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What Company Loses Money the Best?

An analysis of the tech sector’s questionable spending habits

Getty Images/Ringer illustration
Getty Images/Ringer illustration

Anyone who ever ran a lemonade stand or developed a Beanie Baby–investment portfolio understands the basic fundamentals of entrepreneurship: Make sure your revenue exceeds your expenses so you can turn a profit. In the age of stratospheric valuations and abundant venture capital, that’s a lesson Silicon Valley forgot. “Generating income” is for small-business owners invested in the betterment of their communities and older corporations with a “Disrupt Me” sign taped to their backs. If you’re a high-flying startup that’s focusing on growth right now, losing money is the new making money.

It wasn’t always this way. When Apple went public in 1980 it was a profitable company, along with 91 percent of the tech firms that filed IPOs that year, according to Jay Ritter, a University of Florida business professor who tracks public offerings. By 2015, just 26 percent of tech IPOs came from companies in the black, the second-lowest figure since the dot-com bubble in 2000. “Investors are focusing on growth rather than short-term profitability,” says Ritter. “If a company can tell a story about how it’s got a technology where there’s demand and competition isn’t going to keep the profit margins low … that’s the kind of thing investors are willing to pay up for.”

There’s definitely an art to losing money with aplomb, though. It’s not just about growth but also the “growth narrative.” So which losers are actually winners and which losers are the saddest, most desperate kinds of losers?

Great Losers

Amazon

Why They Lose Money: Amazon was not the first company to figure out that humans enjoy sex, violence, and 20 percent off deals, but they were the first to turn that insight into a billion-dollar online business. By offering discounted products, cheap Kindle-branded gadgets, and a gift basket’s worth of random services in its Prime membership, Amazon has become a common part of daily life for millions. All that spending sends the company balance sheet fluctuating wildly between red (a $241 million loss in 2014) and black (a $596 million profit in 2015). No matter — investors keep pushing the company’s stock price higher. Today, it’s the fourth-biggest tech company in the world. They are the greatest tech losers of all time, and they will be respected as such.

Most Outlandish Expenditure: Shipping, which cost Amazon more than $3 billion in the last quarter alone. Offering this for free seems like a simple Prime perk but actually drives up Amazon’s costs by a huge amount.

Profitability Prospects: High. The company has been posting record profits this year as it’s been quietly scaling back its doorbuster deals, narrowing its hardware focus, and trimming Prime benefits. The gravy train may be over for us and just beginning for Jeff Bezos.

Uber

Why They Lose Money: Because taking over the world ain’t cheap. Uber has claimed to be profitable in the United States, where it’s the market leader, but it’s been losing tons of money in a bitter battle with Didi Chuxing in China as both companies deeply subsidize rides. Heavy investment in AI research for its driverless-car initiative is also a money drain. Globally, the company lost a reported $1.2-plus billion in the first half of 2016.

Most Outlandish Expenditure: Paying a shadowy research firm staffed by ex–CIA officials to dig up dirt on a customer who filed a lawsuit against the company.

Profitability Prospects: Moderate. Uber sold off its Chinese business to Didi in an effort to improve its balance sheet ahead of a potential IPO. With a valuation near $70 billion, though, it’s clear investors are willing to give Uber Amazon-like runway as it attempts to redefine urban transportation.

Airbnb

Why They Lose Money: Aggressive expansion into new markets, as well as heavy spending on lobbying efforts to ensure city housing laws don’t endanger their business.

Most Outlandish Expenditure: Offering celebrities free rentals at absurdly lavish vacation homes, like the $50 million Turks & Caicos estate where Kylie Jenner did her most ostentatious summering this year.

Profitability Prospects: High. The company owns the low-end, peer-to-peer room rental market and is now working with landlords to create more hotel-like arrangements with apartment buildings. And it’s mostly winning legal and political battles outside New York. The company itself projects it will be profitable by 2020.

Slack

Why They Lose Money: Any business can adopt office chat app Slack for free for an unlimited amount of time. Unsurprisingly, most users stick to the free service. Last year, the company was losing a “couple hundred thousand dollars a month,” according to CEO Stewart Butterfield.

Most Outlandish Expenditure: All the bathrooms at Slack offices are wired to play French radio, which is more pleasant-sounding than typical bathroom noises. (To be honest, this seems like a rather non-outlandish outlandish expenditure, but it’s what Slack’s got.)

Profitability Prospects: High. Of Slack’s 3 million daily users, nearly 1 million are paying customers, which is an extremely high conversion rate for a freemium product. But the company is also adding employees at a torrid clip. Whether the company starts making money will depend on how aggressively it wants to expand.

Spotify

Why They Lose Money: Because they’re stuck in the music business. Of the money that Spotify generates from subscriptions and ad revenue, 70 percent goes right back out the door to record labels, artists, and songwriters. (As it should, right?)

Most Outlandish Expenditure: Live concerts for staffers in the New York office, as well as a trip to Stockholm, Sweden, for every new employee to visit the Spotify headquarters.

Profitability Prospects: Questionable. Spotify claims that if it can achieve massive scale, it’ll generate enough revenue to pay artists handsomely and line its own pockets. But no on-demand streaming service has been able to prove this business model yet. As the leader in its sector, though, Spotify has the best shot at making the math add up.

Warby Parker

Why They Lose Money: Warby Parker sells designer glasses frames for less than $100, which is incredibly cheap. Selling consumer goods at incredibly cheap prices is a tough way to stay in business, unless you’re flush with venture cash.

Most Outlandish Expenditure: Through the company’s Home Try-On program, customers can have up to five frames sent to their home to test out for free. Great for building a user base but terrible for Warby Parker’s high logistics costs.

Profitability Prospects: Questionable. The company has tapped into an innovative new model for generating revenue: selling glasses in physical stores! “We think about Warby [sales] as a blend of offline and online,” one T. Rowe Price investor said after the startup’s last funding round, describing how nearly every major retailer operates. Whoever figured out that boring consumer good … but on the internet was a viable sector of tech deserves a billion-dollar funding round (see also: Dollar Shave Club).

Terrible Losers

Nintendo

Why They’re Losing Money: After decades of steady profitability, Nintendo now regularly dips into the red because of its failed home console, the Wii U, and lower-than-expected sales of its handheld, the 3DS. And unlike the other companies on this list, 127-year-old Nintendo can’t brush off losses as growing pains.

Most Outlandish Expenditure: The expensive Wii U controller, which is essentially a single-function tablet, even though no one even cares about multipurpose tablets in 2016.

Profitability Prospects: Questionable. There’s not yet any proof that the company’s next flagship console, the NX, will be a success, but the pandemonium surrounding Pokémon Go suggests the company could effectively pivot to the mobile space if need be.

Twitter

Why They’re Losing Money: Because user growth is stagnant. Because it’s a text-based platform in an era when all the money is in video ads. Because acquisitions like Vine and Periscope haven’t been monetized effectively. Pick your poison.

Most Outlandish Expenditure: The time spent adding stickers to Twitter instead of making an edit button.

Profitability Prospects: Low. Twitter has never turned a profit as a public company. And it’s not attracting the kind of engagement growth that’s likely to instill additional confidence in investors or advertisers. Absent a big shift in strategy, Twitter will likely keep slowly burning money.

Dropbox

Why They’re Losing Money: Dropbox has a massive user base of 500 million users, but relatively few pay for the cloud storage service. (The company has 150,000 paying business customers and an undisclosed number of individuals paying for Dropbox Pro.) To make matters worse, it’s gotten into a race to the bottom with Box, Google, Microsoft, and others to offer the most appealing package to customers.

Most Outlandish Expenditure: A five-foot-tall chrome panda rumored to cost $100,000.

Profitability Prospects: Moderate. After years of lavish spending, the company has been cutting benefits this year in an effort to improve its balance sheet. CEO Drew Houston said the company was cash-flow positive in June.

Tidal

Why They’re Losing Money: Tidal’s business model is the same as Spotify’s except it has way fewer subscribers and pays even more of its revenue out to labels and artists. The company reportedly doubled its losses in 2015.

Most Outlandish Expenditure: The Tidal launch event, where a bunch of mega-celebrities signed the music version of the Magna Carta in a noble gesture to get even more rich.

Profitability Prospects: Slim. It’s acquisition or bust, Jay.

Groupon

Why They’re Losing Money: Remember Groupon? [Looks wistfully into distance during flashback dissolve … ] The daily deals site has racked up hundreds of millions of dollars in losses since going public in 2011. Its original coupon business is slowly being replaced by an online marketplace where Groupon sells discounted goods.

Most Outlandish Expenditure: A “Sense of Joy,” which is listed on Groupon’s work benefits page but must be a challenging perk to offer consistently.

Profitability Prospects: Questionable. Groupon managed to get in the black in 2015, but the company has yet to hit on a sustainable business model. And this year it’s losing money again. It’s trapped with a handful of once-hot tech companies (like Zynga) that went public just before the current gold rush and are now wallowing with rock-bottom stock prices.

Secret

Why They (Were) Losing Money: The anonymous social media app (remember that craze?) earned a flurry of breathless coverage in early 2014, but never had a significant revenue source.

Most Outlandish Expenditure: While Secret was still hot, co-founder David Byttow sold some of his shares for $3 million and bought a Ferrari. Sure, that makes it a personal expense, but still. Very classy.

Profitability Prospects: Zero. The app shut down 15 months after it launched, and the founders promised to return the venture funding to investors. What was left of it post-Ferrari, anyway.

Theranos

Why They’re Losing Money: The work biotech firms do trying to develop new medical innovations is extremely expensive — many are unprofitable when they go public, Ritter says. But unprofitability is the least of Theranos’s problems — a Wall Street Journal exposé last fall began the unraveling the company’s entire fairy tale narrative about its affordable blood tests, which were deemed inaccurate by regulators. Today, Theranos is a deeply damaged brand.

Most Outlandish Expenditure: Black turtlenecks and very intense lawyers.

Profitability Prospects: Slim. Theranos CEO Elizabeth Holmes has been banned from the blood-testing sector for two years. Walgreens ended its partnership with the company. Its lab in California was shut down and its Arizona facility may soon follow. It’s been a spectacular fall from grace for a once-hot startup — and a warning signal for all the other losers out there trying to craft the perfect growth narrative.