Good products, but bad businesses

Over the past 15 years, clever digital ideas have captured imaginations, transformed habits and reshaped industries and economies. It might seem surprising, then, that so many great digital products in this generation have come from bad businesses. Spotify has reshaped music, but the company is still figuring out how to turn a consistent profit. Uber has altered cities and become a way of life for some riders and drivers. The company has also spent far more cash than it has brought in over its 13-year life.

App companies like DoorDash, Instacart and Gopuff have hooked some Americans on deliveries of restaurant meals, groceries or convenience items, but hardly any company that brings fresh food to our doors has made it work financially. Robinhood helped make investing accessible and fun, but it hasn’t made free stock trades profitable. Twitter is a cultural force, but it’s never been a good company. There are some tech stars that are also (arguably) great businesses, including Facebook, Airbnb and Zoom Video. But how did so many companies with transformative technologies break the rule that a business dies if it can’t balance its checkbook?

The optimistic view is that we want companies like Uber and Robinhood to have time and money to hone their products, grab as many customers as possible and work out the money kinks later. And some of these digital stars are profitable, depending on how you define “profits.” The bummer view is that we may be living in a technology mirage and the persistence of businesses that shouldn’t survive has robbed us of true, lasting innovation. Let’s hash it out:

Perhaps this is what a revolution looks like. Last year, Uber spent nearly half a billion dollars more cash than it generated — and that was a big improvement. If Uber were a family business, it would probably be long gone. Faith that technology disruption is just getting started, and investors’ hopes to cash in from that, has kept Uber going.

The company’s supporters say that Uber is a leaky canoe by choice. Uber expanded into many cities and countries at once rather than going slowly and capitalised on its popularity by expanding into a hub for transportation and delivering meals, groceries, booze and other goods to our door.

The hope is that this is Step 1 on Uber’s journey to something grander, better for everyone and profitable. A similar transformation is happening at Spotify, which is trying to overcome the ugly math of music streaming by expanding into potentially lucrative podcasts. Instacart wants to pivot from being a grocery-delivery go-between to also selling software to supermarkets to manage their businesses. (Software tends to be very profitable. Grocery delivery is not.)

In many ways, this is exactly what we should want. Because investors have believed in their business plans, companies with good ideas have the time and the money to dream big, expand and figure out how to give customers what they want — and eventually generate real profits, too.

Amazon is a famous example of a company that spent more cash than it brought in for a few of its early years — a temporary condition until it had both a good product and a great business. Until the past couple of years, Netflix also needed to keep borrowing money to stay afloat. And some companies, including DoorDash and Spotify, are unprofitable under conventional accounting measures but do bring in more cash than they spend. Or perhaps hope has obscured common sense.

The other possibility is that these digital ideas never made economic sense in the first place and they’ve been propped up by investors’ misplaced hopes. In that view, this generation of “Profits? What profits?” digital companies is like a homeowner trying to enlarge a house with a rotten foundation.