Losing Money is the Point

It’s mind-boggling how many in the general public don’t understand this, so let me rant about it for a bit: many companies are designed to lose money this year. That’s the fucking point.

Today’s main character energy is the news of WNBA players wearing Pay Us What You Owe Us shirts during the All-Star game. The knuckle-draggers on social media immediately clutched their pearls, saying “ohmygod the WNBA lost $40M last year so players should really be paid zero dollars, not given a raise!!111” You see this all over the place, like all the stories recently about Apple “losing” $1B a year on it new streaming service.

No; losing money is the fucking point.

Econ 101

You’re not “losing money”, of course: you’re investing. (Yes, I realize that line sounds like a meme, but stick with me here.) The money doesn’t just go up in smoke- it gets invested in staff, infrastructure, materiel, and so on. It all comes down to a single bet: more investment in the organization today will mean larger returns tomorrow. That’s it; that’s the thing the average person seemingly doesn’t understand. You’re now smarter than average (which, depending on your take on the general state of the world, could mean a lot to you, or still be embarrassing).

The thesis behind that single bet is the important one, of course: you’re assuming you’re operating in a business where early success can be replicated in a later stage organization. If you can, the thought process is simple: invest in the business and you’re going to make more money, particularly if you have enough cash to grow the business in the meantime (either through your own pockets or through outside investors).

There are myriad reasons why that wouldn’t be the case, though: the market might not be big enough (in which case you can’t keep expanding your sales), your company’s hierarchy or process might not scale at the same efficiency as before, competition might snuff you out, or sometimes you’re just unlucky.

That’s why there are so many Series B+ funds out there whose job it is to basically pour gas on a fire. Much of their focus is entirely on unit economics: the company might be losing money overall, but have they proven their base case out? The most obvious example of this is Uber: by the time they IPO’d they were losing billions of dollars a year… but they were able to reach profitability in certain mature markets. That made it pretty obvious that raising more money made sense: as they developed more markets, the overall business would become healthier, and most importantly: when they reached profitability it would be at much higher profit levels than if they took a slower route without outside capital. And eventually, that’s what happened.

I’ll take anybody’s money if they giving it away

Sports in general is a pretty good example of this phenomena, which is why the WNBA stuff pissed me off so much this morning. I originally wrote about it through my ownership experiences with Oakland Roots: sports clubs tend to be extremely cash-hungry and require a ton of resources just to survive year-to-year. But that’s largely mitigated through valuation increases.

To take the example of the WNBA, again: just between last year and this year, valuations of those franchises grew, on average, 180% year-over-year. (For novices, something growing 180% in a year is one of those “pretty good” investments to have.) There’s additional positive signs — huge new broadcasting deals, growing expansion fees (which is American sports’ sterling example of socialism at work) — but the valuation increase is the most interesting to look at.

Valuations are a really powerful tool that ownership can choose to wield. There are a couple different ways to leverage a higher valuation: you can use it to secure more debt for the org (through loans, future cash flow lending, etc), and you can also peel off minority stakes. If your team goes from $1B to $2B, hey, it might make sense to bring on a new minority owner for $100M. You still keep majority ownership, but you get that $100M back in the company to grow the pie even more (hopefully beyond the point of the equity you sell).

Red is fine

For certain companies, with easy access to external cash and a clear growth pattern, yes, staying in the red is fine. That’s not the case for all companies — your kiddo’s lemonade stand probably doesn’t need a $45M capital infusion. Unless it’s really fucking good, in which case send me a case, sounds delicious. But yeah, for a lot of venture-backed companies, or sports organizations, or other companies where you can afford to put more cash into the business for a larger longer-scale outcome: red is good, embrace the red. And pay your players.