[JumpCrisscross]

> how people value companies based on revenue and not profit

Profit is a closer abstraction to cash flows (i.e. to the investor) than revenue, but it's still an abstraction. Investors looking at revenues and unit economics can sometimes--often--predict future profits and discount backwards, in the same way that a value investor can look at a company's profits and sometimes--less often, frankly--predict future cash flows from dividends or M&A and then discount backwards.

[scarface74]

Profit isn’t an “abstraction”. If you bring in more money than you spend, it means that you don’t have to worry about a “runway”, nor do you have to worry about outside funding.

How can you have a successful business that spends more money than you make?

[JumpCrisscross]

> Profit isn’t an “abstraction”

The term profit covers a number of metrics. All of them are abstractions. The number of assumptions that go into a GAAP profit figure is uncountable. Profit on a cash basis is less wiggly, but it's still--for valuation purposes--useful only inasmuch as it is an estimate of actual cash returns on the investment.

> you bring in more money than you spend, it means that you don’t have to worry about a “runway”, nor do you have to worry about outside funding

Lots of ways for cash-flow positive businesses to be running themselves into the ground. Garden variety is off balance sheet liabilities, though people certainly

> How can you have a successful business that spends more money than you make?

Nobody argued this, not for the long term. But there are loads of situations in which losing money in the short term is the long-term savvy move. (This literally describes all investing. You send cash out when you invest.) Valuation involves estimating the value of those future earnings today.

[cecilpl2]

Amazon famously turned no profit for nearly 15 years. When you run a large business you can do things like reinvest what would have been profit into new projects. This is the whole point of a growth company.

Recognize that, simplistically, Profit = Revenue - Expenses, and that expenses is a dial which can be turned somewhat arbitrarily.

[scarface74]

Amazon basically always had positive marginal revenue - unlike most of the startups.

People like to cite the one case where it worked and seem to be forgetting that most of Amazon’s profit comes from AWS. What are the chances that any of these startups are going to pivot to a competent different vertical to shore up their main business? That’s just like saying all you have to do is rehire the former CEO after a 10 year absence and become a trillion dollar company after almost going bankrupt.

And no Amazon did not use “excess capacity to jump start AWS”.

https://www.networkworld.com/article/2891297/the-myth-about-...

[throwdbaaway]

Indeed, I think the one (fictional) case is the main reason why we got so many perpetually unprofitable tech unicorn.

[missedthecue]

I don't think the important thing is necessarily profit, but margins. According to Bezos, Amazon had positive contribution margins from day 1.

[VBprogrammer]

In theory you outspend all of your competitors such that they go out of business or otherwise lose out on the some network effect. At that point you flick the profit switch on and start swimming in pools of money.

I wouldn't like to guess what the success rate of this game is though.

[matwood]

> How can you have a successful business that spends more money than you make?

Today or tomorrow?

If a company has to spend more than they make today in order to build something they can sell for profit tomorrow, that's investing in the future.

Just looking at revenue or profit is too simplistic. It's also too simplistic to only look at a single point in time.

[scarface74]

So when will that tomorrow ever come for companies like DoorDash, Uber, Lyft, or the darling former much hyped unicorns?

It’s not a single point in time, most of those same companies who IPOd before becoming profitable recently are still not profitable and being punished by the market more than the market in general.