[thegranderson]

There are many industries where this happens. Biotech and drug development is particularly prolific in this regard. Often drug development companies spend tens to hundreds of millions creating a drug, only to have the whole company bought out by a large pharma company once it passes a certain testing/approval milestone. No profits for the company at all. [1]

Just because a business doesn't turn a GAAP profit doesn't mean it is not a worthwhile investment opportunity, nor that investors shouldn't have access to it so they can decide for themselves. There are many reasons why investors might want to back an unprofitable company - I won't go into them all here, as it differs dramatically by industry.

Keep in mind that a large part of the public market capital is from institutional investors who have just as much experience, if not more, as private investors.

No one has to buy shares in these companies. It is all a choice. "The public" is not some block of sorry schmucks who keep getting stuck with toxic investments pawned off by VC funds, and I'm not exactly sure why you seem to think "the public" is getting a bag dumped on them...

[1] Endocyte acquisition by Novartis for $2B, December 2018. Endocyte had ~$300m of accumulated losses and zero revenue prior to acquisition [1] Ablynx acquisition by Sanofi for $4.8B, May 2018. Ablynx had ~€370m of accumulated losses prior to acquisition

[cknoxrun]

Indeed, I was at a biotech drug conference in Berlin last year and was astonished at how little direct research large pharma are engaged in. They've completely offloaded primary research to drug development companies. Maybe it has always been like that, but for me it was an eye-opener.

[xenospn]

I would assume the smaller companies are much more efficient when it comes to R&D.

[zymhan]

And if they don't have a breakthrough drug, they go bust and investors lose their money and employees lose their jobs.

[briandear]

Same thing happens to tech startups. Same thing happens to local restaurants. In fact, the restaurant failure rate is much higher than most other businesses. Restaurants go bust all the time, losing money for investors (generally smaller time investors) and employees lose jobs. It’s called life. Success is never guaranteed. Is it better for someone to have had a job for a year and lost it than that job never having been created in the first place? Businesses are formed and fail all the time. In fact, that failure process is vital: it ensures capital is being allocated towards its most efficient use. Companies not being allowed to fail is what creates stagnation as available capital is consumed by inefficient enterprises rather than being redeployed to better opportunities. It’s the very essence of a market economy.

[djakjxnanjak]

Let’s remember that a job is an arrangement where you are paid for work on an ongoing basis. If you choose to work for a startup, you assume the risk that this work opportunity will go away. But if that happens, the salary you already earned isn’t lost. You are not getting screwed on the trade where you give x hours and receive y dollars.

Working for a biotech startup instead of a big company, you accept this risk for the chance of a payoff in an acquisition.

Now, if your startup isn’t making payroll, GTFO.

[dredmorbius]

They compartmentalise risk.

[scarface74]

I would say a “large part of the market is made up of institutional investors”. 45% and growing of the market is made up of passive index funds.

https://www.cnbc.com/2019/03/19/passive-investing-now-contro...