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How is a company like Reddit “not profitable” yet?
(lemmy.world)
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this post was submitted on 23 Jun 2023
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For Reddit specifically I couldn't give you a good answer, but I recently watched a video about the streaming service Nebula and its path to profitability I found interesting. It isn't a one-to-one but is still an example of how a big business may be technically unprofitable but still appealing to investors.
The short answer is that investors have a good reason to believe that it will be profitable in the future.
So imagine a streaming service. They know the average amount of time a user will be subscribed. Let's say 25 months. So the subscription cost multipled by that 25 months is the average amount of revenue they'll get from a user signing up. Obviously you would not want to pay more for marketing to this user than that amount as you'd never take money (not to mention the other costs of business). No matter how you slice it, you'll pay a good bit for marketing because it's not about just the ad for that user because you can't magically know who would subscribe based on one ad. So you pay a good chunk in marketing, let's say like 10 months of subscription cost. That means you're going to be in the red for 10 months before you ever start seeing profit from that user. That's where investors come in. They see your growth and have been convinced by you that you just need money to stave you over until you start seeing a profit.
Now, the reason a lot of services aren't profitable yet is because the investors and the company (rightfully or wrongfully) believe that they can still grow. So they keep doing this seemingly unsustainable practice of getting more marketing money from investors to get more users onto the platform. Now, sure, after that first round of investment they could just wait until they start seeing profit and out that towards marketing but many times there are more interested in getting more growth now. Especially because there may be a lot of hype for the service they're trying to capitalize on.
So that's an example. Basically you're getting investors to give you money to get customers who should help you turn a profit later but you just continually do that and keep growing more and more.