That’s one broad finding from our latest examination of reported losses at the mostly highly valued unicorns that have gone public since the latter half of 2020. Looking at trailing 12 months earnings for a sample of 12 venture-backed, recently public companies, including the most highly valued market entrants, three-fourths posted losses in excess of $100 million.1
We last looked at losses of hot newly public companies in May 2019, after a closely watched group of tech darlings — including Uber, Pinterest and Lyft — had hit markets with a mix of heady growth and copious red ink. In that IPO sample, just over half had losses of $100 million or more in the calendar year before going public. Uber led the pack with a $3 billion loss.
So, looking at the past few years overall, revenue and loss trends are pretty constant. Yes, valuations are up, but big losses are still typical.
The idea that investors should shun a company because it’s unprofitable, of course, is a nonstarter in tech IPO land. The vast majority of tech companies tapping public markets post both high growth rates and persistent losses. Scaling costs money, and both public and private investors are pretty comfortable watching favored companies post losses en route to becoming dominant players in their respective markets.
But losses still say something about a company’s expected trajectory. And everyone’s losses are a little different, driven by a mix of fixed expenses and business decisions around marketing spend, margins, and how aggressively to set prices in the interest of gaining market share.
Some losses are easier to write off as a cost of growth than others. Take BigCommerce, a provider of subscription software for e-commerce that went public in August. The Austin-based company had revenue of $109 million in the first nine months of 2020, and narrowed its net loss to $23 million, per securities filings. That’s not a bad number considering the company spent $52 million on sales and marketing over that period, and grew revenue roughly 25 percent year over year.
Then there’s Palantir. The company posted a loss of over a billion dollars in the first nine months of 2020, per SEC filings, more than double year-ago levels. While on the surface this looks bad, Palantir explains that it previously pursued multiyear upfront payments from customers. Thus, revenue was booked in an earlier year for work ostensibly done in a later year. Using a metric called “adjusted operating income,” Palantir says it earned $73 million in the third quarter.
Several companies also hit markets a little earlier than is typical for venture-backed companies, and it shows in their finances. Insurtech startup Lemonade, for instance, was a 5-year-old company when it went public in July. It’s growing fast, but still posting huge losses relative to sales.
So, do these kinds of losses matter for long-term investors? For what it’s worth, I’ve watched losses for a long time, and here is my take: The ability to lose money and sustain a high valuation is essentially a form of privilege extended to venture-backed companies in tech, biotech and other hot industries. These companies can continue to post losses so long as they’re growing and investors remain convinced that both the company itself and its target industry will deliver long-term upside.
This privilege can go away rather quickly when market sentiments turn. In the case of the dot-com crash and the 2008 financial crisis, for instance, companies that launched hot IPOs sometimes saw shares trading below cash value a few months later.
On the other hand, a company with a hot brand can lose money for quite a long time. Tesla, which went public in 2010, only posted its first full year of profitability last year. In its nine years as an unprofitable public company, it still ranked for years as the highest valuation automaker on U.S. exchanges. Amazon, which went public in 1997, didn’t post its first profitable year until 2003, but managed to remain a market favorite until then.
Privilege can be a loaded term, and I don’t intend to imply that money-losing companies are unworthy of investors’ confidence. Some will prove worthy over time, others not. But the point is, investors don’t allow just any company to keep losing money. McDonald’s or Coca-Cola can’t just declare they will forego profits in the name of growth. Investors count on steady earnings and dividends.
In short, losses paired with growing revenue might not matter much now, since investors themselves don’t seem to mind. But down the road they could start to matter, and that sentiment shift has a history of happening rather quickly.