Money Burning Startups Are Getting A Harsh Reality Check
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- เผยแพร่เมื่อ 11 มิ.ย. 2024
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Over the past 10 years, the prevalence of money-burning startups with insane valuations has gone through the roof thanks to extraordinary amounts of VC funding. This trend peaked in 2021 when over 2 startups were achieving unicorn status on a daily basis. But, since then, VC funding has finally started to cool down resulting in money-burning startups facing a harsh reality check. Many startups are having to raise at lower valuations than their previous rounds for the first time. Some startups are even having to consider bankruptcy as they burn through the last remaining capital that they still have access to. In fact, in the first half of 2023, 338 US companies filed for bankruptcy out of which 54 were VC or private equity backed. Many of the startups that have survived the fall are considering getting acquired or merging to soften their annual losses. More established startups like Twilio are scrambling to become profitable but they’re finding out this a lot harder than it originally seemed. This video explains the rise and fall of VC funding and the crisis that money-burning startups are currently facing.
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Timestamps:
0:00 - No More Money
2:22 - Growth Investing
6:44 - Exceptions Make A Case
10:29 - Dotcom Bubble 2.0
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These companies could only persist because of low interest rates. Now that the interest rates are rising, it will be interesting to see if they can become sustainable. I don't think so.
Time will tell
@@LogicallyAnsweredplease make a video of the end of the Microsoft acquisition of Activision Blizzard King. You could sumarize all that happened and maybe try to tell what’s about to come with this gigantic buyout.
Yeah, when interest rates are below the inflation rate you're losing money anyway, so investing in a cash incinerator that might one day become profitable starts to look more appealing.
What interest rates are we talking about
Low interest rates with baby boomers flooding the market with easy to access investible cash, and both are now over. All that cheap money is being rolled into T-Bills at almost 5% and well funded retirement is now guaranteed.
As someone who's currently working for one of those over-the-night-Unicorns I'm actually glad that the market is coming to its senses. Up until a year ago, every brain-dead idea that would percolate in the company would get money and people thrown at it as the investors' coffers seemed bottomless, now after three rounds of layoffs, and another one looming behind the corner, we're finally starting to actually do some useful work. Might be too late for us, but the madness had to stop...
I bet it's Airbnb
Imagine the compounding cost to civilization of central fiat banking. Then realize the markets must clear all this mail investment if they do not continue to grow. 😢
How the hell is Uber losing so much money?! Probably 90% of the stuff is not needed like in most tech companies.
That’s what I’d like to know
Transportation is rarely a money making venture. Highways don't make money (infrastructure costs - gas taxes), mass transit usually has a fare coverage ratio less than 1, airlines and car companies need to be bailed out every decade or so, etc.
@@jelanidacostabest8195but there is big catch, Uber does not bought and own any of the vehicles. So, where are the money going?
@@user-vo9wd6tx6cyet when they're gone, the economy will die. Hence the generous subsidies and bailouts from governments.
This is why I dumped the stock as soon as I doubled my money
tbf, was it really surprising when companies built on the foundation of a flaming money pit would be bad at making money?
Who would’ve thought??? 😂
play with fire and find out
It is a pyramid scheme companies built for pyramid scheme systems.
What do you think the "modern" banks are?
Print their own money/zero accountability or oversight/ as long as the figures go up no one cares how.
Just because they use "established" names that changes their actions how?
Haha they really thought they were Amazon 🤣🤣
@@Wealthwise_capital I think you mean 100k to 10k.
I still remember the Lyft interviewer... he was brushing a dog on his lap the whole time when interviewing me. Now that they are close to doom, I wonder how that Godfather is doing
He’s prob doing fine 😂
@@LogicallyAnswered I hope he is brushing the dog on the street with a sign next to him "The mighty power needs food too"
From $9 billion in loses to $300 million in loses in a yr when the investments start slowing up means Uber was stealing from their investors 🤣
Damn , really they were just buring cash , without any long term vison for profilibility.
Facts 😂😂. When you finally hold executives accountable you'll see major changes.
they were probably spending a lot on discounts to attract intital customers and other marketing strats. They just stopped when they got news that funding was decreasing.
Profitable now
@@FatherPhiyeah. But only after 32 billion dollars in losses first.
Big companies use all loopholes they can find to make profit even on a loss.
Specially those that have locations in multiple countries. They run a loss on purpose in countries where they get government subsidiary or tax returns if they run a loss, while running profit in countries that have the lowest taxes or allow them duo to corruption to avoid normal tax payments. That is how things work for years/decades.
Certainly makes you wanna throw up when a company reporting a global revenue record gets in the very same year millions of tax payer money in tax returns cause in that country their location ran a loss... as if this wasn´t done on purpose.
Yup. I wonder how we can be so dumb with our money.
Rock bottom interest rates meant that access to capital was very cheap. Companies with unsustainable business models can survive much longer under those circumstances. Also, these companies are then going to find it hard to pivot to profitability as they've been offering a cut-rate price to customers to fuel growth for so long that those customers have gotten accustomed to them. Raising prices is going to be met with immense backlash.
It's surprising how close you come to acknowledging that this was a multifactorial issue that was far more than just cheap capital, then still blame cheap capital.
Its called modern ponzi schemes
Hahaha
We’ve watched Amazon get large enough to engage in price fixing across damn near every product and customer segment except the luxury market
I don't think Amazon will be able to keep that up long term as their constant need to raise prices on prime and restrict their free shipping as well shows to me that they are hurting for operating cash. Meanwhile their the stock market darlings.
@@Denozo88Also adding fees for returns, just to add on to what you said.
This is the blitzscaling strategy. Corner the market with cheap prices, then raise them once you're the only game in town. Boots on necks sure are great if you can be the boot.
7:17 they don't launch AWS to fund their e-commerce dude, it is quite the other way around, aws exist because Amazon need big server to serve terrafic when Black Friday, but when the party over they realise they can lend their server to small start up cheaper than on premise solutions. basically the economic of scale.
Came to the comments section looking for this. It was a serendipitous decision for Amazon, but it wasn't looked at as a method of funding the business. They were just trying to defray some costs.
Necessity always win😎
It hasn’t helped that companies like meta and alphabet, while profitable, will throw money at any random idea that pops up to see if it works. It means all start up companies have been forced to adopt the expand at any expense model because they know that there is a high chance one of the current big players is already pouring money into it or at the very least will start once they see a market.
I never understood how companies are worth billions and have negative profit at the same time.
Valuation.. Investment is another way of increasing a company's value! Which in my opinion is madness 🤕
its because the valuation is based on future profit.
If everything is hypothetical nothing is!
They just ride on the hype train, you know, like the crypto/NFT boom to make quick profits and then scram. I'm sure deep down they know it doesn't make sense, but are too afraid to leave.
Growth expectations, especially if you're trying to break into an existing market (taxi/hotel services), you'll need to operate at a loss to grow your market. If ubers weren't like $10 when I visited Cali, I never would have used them. Now that I've used an Uber, I might keep using them even if prices go up.
It's incredibly rare that a company makes a profit in it's first few years of operation. So long as it can afford its operating costs, it'll keep running and (hopefully) growing.
LOL. I love Hari, LMAO. I love how one minute in your clips you look like you just woke up and dirty and the next minute (your next clip) you look all shaved, fresh, groomed, clean cut and pretty🤣👍🏼
😂
I've come to realize that money is a tool. I’ve worked so hard over the years to realize that if you don’t make money work for you, you can’t experience true freedom. I’m glad I found that out although it was later in life, but that marked the turning point in my finances
I only save money for emergencies, like having an emergency fund. I'm aware that it loses value over time and doesn't make me anything, but it's there as a financial insurance, to cover my ass if ever I get into some trouble from life.
@@Watkinsgorge definitely speaking with her soon, I'm bombarded with the don't sit on it during the inflation, I wanted to jump in 8/22 and did nothing. So far this year I think I need to get my feet wet
I'm scared but also excited to add to my positions as the market drops. Looking forward to 10 years from now with the hope of retiring early.
My strategy is to put half my income into the stock market at the start of every month regardless of what is happening. The second part of my strategy is not to sell for at least 15-20 years. Time in the market beats timing the market.
How? Bonds?
If I had the power to take one app out of the market it would be airbnb, I live in an area with these short term rentals gobbling up houses and it seems like a house of cards with amateur landlords fucking up the housing market but making money hand over fist short term wise. I'm glad nyc banned it, I just hope it happens worldwide.
Home owners making money yet AirBnB who gets a piece of that hand I’ve trust money can’t find profitability? Smells criminal. AirBnB is just an app middle man connecting owner to renter.
@@paperandmedals8316 home owners making money is a whole other problem. There's instances of homeowners protesting building of new housing as the increased supply would decrease the price of their own home.
@@paperandmedals8316 *illegal hotel operators.
For google: they didn’t build all these products. They bought them
I think you glossed over the implications of the marketing effect on balance sheets. If the marketing is necessary to not only grow, but sustain the business as was the case with Groupon, for example, then there is a serious problem, but if the initial marketing push helps to expand market share and the underlying business is profitable, then the marketing can later be shrunk and the business can be cash flow positive, and perhaps even grow more organically. What I’m hearing is that advertising revenue is in for a reckoning as it’s no longer a potential safe long term investment in growth, but wasted money that means less profits today.
Definitely a nuanced topic
@@LogicallyAnsweredYet you created (another) reductive video about a complex topic.
The thing is, money burning startups and their action to monopolize market by doing no margin/negative margin did irreversible damage to the once established, healthy market. In my opinion, for example, taxi companies and retail market. In my country there were dozen of taxi companies with their perks. Taxi A with a low fare lower class cars, B with mid fare and mid class, and so on. But when uber (and local startups) came into play, they give users free ride, recruiting massive drivers with no background checks, give drivers lots of incentives so they quit their main job, etc. It goes on and on for years until they almost monopolize the market, and when investors tired of burning money, they raise the prices like we never seen before, with the quality of taxis has diminished, and their drivers suffer too. Employees and users never win, only the pockets of the founders are full.
I've been waiting for these companies to burn as they've never made profit. Issue has become that they're almost all like public infrastructure at this point, being used to replace taxi's and hotels for example. But you know they haven't won as they've never put those services completely out of business either.
They will fail and profitable alternatives will quickly take their place. At the end of the day Uber and AirBnB are just apps and web sites playing middle man to supply and demand. The fact either combat loses money is criminal.
As long as the market continues rewarding the growth at all costs strategy with high valuations and later high stock prices, people will keep chasing the strategy.
2:09 “Burning Money are finally startups Getting their funding cut” bro what were you trying to say😭
I hate airbnb. I personally and irrationally blame them for the housing market.
"We are entitled to be rich. You must let us waste your money!"
I think you missed a crucial point. I'm pretty sure most of these companies are insanely profitable internally but externally they show loss to avoid taxes.
They set offshore tax havens and then send loss loans to parent companies.
I would have accepted this if I wasn't seeing many long run startups going under. For example we work. They were having losses and finally went under now. After a decade or so
i'm sure that's the case for some. But in some cases, like uber, it just isn't profitable to be in the space they're in
The core reason is the ultra low interest rate the Fed kept for way too long. This music ended when all the rate hikes the past 18 months
It costs a lot to build centralized services that were never meant to be centralized.
Edit: uber has massive digital control over their business. They can change their profitability literally overnight with a few changes on their back end
Yes! I’m so glad someone made this video.
what would happen if Amazon dropped its money-pit retail business and retained only the profitable AWS business. would that be a bad thing?
For the rest of the world, that might be a bad thing
Maybe Alibaba can take over tho
"money-pit"? Its profitable thanks to ads! "For the first time, Amazon broke out the revenue it collects from advertisers on its platform. Previously this revenue had been lumped into a category Amazon labeled “other.” In 2021 Amazon collected $31.16 billion in advertising revenue from sellers on its platform, which was a 32% increase over 2020. This makes Amazon the third largest digital advertising platform in North America, behind Google and Facebook. For comparison, Amazon Web Services (AWS), long thought to be Amazon’s most lucrative business, generated $62.2 billion in revenue in 2021. AWS is one of Amazon’s most capital-intensive offerings, consuming more than half of their capital expenditure budget, and yielding only $18.5 billion in operating income. While Amazon did not disclose the operating income generated from their ad business, it is almost certainly bigger than the income generated by AWS, making the advertising business the most profitable segment of Amazons entire empire."
The brand would suffer if they close their retail business
Yes, given that AWS is still a small percentage of their overall business. This video is a bit misleading - Amazon is not profitable by choice, not because of an inability to be profitable.
some of these companies, when they interview you, felt like it was a bunch of mobsters interviewing you
I started watching videos of insane construction projects in Dubai and "The Wall" in Saudi Arabia. Those islands in Dubai are sinking . There's probably a lot of similarity between unicorn stocks and artificial islands .
Why do I get the hunch that startups at least in part are vehicles for money laundering.
Great video brother!! Have a great weekend!!
Thanks Daniel, you too!
Thanks for high quality videos bro!
Keep going 🔥
Thank you yerkebulan! Will do
Well, this is what happens when ZIRP becomes a lifestyle for too many companies 🤷🏽♂️
A great video as always.
Good video as always, but it was funny how Hari has a haircut in one minute of the video and doesn't in another xD
Is it finaly the end of the Size over profit era companies funding . I see it happening with the Vice, Buzzfeed and other type companies in that sphere seing the investors money drying up.
For the time being yeah, but I think it’s rather cyclical
@@LogicallyAnswered Yea people don't seem to learn that much from previous mistake
At least Westerns market though. Non-western startups know where to expand and have a higher chance of profitability in a short period of time. Take Grab Holdings for example. Though they have been in the Southeast Asian market for 11 years now, they are on target to become profitable in 2024 as every year they're cutting on losses. Grab also bought Uber's Southeast Asian division in 2018 in exchange of Uber getting Grab shares. Today, Grab is an all purpose app where you could hail public transport, order products, ship products, pay bills, and transfer cash. Similar strat used by Google and Amazon where a profitable business such as advertising and server rentals sustains impossible to profit services such as emails, maps, and video services.
The problem of most startups are they're targeting just only one market that is difficult to impossible to sustain much more profit from. You mentioned Vice which used to feature controversial topics such as getting the terrorist groups' perspectives by interviewing terrorists in action or visiting North Korea. Those are not advertiser friendly but audience friendly though. They have no choice but switch to an advertiser friendly content which their audience hated.
funny thing, buisiness models change when capitol goes from near zero back to more historical averages
As a Silicon Valley engineer, this is a great analysis.
I am struggling startup founder, just think how many startup like our get seed funding with those rounds, they are not burning investors money but entire ecosystem of startup.
Great video as always
Thank you Balpreet!
Yes, the start-up I was working for just became a shell of what they were going from 98 employees from August to 20 employees in December. those include the Board too.
I’ve got to know what it is that makes Uber so expensive to run. Servers and developers don’t cost hundreds of millions of dollars for an already complete product.
I can listen to and look at this guy all day.
🙏
Not me turning the phone around when he put the graph up
2:10 "Burning money are finally startups getting their funding cut" I understand that it's suppose to be a cool transition but that really screwed with me when I looked away to drink my coffee lmao. The new Dont Dead Open Inside
Are they supposed to maximize profits as you stated or maximize share holder value?
I’m so early I need to change my trousers.
Hahaha, thanks for being early bro
If a company hasn't been able to make any money for 10 years, it is almost guaranteed it will never make any money in future at all.
If you have been playing a game for 10 years but never be able to win, it is almost guaranteed you will never win that game in future at all.
Just think how many prime years you still have left to burn, it will be a down slope with no turn back.
Did you fr advertise one of these companies on this video?
What happened is that there are too many people with too much money and can't figure out what to spend it on. And businesses are taught that money just sitting in the bank is lost profits.
"The Social Responsibility of Business is to Increase Its Profits." - Milton Friedman
Where does the money go? Since companies are very much only looking for free internship with 25 years of experience😅
Companies like these are. What kills the market and drives prices up
What Sears (and it's catalogs ) were during the 20th century, Amazon is during the 21st century and beyond.
It’s a misleading analysis when you don’t start with the peculiar and temporary circumstance of low interest rates.
Make a video explaining why rates were unusually low and why they won’t go back to that. I suggest you look at the impact of the integration of the Chinese workforce into the global economy.
I’m not sure it’s changing as fast as it should. For example, Disney is up 5% today after The Marvels opening. It makes zero sense - how does one get a return off of hundred million $$ losses?
One other thing to note for those who use these platforms: If any of these companies survive the next 3 to 5 years and eventually make money, they will do so by cornering their market and, once they have achieved a large enough market share, raising prices. Right now low interest rates subsidized them, and therefore also subsidized the people who use these platforms. That's coming to an end.
"Late stage startups" what kind of BS jargon is that?
At what point do you cease being a startup.🙄
Obviously, there’s no exact number. But usually I would say a couple years after IPO. If a company is able to do well on the public markets without the help of private VC investors, they’re no longer a startup.
When I refer to late stage startups, I’m referring to multi billion or even deca billion dollar private companies that are still raising hundreds of millions if not billions from VCs. Usually on series F, G, and H of funding.
Don't forget to specify that your ad is an ad. There's no mention of it in the video or the description.
Never understood not making any profit for ages upon ages
Can someone smarter than me explain why such massive over-investments, valuations, and billion-dollar purchases don’t impact inflation?
They do, that's why we're experiencing such high inflation now.
Nice vid ✊🏾
You forget the fact that they also make you dependent on free services that they later charge you for. Such as cloud storage on Gmail.
Yeah, that's why I don't invest in companies unless they are profitable, or else, they are literally over valued. I'm risk adverse, so I play safe, more or less, never following the hype. Didn't think aBnB was unprofitable though. How much is their overhead that they can't make a profit?
Crazy how these companies have investors still in for 15 years yet those investors could have invested that into nuclear energy power plant lose the same amount of money for the 10 to 12 years then get their money back on the 15th and most likely quadruple in profits after that point. Sad how differently things could have panned out instead of looking for the quick gains
VCs get paid with the IPO, the rest of us are their bag holders😂
great vid. i subscribed
Your content is excellent, interesting, and engaging. Its clear you did a lot of research to put your videos together. Helpful suggestions: slow down your rate of speech - at the pace in this video it is mentally exhausting to process it all over a 14 minute long presentation. Also, when slowing down the pace, hopefully your diction and pronunciation will become clearer. It was difficult to process at times.
Your definitely not part of Gen Z or afterwards.
love the fact your face is in your vids now 👌🏾
Finally, the madness is over
US is in 300T debt. Almost like in edge to go backrupt and it threatens banks not to fund investors who fund startups. Eventually this leads stop cash flow everywhere.
Spoliers: We've been bankrupt for 6 years now. The last known series of money printed was 2017. Nothing has been printed since then. Countries are returning to precious metal based currencies. Fiat is unsustainable and has nothing to back it with. Can only print so much Fiat currency before it's totally worthless!
Amazing video Logic :]
9:58 Boeing hiding in a corner like 🙈
Great video man but too many graphics than your previous videos and PowerPoint-esque transitions
Appreciate the feedback man
Found your channel, enjoying its content. Thank you.
Hope Uber and lift folds soon. They destroyed taxis and public transportation in some regions, while worsening the congestion problem on city streets. Airbnb is also horrific for the rental market and should fold ASAP.
Lol, this comment is comedy
Three magic wishes
1. Be a CEO do nothing all day and live life on über easy mode
Just hold a bunch of stock and you don't even have to do CEO work
How they acquire other companies when they are losing money?
The problem is that peoples memories are short. The whole cycle will likely repeat in another 20 years.
2:11 had to screenshot this and show my friends to make sure I wasn't having a stroke lol.
They are overpaying there tech employees.
It was their way to attract the people to start their business
with all the fees i pay Uber when i use it, its crazy that they dont make money
Insanely well made video. Solar and wind are next. Green transition is dead. Green research must drop the prices to 1/3 for green tech to be feasible in the US and 2/3 for the world considering they have no subsidies. Question is how could green research get the funding to do the R&D? We don't even have time. Guess it gets warmer, and US goes to Canada.
Savage take hahaha
Going nuclear has always been the real green energy solution, literally. lol
“Burning money are finally startups getting their funding cut.” Your graphics guy must have had their paycheck bounce or something.
Hahaha
Is you sponsor SILO also a Money Burning Startups ?
🧠 These investors have *lost their minds* 🤣🤣 10-15 y of LOSS? They got this backwards, surely?
They wanna hit the next Google soooo bad 🤣🤣🤣🤣
Fake money 🫣
Fun fact:Uber which has over billions in loses turned it's first ever profit this year.
I guess what they say it's true,some companies are too big to fail afterall.
Especially uber and airbnb
Not failing doesn't necessarily translate to all time high on their shares, probably never.
with Silicon Valley Bank going bankrupt, and interest rate going high. companies like Gamestop with 1Bln dollar in bank and 2 million dollar cash burning per quarter with 1.3 Billion Revenue per quarter is at 52 week low.
Perhaps start ups should not be buying multimillion dollar headquarters. Uber thinks it’s a good idea to agree to a $1,000,000,000 lease on their headquarters over 20 years… that’s 50,000,000 year. Pay it’s CEO $24,000,000 year.
Like honestly they losing money because they have no money management. Having a headquarters in California is just a flex. It has no real value just costs that pile up fast.
If they're making a loss why do they keep oparating?
I wonder how a company like doordash would fair under these kinds of circumstances
We just need to learn one lesson: history keeps repeating itself. In the past there were so many other growth companies, though we're certainly reaching levels of insanity that could never be seen before.
This is probably the time when value investors can remind growth investors of the value premium and how it persists over time. In the next cycle I need to understand how insane human nature is driving us, and how these bubbles can be used to profit...
Good luck haha
@@LogicallyAnswered Sadly you're 100% right with that. If it were that easy we wouldn't have had people like Michael Burry...
But I feel like there's a simple rule of thumb for big speculation bubbles: whenever you think that it has reached its peak, that's just when it really takes of. A great example is probably Cathie Woods. Everyone starting talking about her, but the crash of her fund only occurred many months after the speculation seems to have reached its peak. The best idea would probably be to buy into such a bubble when Wall Street seems to be loving something, cashing out when something starts to get too popular. Though it's completely delusional to think that something like this could reasonably be done. It's probably best to short a bubble long after the peak has been reached.
The best way would probably be to buy into the companies that profited off of this insanity: investment banks, brokers and the exchanges. Though the valuations really tend to reflect the optimistic nature too often times...
Crazy all these start ups loosing money with high interest loans and JPM making 24 billion just off interest
Imo growth before profitability can lead to massive success, but also failure. Profit before growth is more consistent, but the amount of growth is much much lower.
6:57 I would not consider Amazon "big tech". They are a retailer with a website. AWS though...
I don't think the average person appreciates how much AWS made Amazon profitable. I think the average investor still thinks that somehow it was their retail sector that did it.
9:00 "Instagram is now valued at over 100 billion and whatsapp is likely worth even more" To me this is an extremely bizarre statement, in what world would Whatsapp be worth more, yes it probably has far more users but how is it going to generate profits? Nobody will accept advertising and extreme minority will start to pay for some premium version, so it to me seems like delusion to think that Whatsapp would be worth more
love the content but damn cool it with the bollywood transitions and animations man im getting nauseous looking at it
Airbnb has reignited my interest in hotels 😂
I watched so many videos on uber and i do not understand how they manage to loose money. Its an app there is NOOO overhead. They should make an profit if they earn 1$ every ride.