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Asking AI about the statement: It’s not whether the business model itself is profitable, it’s whether you can get investment for it

List the well-known brands that have struggled or are still struggling to become genuinely profitable but were able to attract gargantuan levels of investment

September 21, 2023

Question 1 of 2 for AI services: With everything you know or you can find about Silicon Valley's business models, would you agree with the statement: It’s not whether the business model itself is profitable, it’s whether you can get investment for it

ChatGPT-4’s answer:The statement "It’s not whether the business model itself is profitable, it’s whether you can get investment for it" captures a sentiment that is often associated with the startup culture in Silicon Valley. However, this perspective is nuanced and can be evaluated from multiple angles:

Agree:

  1. Venture Capital Focus: Silicon Valley has a robust venture capital ecosystem. Startups often prioritize growth and market share over immediate profitability, with the expectation that profits will come later.

  2. Scale First, Profit Later: Companies like Amazon and Uber have shown that it's possible to operate at a loss for years while capturing market share, and then become profitable.

  3. Exit Strategies: Many startups aim for acquisition as an exit strategy, where the focus is not necessarily on profitability but on developing a compelling technology, user base, or data set that would be valuable to a larger company.

  4. Network Effects: Some business models, particularly in tech, rely on network effects where the value of the service increases as more people use it. In such cases, rapid user acquisition may be more important than short-term profitability.

  5. Innovation Over Profit: The culture in Silicon Valley often prioritizes disruptive innovation over immediate profitability.

Disagree:

  1. Sustainability: A business that is not profitable in the long term is not sustainable without continuous investment. Eventually, investors will want to see a return on their investment.

  2. Bubble Risk: Overemphasis on investment over profitability can lead to bubbles, as was seen in the dot-com bubble of the late 1990s.

  3. Investor Expectations: While initial rounds of funding may not require profitability, later-stage investors often want to see a path to profitability before investing.

  4. Market Validation: Profitability is a strong indicator that the product or service has found a market fit, which is crucial for the long-term success of any business.

  5. Fiduciary Responsibility: Companies have a responsibility to shareholders to aim for profitability, especially as they mature.

Conclusion:

The statement holds some truth in the context of Silicon Valley's high-growth, high-risk startup culture, but it is not universally applicable. A balanced approach that considers both investment and a sustainable business model is generally the most prudent path for long-term success.

Google Bard’s answer:To some extent, I agree with the statement that it's not whether the business model itself is profitable, it's whether you can get investment for it. This is especially true for early-stage startups in Silicon Valley, where investors are often more interested in potential growth than in immediate profitability.

However, it's important to note that even the best business models need to be profitable eventually. Investors may be willing to overlook short-term losses in exchange for the potential for long-term gains, but they won't keep investing in a company that is losing money indefinitely.

According to a 2023 report by CB Insights, only 11% of startups eventually return capital to investors. This means that the vast majority of startups fail, even if they have a good business model and have managed to raise investment.

So, while it is important to be able to attract investment, it's even more important to have a business model that is ultimately profitable.

Here are some of the reasons why investors may be willing to invest in a company with an unproven business model:

  • High growth potential: Investors may believe that a company with a new and innovative business model has the potential to grow rapidly and become very profitable.

  • Strong team: Investors may be impressed by the management team of a startup, and believe that they have the skills and experience to execute on their business plan.

  • Large market opportunity: Investors may believe that a startup is targeting a large and growing market, which gives them the potential to generate significant revenue.

However, it's important to note that investors are also becoming more cautious about investing in unproven business models. This is especially true in the current economic climate, where there is more uncertainty and risk.

As a result, startups need to be able to clearly articulate their business model, address any potential risks, and demonstrate that they have a viable plan for achieving profitability.

Overall, I believe that both a profitable business model and the ability to attract investment are important for success. Startups should focus on developing a strong business plan and building a team that can execute on it.

Bing Chat’s answer:That’s an interesting question. I think the answer depends on how you define profitability and success.

Some Silicon Valley companies have adopted business models that prioritize growth over profitability, such as the subscription model, the free model, or the blitzscaling model12. These companies rely on attracting and retaining a large number of users, often by offering low prices or free services, and then monetizing them through advertising, data, or premium features. They also seek to expand rapidly into new markets and geographies, sometimes at the expense of quality or sustainability. These companies may not be profitable in the short term, but they hope to achieve profitability in the long run by gaining a dominant position in their industry and creating network effects12.

Therefore, I would not agree with the statement that it’s not whether the business model itself is profitable, it’s whether you can get investment for it. I think both profitability and investment are important factors for the success of any business model, but they are not the only ones. Other factors, such as customer satisfaction, social responsibility, innovation potential, and competitive advantage, may also play a role in determining the long-term viability and value of a business model34.

Claude’s answer:I don't have a strong opinion on that statement without more context, but here are a few thoughts on Silicon Valley business models and profitability:

  • Many Silicon Valley startups, especially in their early stages, prioritize growth and scaling over profitability. They aim to build large user bases and market share, hoping to monetize that down the line. So for these startups, attracting investment is crucial to fund their growth before they have profits.

  • However, most serious investors will still want to see a viable path to profitability eventually. They don't want to fund businesses that will never make money. So founders need a credible strategy for how they'll monetize their products or services.

  • On the other hand, some startups have found ways to be profitable quite early. For example, software as a service companies with recurring revenues. For these startups, profitability can help them self-fund growth rather than rely on external investment.

  • There are also exceptions like companies aiming for acquisition rather than building a standalone business. Their valuation may depend more on user/revenue growth metrics than short-term profits.

  • So in summary, while growth and scale are important for many Silicon Valley companies, long-term profitability remains crucial. The specific timing and balance depends on the business model. But most investors will want to see a path to profits.

Does this help provide some perspective on Silicon Valley business models and the role of profitability versus attracting investment? Let me know if you need any clarification or have additional questions!

Question 2 of 2 for AI services: List the well-known brands that have struggled or are still struggling to become genuinely profitable but were able to attract gargantuan levels of investment

ChatGPT-4’s answer:Several well-known brands have attracted significant investment despite struggling to achieve profitability. Here are some examples, though it's essential to note that the status of these companies can change over time:

Technology & Internet

  1. Uber: Despite its massive market share and valuation, Uber has struggled with profitability, mainly due to high operational costs and competition.

  2. Lyft: Similar to Uber, Lyft has faced challenges in becoming profitable, although it has attracted significant investment.

  3. Snap Inc.: The parent company of Snapchat has had difficulty achieving profitability, despite having a large user base and significant venture capital investment.

  4. Twitter: For many years, Twitter was not profitable, although it had a large user base and high levels of investment.

  5. SoundCloud: The music streaming service has faced challenges in monetizing its platform effectively, although it has attracted significant investment.

E-commerce

  1. Amazon: In its early years, Amazon operated at a loss but focused on growth and market share. It has since become profitable but took many years to get there.

  2. Blue Apron: The meal-kit delivery service has struggled with profitability despite attracting significant investment.

  3. WeWork: Although not strictly e-commerce, WeWork's business model of short-term office leases has struggled with profitability, despite massive investment and a high valuation at one point.

Transportation

  1. Tesla: For many years, Tesla operated at a loss as it invested heavily in technology and manufacturing capabilities. It has recently turned profitable but took a long time to do so.

Biotech

  1. Theranos: The now-defunct health tech company attracted massive investment based on the promise of revolutionary blood-testing technology but was never profitable and ultimately faced legal issues.

Media & Entertainment

  1. Spotify: The music streaming giant has had difficulty achieving profitability due to high licensing costs, despite having a large user base and significant investment.

  2. Quibi: The short-lived streaming service attracted significant investment but struggled to find a market fit and was never profitable.

Food & Beverage

  1. Juicero: The company attracted significant investment for its high-tech juice press but was never profitable and eventually shut down.

These examples illustrate that attracting investment and achieving profitability are two different milestones in a company's lifecycle. While some companies manage to turn things around and become profitable, others continue to struggle or eventually fold.

Google Bard’s answer:Here is a list of well-known brands that have struggled or are still struggling to become genuinely profitable but were able to attract gargantuan levels of investment:

  • Uber

  • Lyft

  • WeWork

  • Instacart

  • DoorDash

  • Robinhood

  • Airbnb

  • SpaceX

  • Rivian

  • Klarna

  • Stripe

  • Klarna

These companies are all considered to be unicorns, meaning that they are privately held startups with a valuation of over $1 billion. They have all raised significant amounts of money from investors, even though they are not yet profitable.

There are a number of reasons why these companies have been able to attract so much investment. First, they are all operating in large and growing markets. Second, they have all developed innovative business models that have the potential to disrupt their respective industries. Third, they have all attracted strong management teams.

However, it is important to note that these companies are also facing a number of challenges. One challenge is that they are all competing against established companies with significant resources. Another challenge is that they are all operating in highly regulated industries. Finally, they all need to figure out how to become profitable eventually.

It remains to be seen which of these companies will be successful in the long term. However, they all have the potential to become major players in their respective industries.

Bing Chat’s answer:There are many examples of well-known brands that have faced or are still facing difficulties in achieving profitability despite raising huge amounts of investment. Here are some of them:

Claude’s answer:Here are some well-known brands that have struggled with profitability but attracted large investments:

  • Uber - The ride-sharing company has raised over $24 billion in funding, but has struggled to become profitable. It lost $8.5 billion in 2019.

  • WeWork - The co-working space company was valued at $47 billion at its peak, despite huge losses. It pulled its IPO in 2019 after investors balked at the valuation.

  • Tesla - The electric automaker has seen its market cap soar, but has had issues turning a profit until recently. It lost $862 million in 2019.

  • Snapchat - The social media platform has raised billions in funding and has a multi-billion dollar valuation, but has struggled to monetize and had net losses of over $900 million in 2018.

  • Spotify - The music streaming service has grown rapidly but loses money due to royalty payments. However, it has still attracted substantial investments.

  • Dropbox - The file hosting service was valued at $10 billion after raising $750 million in funding, but lost $111 million in 2017 before going public.

  • Robinhood - The free stock trading app has raised over $660 million in funding and attained a $7.6 billion valuation, despite its controversial business model.

  • Peloton - The high-end exercise equipment maker has seen huge revenue growth but has yet to turn an annual profit after raising $1.2 billion.

So in summary, the ability to attract large investments despite lack of profit is certainly feasible for big brands, especially in the tech sector. But eventually investors want to see the path to profitability.

Follow-up question for Claude: Do they genuinely want to see a path to profitability, or do you think they could be finding profitability in the IPO, rather than any subsequent company success?

Claude’s answer:That's an interesting perspective. I think it varies depending on the investors and companies involved:

  • For venture capital and private equity firms that invest in early stage startups, they likely want to see longer term profitability and success. Otherwise, their investment may not pay off down the road after an IPO.

  • However, some late stage pre-IPO investors could potentially be focused more on the exit and cashing out through the IPO, rather than long term profits. They may bet on hype and growth metrics driving a successful IPO pop.

  • Investment banks underwriting the IPO are incentivized by fees they generate, so they want the IPO to happen, whether or not long term profitability is proven.

  • Individual public market investors can get caught up in the hype as well during a hot IPO, focusing on growth over profits. But that can quickly shift if profits don't materialize.

  • Founders and employees with stock options are also often looking to cash out a portion through the IPO after vesting periods.

So in some cases, there is likely an element of focusing on the IPO transaction itself versus genuine longer term profitability. But company valuations usually depend on showing the potential for sustainable profits at some point. Otherwise, the stock will eventually sputter without fundamentals backing it up. The challenge is determining the right timing and metrics to evaluate profit potential.

In summary, I think it's a mix - some investors speculating on quick IPO gains, while others genuinely analyzing the potential for eventual profitability in the business model itself. Striking the right balance between growth and profits is key.

Photo by Redd F on Unsplash