If they really wanted to, many high-growth startup and expansion stage businesses could be profitable. Some just choose not to be.
Why in the world would they do that?
As Fred Wilson explains on his blog (borrowing from a post by Mark Suster at Both Sides of the Table), the primary reason is that they choose to invest heavily in building their business with the hope that the return (and profits) will be significantly higher down the line.
Those expenditures include hiring salespeople (sometimes in different geographies) or building additional products, all of which result in the company losing money or, in a best case scenario, breaking even.
The bottom line, Wilson explains, is that a lot of web companies aren’t optimizing for profits this year. They’re optimizing for the future, focusing on the ultimate potential of the business and the total amount of cash flow it can generate when it finally reaches maturity.
Of course, Wilson writes, that means high growth companies better not swing and miss on the investments they make into their business. In his full post, he explores the potential downfalls of that strategy and how the public markets tend to interpret that long term vision. To read it, click here.