What Unicorn Money-Sinkholes Actually Disrupt | Wolf Street

What Unicorn Money-Sinkholes Actually Disrupt | Wolf Street

All these companies disrupted existing industries with reckless losses. And investors rewarded them by given them more money, rather than cutting them off until they come to their senses or file for bankruptcy.

If a company that has been in business for years and has thousands of employees and hundreds of millions or billions of dollars in sales, and it cannot make a decent profit during the Good Times, it doesn’t have a functional business model.

Having a functional business model means conducting business in a profitable way over the long term. This means that during the Good Times, the company must make a solid profit, and during the bad times it might have to scramble.

But these companies lose money hand over fist even during the best of times. They’re designed that way, and executives are rewarded that way, and investors want it that way. They disrupt existing industries by not having to stick to the principle that a business has to be a self-sustaining enterprise.

The easiest thing in the world is to run a money-losing business, where bigger losses are better. As long as investors are willing to pay for it. The hard part is bamboozling investors into paying for it.

The only way they disrupt is by having temporarily changed the logic of business – that a successful business is now a cash-burn machine, and the more cash it burns the better. And it took a lot of genius to accomplish that.

The genius lies in bamboozling public and corporate investors into enthusiastically and unquestioningly going along with this, and making them believe in this new religion. And that works for a while. But in the end, there is the harsh reality of business, as the dot-com crash has shown when most of these companies disappeared, and as the current generation of unicorn busts is beginning to show, and as this crisis is beginning to show.

via What Unicorn Money-Sinkholes Actually Disrupt | Wolf Street