There is an ongoing debate about early profitability and many have called the tech world a bubble because so many "successful" companies are losing money. But that's a common misconception as it's totally reasonable to lose money as you build your startup.
Think about your childhood. Think about the neighborhood lemonade stand. In order to transform it into a successful venture, you first needed to go to your local supermarket. You had to buy a table, a tablecloth, a sign, some lemonade powder, water, and a few more things. Without those purchases, there is a zero percent chance your lemonade stand would succeed.
When you go to the supermarket and buy all those necessary things, are you losing money? Of course not. You're investing in the business so that down the road, when you sell enough lemonade, your stand will become a successful enterprise.
The same is true for tech companies. A friend of mine who was one of the first employees at Facebook told me the following story. It was early days and Mark Zuckerberg was busy building out the feature set at Facebook. My friend approached Zuckerberg and told him he knows how to monetize the site. Zuckerberg got up and wrote one word on the whiteboard: "Growth." What Zuckerberg meant by that is that he is focused on growth and not on monetization, my friend explained. The concept is that if enough users use the site, monetizing the platform won't be that difficult. Guess what? He was right.
Let's simplify this for a second.
Imagine you have an app. You release this app of yours on Apple's App Store. Now you have to make a decision. Do you focus on user experience with the hopes that people will love the app, use it, and even recommend it to friends? Or do you focus on monetizing it by putting low-quality ads in the app, with the hopes that people will accidentally click on the ads with their thumbs and you'll make a few bucks?
If you focus on the former, a good experience, people might download the app and enjoy it enough to keep coming back. Once you hit critical mass, adding a monetization layer, like a subscription won't be that difficult. However, if you focus on monetizing the app from the get-go, people might download the app, use it once, hate the experience, and then delete the app never to use it again.
Obviously, the first option is the better one, unless of course, all you want is to make a few quick bucks. No brand was ever built by putting ads in their products from day one.
Examining all the leading brands will give you a clear picture of how it's done. FedEx, Tesla, and Amazon, for example, were not profitable for many years. The same is true for many successful companies in the tech sector.
I once attended a lecture given by a CEO of a multi-billion dollar company. When I say that the company was worth billions, I'm talking about company valuation, which is what investors say the company is worth. There was only one issue, the company was losing millions of dollars.
Someone from the audience asked this CEO when the company would be profitable. His answer was spot on. He said, "We'll be profitable when we stop focusing on growth and start focusing on monetization."
In other words, the company was now spending millions on expansion and on positioning itself as the leading player in its space. If and when the CEO decides that they are big enough to focus on monetization, he will put the brakes on growth and press the gas on turning a profit.
Let me give you a concrete example. Without naming names, a huge tech company once hired a very expensive singer to perform at its employee offsite retreat. Now, this company was losing millions of dollars every month. People went nuts. "Why are you spending all that money on that singer instead of focusing on becoming profitable?"
Those people don't get it. Hiring that singer was an investment in human capital, aka the employees. In today's highly competitive market, retaining employees is not trivial at all. If you don't keep employees happy, they will not stay for very long.
Google is famous for giving employees amazing perks. Are they losing money by stocking all their refrigerators with endless snacks and drinks? Of course not. They are investing in their employees, which is an investment in the company, which will ultimately lead to success.
Many people famously asked why Tesla is worth so much more than traditional car manufacturers when those companies sell significantly more cars than Tesla.
Elon Musk replied that valuations are not only based on current revenue, but also on potential future projections. In other words, a company is not valued at how much profit they are making now, but also on what they're building, and how successful it will be in the future.
Here is the bottom line. Not only is it OK for tech companies to "lose money" as they build the business, but also it is often necessary and mandatory to go through the growth stages, which involves losing money in the beginning if they ever want to achieve profitability.
As for the claim that we are in a bubble because so many successful companies are actually bleeding money, well, that's just silly. A bubble implies that companies are actually building what's referred to as vaporware, aka nothing real or significant. Clearly that's not the case today in a world that has more innovation and deep tech than ever before.