{"id":7614,"date":"2020-12-09T10:00:48","date_gmt":"2020-12-09T04:30:48","guid":{"rendered":"https:\/\/gtm360.com\/blog\/?p=7614"},"modified":"2024-01-04T16:03:40","modified_gmt":"2024-01-04T10:33:40","slug":"how-do-founders-become-rich-when-their-startups-dont-make-profits","status":"publish","type":"post","link":"https:\/\/gtm360.com\/blog\/2020\/12\/09\/how-do-founders-become-rich-when-their-startups-dont-make-profits\/","title":{"rendered":"How Do Founders Become Rich When Their Startups Don’t Make Profits?"},"content":{"rendered":"

This is a slightly edited version of my answer to the following question on Quora<\/a>:<\/em><\/p>\n

How is it that Amazon doesn\u2019t make a profit, yet Jeff Bezos\u2019 net worth is in the billions?<\/strong><\/p>\n

The question is temporally flawed since Amazon does make profits today.\u00a0But there was a time when Amazon made losses and still Jeff Bezos had a networth in the billions \u2013 or at least hundreds of millions.<\/p>\n

Then there are so many companies that make losses now but their founders are worth billions e.g.<\/p>\n

    \n
  1. The two Co-Founders of Flipkart pocketed a cool billion dollars each when their startup was acquired by Walmart for $22 billion in 2018. Flipkart had never made a profit during its entire lifetime as an independent company.<\/li>\n
  2. AirBnB \/ Brian Chesky. AirBnB never turned an annual profit since its 2008 launch (Source: shrts.in\/a9rF)<\/li>\n<\/ol>\n

    \"\"<\/a><\/p>\n

    So there\u2019s nothing structurally flawed with the question. In fact, it highlights a paradox that intrigues – even annoys and angers – a lot of people.<\/p>\n

    To resolve this apparent paradox, you need to grasp a disruptive change that has happened to the nature of business over the last 10-12 years.<\/p>\n

    Back in the day, a founder started a business, the business made profits, the founder took home the profits, that created networth. So, in that era, if a founder was rich, it automatically meant the company made profits. Per contra, if a company made losses, its founder couldn\u2019t be rich.<\/p>\n

    Those days are gone.<\/p>\n

    As New York Times<\/em> observed in The Entire Economy Is MoviePass Now. Enjoy It While You Can. (Published 2018)<\/a>, profit is so 20th century. <\/span><\/p>\n

    Nowadays, companies may make losses but their founders can be rich. This is especially true of new-age VC-funded companies.<\/p>\n

    Their wealth is explained by the modern trend in which many loss-making startups enjoy valuations in billions.<\/p>\n

      \n
    • Unicorn: $1 billion or more e.g. Ola<\/li>\n
    • Decacorn: $10 billion or more e.g. Uber<\/li>\n
    • Centicorn: $100 billion or more e.g. ByteDance<\/li>\n<\/ul>\n

      Frothy valuation is in turn explained by the so-called Greater Fool Theory<\/strong><\/em> described in my blog post entitled\u00a0Teardown Of The VC Investment Model<\/a>.<\/p>\n

      \"\"<\/a><\/p>\n

      As a result of the Unicorn<\/em>, Decacorn<\/em> or Centicorn<\/em> status of their companies, their founders, who have substantial shareholding in these companies, are worth billions.<\/p>\n

      As I highlighted in The Six Secrets To Attract Venture Capital<\/a><\/span>:<\/p>\n

      \n
      The VC Investment Model has created a new paradigm in which wealth can be generated without profits. Gone are the days when a company had to make profits for its stakeholders to become rich. Today, promoters and investors of many VC funded companies have become billionaires even though their companies have never made profits e.g. Flipkart, PayTM, Uber.Lest you think that this kind of bounty happens very rarely, over 70% of tech companies that IPOd last year in the USA made losses<\/strong><\/em> and almost all of them created billions in networth for their Founders (and rewarded their VCs with multibagger returns).<\/p>\n<\/div>\n<\/blockquote>\n
      \n

      Dropbox, Spotify, Snap, SurveyMonkey, Tesla … these are not the only startup-turned-public companies that enjoy skyhigh valuations despite making whopping losses. 83% of IPOs in 2018 were for loss-making companies. https:\/\/t.co\/FWAE9InArz<\/a><\/p>\n

      — Ketharaman Swaminathan (@s_ketharaman) March 5, 2019<\/a><\/p><\/blockquote>\n