to sell a car in one of those states, a certain percentage of the cars you make have to be zero emission vehicles. And I say certain

percentage because it differs from state to state. And if the automakers are not going to be able to make that percentage number, you know, if they're not able to produce enough zero emission vehicles to make up that percentage of the cars they want to sell in those states, they have to offset that by buying up regulatory credits

from some other automaker that does meet those requirements. Well, all Tesla vehicles are electric, and so Tesla has a big old heap in handful of regulatory credits that it can sell to other manufacturers, and it does so. More than half of Tesla's revenue in twenty twenty came not from selling cars, but from taking money from other automakers that will not be able to meet those regulatory requirements

by twenty five. Just pretty wild, right anyway. Twenty twenty was the first profitable year for Tesla, but the company would have operated at a loss if it had not been for those regulatory credits, and those credits are not gonna stick around forever. In a few years, other automakers will have caught up with those regulatory requirements because we're going to see more states passing them. We might see federal level. Other parts of the world are following suit.

So that means that eventually all the car companies are going to be on the same page, and those that credit market will not even exist. It will go away. So while Tesla is profitable for the moment, it will not be able to rely up on that specific source of revenue for much longer, and it will need to find another roadmap to profitability. I have another pair of companies to talk about, but before I get to that,

let's take one last quick break. Okay, finally, we've got a pair of companies to consider, and I'm putting them together. I'll talk about them separately, but they're they're paired together because they're both in the same business. And those companies

are Uber and Lift, the ride sharing companies. Uh. These companies have long been seen as huge disruptors to the legacy taxi services around the world, right, I mean, there are famous protests that taxi unions have held in response to companies like Lift and Uber moving into their territories. So they are seen as these massive disruptors, and disruptors tend to get a particularly romantic portrayal in the tech sector.

They're thought of as being these, you know, giant companies that can just stride in and shake the way things are done and and just be incredibly profitable. But these particular companies have been disruptive at a considerable loss. Uh heck, a loss so considerable that even some of the most creative accounting on the planet can only make those losses

look less bad. Let's take Uber for example. Uber started in two thousand nine, and originally it was sort of a black town car service, you know, kind of a uh an upscale way to get around. It was not

quite frame the way it is today. And the story goes that the co founders of the company were sharing stories about how hard it was to get a taxi in Paris during a snowstorm, and wouldn't it be great if someone could just create a company that could shake up the way that car services work and that taxi services work. And this led to this idea of a ride sharing company, which really is more of a ride

hailing company. I think a right sharing company would be more like something that would encourage car pools, but that's not what Uber or Lift do. So while we often call them ride sharing I think they're really more ride hailing companies. And what followed was a meteoric rise in terms of investment rounds and rolling out of services. The

company also earned itself a pretty ugly reputation. For one thing, Uber insisted repeatedly that the people driving for Uber were not Uber employees, but rather they should be considered independent freelance contractors, which meant they also would not qualify for stuff like benefits. For another, the company became famous for having a truly toxic corporate work environment, and it was one that protected male executives from charges of harassment from

their female coworkers. You know, harassment and worse. The stories are are truly terrible, and it became one of those companies that prompted folks to say human resources is not there to protect you, it's there to protect the company. Now. That whole story is beyond awful, and it culminated in the board of directors forcing the co founder and CEO of the company out. He was he was highly encouraged

to resign. Let's say what followed was a new leadership team that claimed to be dedicated to overhauling the corporate culture and atoning for the past and building towards profitability, because you know, Uber wasn't profitable at all. It was losing money every year. So while we were hearing these stories about Uber drivers seeing much of their fairs siphoned to the company. In other words, the people doing the driving, we're seeing a lot of the money they were bringing

in going not to them but to the company. The expenses of the operations were such that Uber as a whole still wasn't turning a profit. So it's kind of like the worst of both worlds, right. You had the drivers saying we should be keeping more of the money that we generate, and the company, meanwhile, even taking the you know that percentage, was losing money. Despite all this, Uber still held an initial public offering and became a publicly traded company. So once again we have a company

that was not profitable. It was operating in a loss year over year, still holding an I p O, and still generating crazy stock market prices. So it continued to lose money on an annual basis. Despite all this, the company's fiscal year for twenty nineteen was bleak. It had a loss of eight point five billion dollars and have billion dollars loss, but in early the hope was that by the end of that year the company would be profitable. And then the pandemic hit in full force, and as

you might imagine, was a tough year. Oddly enough, not as tough a year as two thousand nineteen was for Uber, so Uber posted a six point seven seven billion dollar loss in unless you're paying attention to Uber's finance call when discussing, because that's when the magical accounting comes into play. Now, you see, Uber was being kind of loosey goosey with the concept of ebida and ebida or e B I T d A is an acronym that stands for earnings

before interest, taxes, depreciation and amortization. It's kind of a way of saying how much cash a business generates or loses over a given amount of time, So you could have quarterly or annual, et cetera. It's not quite profit, or at least it's not as simple as profit as you do have these other factors like taxes and such that will factor into the end result, but it's generally used as a way of judging the comparative health of

a company at a given time. Well, Uber was working with an adjusted EBIDA that included twelve categories of exclusion, which in itself was pretty unusual. So with that, creative accounting essentially saying here's how much we lost as long as you ignore these twelve other factors, that collectively means we actually lost more than this, those losses came down from six point seven seven billion dollars to a more modest two point five three billion dollars. Because creative accounting

can only get you so far. Now, Uber executives argue that the company is on track to have a positive EBIDA by the end of twenty one. But keep in mind that's with all these exclusions in play. If we actually include those factors rather than exclude them, we're likely still talking about actual loss in the real world once

all the ink dries. Despite that, the shares for the company have been on the rise since they're low of fifteen dollars per share during an earlier time in the pandemic, so that company could turn a quasi profit at the end of one, but with you know, a big asterisk behind that. If it can do that, and if it can build upon that, then we might finally see a ride sharing company emerge from operating at a loss despite you know, that whole disruptive thing. But now let's talk

about Lift. Lift launched in two thousand and twelve, so it came after Uber, and over the years has been in a pretty nasty battle with Uber. Sometimes that battle even included employees of one company actively trying to sabotage the operations of the other company. It got ugly, y'all.

But that's a matter for different episode. Anyway. Like Uber, Lift operated at a loss year after year, expanding into new markets and holding its own I p O to go public, but the company continued to lose money, not turning a profit. In twenty nineteen, it lost two point six billion dollars. In twenty the company saw revenue shrink, so it was three point six two billion dollars in two thousand nineteen, it shranked to two point three six

billion dollars in twenty twenty. That's revenue despital that even though it's a less revenue, it actually also saw fewer losses. In twenty nineteen, it came in at one point seven five billion dollars in losses, still not great, but not

as bad as twenty nineteen. But like Uber, lift has its own you know, accounting wizardry that it uses lifts adjusted ebitas stated that it actually lost six hundred eighty nine point nine million dollars in twenty nineteen, and surprisingly, it lost seven fifty five point two million in twenty Now I say surprisingly, I realize I'm throwing a lot of numbers at you. It's kind of just becomes word

salad or numbers salad at a point. But the reason I say surprisingly is because using lifts metrics, it looks like the company lost more in than it did in but using a different set of metrics, the opposite is true. In both cases, It's still lost money both years, and just the question is how much Like Uber Lifts, mathematic wizardry suggests that the company will reach a positive EBITA

by the end of this year. But like Uber, without that adjusted EBITA approach, the story is that the company is going to continue to operate at a loss unless things really change in the last quarter of one. In fact, earlier this year, Lift announced that it had a net loss of four d twenty seven point three million dollars

in the first quarter of one. Now I can't tell you why their second quarter results are because I'm recording this on the same day it publishes, August two, and the company hasn't announced that yet because that announcement happens tomorrow on August three, So we'll see then if things have changed. But yeah, this is an odd thing, right, It's weird to see these companies that get these incredible valuations.

There's this amazing amount of excitement and investment poured into these companies, and they can go for a decade or longer without turning a profit, and some of them might never turn a profit. Now, the good news is that for the ones that can stick around long enough, they might be able to find a revenue path that does work and that they can build on that, and so that investment over the long term becomes a good idea.

But for a lot of people, I think they probably feel like these companies feel like almost a Ponzi scheme or pyramid scheme, and that you might get in early on and invest in this company, and then you get the sinking feeling that the company is never going to turn a profit, But if you hype it up, then other people are going to come in and invest, and you might be able to get your investment back out

or even turn a profit on it. Right, Like if you bought shares of stock when it was trading at fifteen dollars and then it ends up trading at sixty dollars, you can get out and make a profit on that. Even if you deeply suspect this company is not going to be profitable. It's crazy to me, like tech either works or it doesn't work. Right, It's pretty simple to describe the operations of tech when you really boil it down. But business, you know, business just don't make no sense.

I mean, I guess it makes sense. End dollars. That's a dad joke. I'm done. I'm sorry. Hey, this wraps up this episode of tech Stuff. If you have a suggestion for a topic I should cover in the future, please each out to me. The best way to do that is on Twitter, you know, the profitable one and the handle there is text stuff h s W and I'll talk to you again really soon. Y. Tech Stuff

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