Does a business have to be profitable?
Excluding non-profits, how can a business run without the future intention of making profits? Why would anyone invest in such a business?
From the website below, I made the assumption that no profit means that, through primary revenue streams, not enough was made to cover operational costs (as anything more than that would be profit which is a very narrow margin to shoot for in terms of revenue). Am I wrong in this assumption?
Context: This question was sparked from this website: http://rcs.seerinteractive.com/money/ The services/companies I'm referring to are Instagram and Tumblr. For Tumblr, it states that they is making their money mostly from investors (but one of the linked articles seems to show that they have the future intention of creating more revenue opportunities). However, it seems before Instagram was bought by Facebook, they were making no money, which doesn't make sense to me.
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That site that you linked to is really interesting! I wish there were more companies listed there. – rbwhitaker 11 years ago
3 Answers
I would disagree that they do not have a future intention of making profits. The reason people invest in/buy Instagram or Tumblr is that they believe that they will be able to make not just revenues but also profits through monetizing the customer base.
They may plan to sell ads, they may plan to upsell other services or drive the traffic to their other properties, or they may plan to someday change the business model for the core property. They do have a vision for how to make money out of it one way or the other, even if they aren't making it right now, and even if the vision is as rudimentary as: 'if we get a whole bunch of users giving us a lot of attention we must be able to make money out of that somehow'.
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I guess that's not much of a surprise. So they operate with the future intention of making profits from investments investors invest with in hopes of these future profits? Still makes me wonder about the whole Wikipedia story. Jimmy Wales tried to monetize but the community backlashed and it ended up becoming a non-profit. I wonder if the investors lost their money there. – Nope 11 years ago
It does make sense, based in the added benefits.
TUMBLR
Yahoo is not buying a money-making machine, but a HUGE audience. even my personal blog is on tumblr. Now yahoo has access to my data and can offer me through tumblr whatever they need. Also they acqui-hire the brilliant Tumblr founder.
Facebook was struggling really hard with mobile. Even Zuckerberg came to accept that even if the mobile user-base was growing steadily there, they hadn't figure it out how to make it as profitable as the web based machine. also Instagram had acquired a big user base in mobile, they were the best photo sharing app there. so they again bought audience and acqui-hire the founders.
bonus
Remember, if your competitor is ahead of you and you have enough money to buy them. why to lose time fighting with them? “The supreme art of war is to subdue the enemy without fighting.” Sun Tzu
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ahh - the good old "eyeball metrics" that created the dot com bubble. just kidding (sorta), it's really reasonable that one business serve as a module to another. – Walrus The Cat 11 years ago
It is possible to satisfy investors with the product itself if those investors happen to be the customers of that product, and if they each invest only just enough to produce the amount they need.
This is a variation of crowdfunding that will likely become popular in the near future.
The idea is to attract potential customers to essentially pre-pay for the goods and services they want and then use that money to begin production.
Instead of selling the product, the product is actually used to pay the investors.
Since the product is never sold, the price each consumer pays is exactly the costs they paid as a co-owner and so profit does not even exist because the final transaction (selling the product) does not occur.
For example, imagine a large group of people want to start a shared transportation system.
They get together and estimate the size of the operation needed to accomplish this goal (such as how many cars, vans and buses they will need).
They then 'issue' tickets that will be valid for use later, when the system is finally operational.
These tickets are sold at a discount rate to attract people to buy them now even though they cannot be used immediately.
Each ticket has a "window of validity" such that they are not usable until some date, and expire after some later date. There may be other constraints as well.
Each person in the group buys as many tickets as they want. There is no need to require some minimum or maximum limit.
This money is used to purchase the equipment and hire the drivers and mechanics.
As time goes on, more tickets will be issued and sold to cover recurring costs.
