Beyond spez (and the fact that he is a greedy little pig boy), I’m curious about the corporate dynamics that prevent a company like Reddit from being profitable. From an outside perspective, they make hundreds of millions per year via advertising, their product is a relatively simple (compared to industries that need a lot of capital to build their product), and their content is created and moderated for free by users. Could any offer some insights or educated guesses? Additionally, I’m curious how this all ties into the larger culture of Silicon Valley tech companies in the 2010s.
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This is the simple, plain truth right here. There is no other way to “fix” the internet now. It’s all infected with freemium and shitty subscription based services.
Software engineer here, of the kind who works for companies similar to Reddit.
I don’t know more than anyone else about their financials, and I can surely believe that Reddit has been wasteful in a lot of ways in the past financial climates, since they didn’t have to optimize for profitability. But I can tell this firsthand: people tend to drastically under-estimate how much constant innovation is required to get past bottleneck after bottleneck just to keep the lights on, on very high-scale services.
Reddit’s scale is humongous, so I can see how it would require hundreds of employees just to keep it up and going.
I recall from past discussions on the site about its finances that theres a few major obstacles they hit;
Huge staffing costs. Not even necessarily bloat - though there is reportedly some of that - but just that they require a shitton of staff with expensive credentials to maintain and develop the site and its’ backend. As the site grows, issues with code or algorithm or features require more and more resources to scale sustainably, so development snowballs similarly. It’s expensive to maintain a stable of coders or developers capable of working in that scale. And not just code - their community or sales teams are also needing a lot of bodies and competitive compensation, especially up the food chain.
Hosting costs. As more and more of reddit’s content is hosted in-house, their cost to deliver content has skyrocketed. There’s very good business arguments to be made for keeping that content internally hosted, but those are all long-term payoff, while the costs of hosting are all much more immediate. In a prior conversation a former employee said that reddit’s hosting costs have effectively kept pace with its growth in revenue.
Poor monetization, lack of vision, poor understanding of their own community.
Reddit launched without a monetization model, the plans was to build a VC darling and sell it so that monetization was someone else’s problem. Now that the platform is trying to get cash positive, they’ve effectively failed to come up with a Plan A and gone for Plan B: ads. It’s a particularly weak option, but a ‘safe’ fallback option used by shitty blogs and newsreels around the world. Reddit isn’t offering particularly great value, it’s not offering particularly great targeting, it’s not even able to offer prominent placement or assured attention. Reddit is in a very poor position to sell ads when compared to Google or Facebook.
Reddit has struggled to make ads relevant, and has struggled to discover alternative revenue streams. The most major alternate revenue option has been awards / gold, but Reddit’s commitment to that space has been half-assed at best, and resented or used toxically by the community at its worst. To the users or the outside world, we’ve never seen any attempts to make their niche more relevant to outsiders, or to make money from site users. Instead, they’ve waffled somewhat noncommittally in both spaces, while not excelling in either, or in walking a balance. I think it’s safe to say from the Third Party Apps that there was huge willingness from Reddit’s userbase to pay money in order to engage with the site in specific ways, and willingness to spend money on the community as a part of the community. Reddit never meaningfully figured out how to tap into the enthusiasm their own site inspired in its userbase.
Which I think is in large part because Reddit never really understood their own community. Reddit started with this wild anti-commercial, anti-adweb, mentality and attracted the technologically literate and internet-savvy demographic as it’s core userbase, which went on to inform sitewide culture up to today. They launched a platform with anti-ad sentiment, attracted ad-opposed userbase demographics … and then went ad-supported. This could have been something that reddit pitched successfully to the site at the time - they could have acknowledged that folks don’t like ads and made a point of framing advertisers as entities choosing to support reddit and keep it free & functional - Reddit likes supporting “it’s own”. They could have facilitated and supported connections between advertisers and targeted communities in ways that bypass Reddit’s hostility towards ads and appeals to advertisers. Instead they just started serving ads. Likewise with awards, premium, and similar: they could have done far more to play into the gamification and the willingness to support the platform - they just failed to. And today … site Admin, Reddit Inc, have burned all of the community goodwill that could have made those programs successful by instead forcing corporate-feeling monetization and advertising upon the community.
More than wasting money directly, they’ve wasted opportunities and advantages. I think one huge long-term learning from Reddit’s current struggle is the importance of soft skills and social acumen in managing a tech platform whose masthead product is its “communities” - they desperately needed people on staff who understood community and who understood their userbase’s values and culture.
That is a brilliantly thoughtful take, thanks a lot for taking the time!
The one thing I would temper, is that we don’t know for sure if there would have been better ways to monetize. I’m hopeful that there have been smart people at Reddit who looked into it and gathered good insights about it; maybe some approaches that feel right to us laymen actually crumble under closer scrutiny, with those insights we don’t have. Maybe there is a different leadership team out there who would have figured it out; but I don’t want to rule out the possibility that there isn’t, and that it just couldn’t get figured out. Maybe Reddit was just a terrible investment that had no way to get anywhere good, and that’s just how it is with startups sometimes.
Having worked at startups, there almost certainly were better ideas floating around that couldn’t get the political capital to get adopted.
Better ideas, most definitely. But good enough to make Reddit profitable? I guess my point is: it’s very possible that yes, but it’s also very possible that there wasn’t really anything to be found.
The one thing I would temper, is that we don’t know for sure if there would have been better ways to monetize.
This is a fair point, and I do want to avoid the Armchair QB issue, where it’s easy to make something The Team didn’t do sound like it would have been successful, once matters are already decided and whatever was picked clearly failed.
That said, I think that over their lifespan, especially their time at peak, there must have been opportunities and options for monetizing that Reddit failed to fully exploit or embrace. I think that so many other people have made so much money off of Reddit over the years that Reddit Inc not getting their share feels like it must have involved missed opportunities.
At the very least, I don’t think that the existence and community of Reddit is inherently impossible for Reddit to profit from.
I apologize in advance, this train of thought ran long and late; it’s a really unique situation that touches on some stuff I think is super interesting.
Monetizing reddit required some very unconventional thinking compared to typical approaches at tech startups. Which kind of does loop back to how I closed above - I think that some of what has slowly gone wrong with Reddit over the past decade is rooted in tech startup culture itself, and that tech startup culture very highly values founders, tech people, software solutions, metric-able sales tactics … and can massively undervalue soft/social skills and knowledge more aligned with Humanities’ fields.
Starting off trying to go user-supported on somewhere between a donation basis and a soft-gamified award system is very tech startup - build a good software product users like to interact with, then ask the users to support the company, ~but make it fun~. That their next option was then to transition to ad sales using things like in-community placement to “target” is a fairly equivalent model of creativity - the users aren’t donating enough, so lets serve a couple ads just to cover the gap.
Now, fully: I have biases here. I’m from a branding and communications background and my academics was ‘community’. With that starting point, I don’t think Reddit ever truly understood how significant and how impressive what they had built, from a community perspective, really was. Or how massive a commercial opportunity many of those communities represent if approached correctly.
As a very surface example, I think something like 90% of niche hobbies are fundamentally based around goods or services of some sort, and have companies competing to access the hobbyists as a targeted market. Reddit has hosted the dominant communities for many of those hobbies for a decade or more. Yet Reddit has never visibly attempted to leverage that.
Something I’m sure has been suggested and I strongly suspect has been rejected because it’s complicated and has a long payoff scale would be selling abstract ‘community membership’ to companies buying ads. Not just placing the ads, but a much more comprehensive, but less strictly tangible, package of traditional ads, product placement, community management, and communications coaching. Redditors really like supporting “their own” and they tend to value even corporate entities that can engage on their level and participate in community membership; companies that can proverbially “take off the suit and shitpost” can Fellow Kids their way to financially valuable relationships with communities. Reddit being able to offer an advertiser a package similar to the level of support Victoria provided AMA celebrities during her time with the community - meets the successes that a company like Ghost Ship sees in their level of community engagement around Deep Rock Galactic.
It definitely is more complicated than just that and that model has other separate sales barriers, especially as a starting program. Equally, it cannot offer the concrete outcomes many large companies currently look for, while being a challenge to price accurately for smaller companies etc - I absolutely acknowledge that it would be hard. At the same time, I’m also wanting to note that this approach would be playing into an existing model for many companies’ engagement with relevant consumer groups on Reddit already, and when done well the approach has a massively proven track record and clear payoff. Without necessarily following the exact model I’m speculating about above, but using it as an example of ways that Reddit could have been working to add value and and support to a space that already exists with proven (advertising) marketplace demand.
TLDR; at the very least, there absolutely were ways Reddit could have monetized its strengths rather than just its traffic.
No need to apologize!
Yes, I agree there is something to this. I’m thinking monetizing the strengths would have been an unproven path for stakeholders, compared to the usual ways they worked elsewhere, and thereby was considered too risky? I’m not sure what went down.
Great breakdown. Appreciate the info. Love the part about ads as well. It’s also inherently difficult for ads to get impressions when users can just submit a veiled post about something in a community for free.
If there was a c/ThreadKillers community this deserves to be posted there
There is a https://lemmy.world/c/bestoflemmy
This could have been something that reddit pitched successfully to the site at the time - they could have acknowledged that folks don’t like ads and made a point of framing advertisers as entities choosing to support reddit and keep it free & functional - Reddit likes supporting “it’s own”. They could have facilitated and supported connections between advertisers and targeted communities in ways that bypass Reddit’s hostility towards ads and appeals to advertisers. Instead they just started serving ads.
And they didn’t just start serving ads, they started serving ads like the HeGetsUs campaign that were so poorly targeted that the community they’d built absolutely hated them.
This might be a stupid question, but how much waste (if any) is there typically in corporations like this? Useless HR cruft and the like.
Definitely not a stupid question, it’s a big topic, and there are people whose entire job is dedicated to removing that cruft as much as possible.
At a micro level, for instance if you only look at the people I directly know and work with, there’s actually little cruft at all. We sometimes get stupid wasteful mandates from execs, and they waste a bit of everybody’s time, but it’s rare, and typically very small amounts of time. Other than that, I can tell you what every single person is useful for, and I can’t think of a single person who isn’t pulling their weight.
But at a macro level is the hard part, and I don’t think anyone can really know. An organization can’t scale if it doesn’t get seriously decentralized. As a worker, you need to make bold decisions for yourself and the teams around you, without having to know what the hundreds of other teams are up to. That means I can’t tell you for sure that there isn’t another team far from mine (for instance, from an acquisition or something), who is doing 95% the same thing my team does, but that we don’t know about.
Execs are constantly trying to identify those possible collaborations and introduce relevant teams with each other, but even they can’t know what everybody is doing.
I worked at Apple for a while, and since it’s a very secretive company, they had a very odd way of embracing it completely, which I’ve never seen elsewhere. I worked part-time 3 months on a project, before finding out that a team under the same VP had already solved the problem years ago. I whined about how inefficient it is to my director and he basically told me that unlike other companies, at Apple it’s by design. Basically, they’d rather have duplicate efforts, in order to maintain the project secrecy for the goal of “surprising and delighting” customers, and also in order to find always new and innovative ways to solve problems if the new solution turns out to be better. (Mine definitely was not. 😂) Apple really has an unusual innovation culture in general, I liked some of it, but definitely not that part.
Thank you for such s measured response. Many developers would want to see any manager burn in hell as they tend to feel like they always know better. And while on a technical level that might be and if is true, on other levels a good manager can have a massive impact.
Sure! I think I used to be a bit more annoyed by managers in general, before I got myself in the crazy situation where I actually was an engineer manager myself for a few years! I went back to an IC role since, and I don’t miss it, but now I feel that while there are incompetent managers (and incompetent people in all positions), most are just doing their best. It’s a tough job, it’s made of a lot of navigating between one rock-and-a-hard-place situation to the next.
On one level I definitely see the appeal of that way of innovating though. At the early stages of solving a problem, one solution might appear superior, but then unforseen problems come up further down the pipeline. Having completely disconnected groups work on the same problem in one way reduces the chances that everyone falls into the same trap.
In a sense, that’s how we work in the scientific community: You have different, more or less disconnected research groups researching the same problems, and even when someone publishes a solution, another group may realise that they are on the track of a better solution that they can publish a year later. We still collaborate quite a lot, but a lot of what a research group does is quite disconnected from the rest of the world until someone publishes.
Oh yeah, absolutely, I’m not saying it doesn’t make sense; particularly if you’re called Apple, which was the most valuable company in the world at the time, and therefore had insanely deep pockets. It absolutely makes sense that they would prioritize augmenting the odds of serendipitous events over cutting costs, because they’re far more likely to die of lack of innovation, than lack of funds. Really only saying that I didn’t like that part of it much for myself. But I agree, it did make a lot of sense for their situation.
Also, to be comprehensive, there are more things that I liked about the Apple culture, than things I didn’t like. They had an very extreme approach to individual ownership, which was very empowering, and which I’ve been missing since.
This is probably the best summary for how tech business works
Thank you!
Ok, commenters here don’t understand how businesses work. So, let me explain it real quick.
If a company doesn’t trade publicly, then making profit doesn’t make any sense. Companies must pay taxes from profits, so if you make any profit, you will lose money.
Small example with made up numbers (as taxes are different in different countries). Your company makes £100 in profit in year X. Corporate tax is 10%. That means that you have to give £10 to the tax man and you’re left with £90 instead of £100. You just wasted £10 for no reason.
So what do you do instead? There are multiple options to get rid of profit and turn your hard earned £100 into something useful. And usually multiple things are done throughout the year. You can pay dividends to your private investors and yourself. You can invest money back into business and buy something useful like a new coffee machine, a laptop, some patents, etc. You can pay bonuses to your workers. And there are many other things to do.
Now you might ask why do taxes work this way? It’s actually a genius solution to an old problem no one has experienced in centuries - money hoarding. Current tax system forces companies to reinvest money into economy one way or another through natural greed of their owners. Because otherwise they would just hoard money and destroy the economy.
And here’s some fun trivia: if you own a private company and you have profit - you’re dumb. Well, it’s not fun actually, you should hire a professional accountant who will help you out.
Tbh it depends. Usually it is like you say, but it depends on the goals of the owner. Steam is private for years and they make profits. Also if you have smaller business and you treat it like your business, you just want to get sallary for what you do. “Dumb” is too strong word as it depends on your position and goals
First of all, Steam being profitable doesn’t mean anything, because Steam is not a company. Company is Valve Corporation. Also please don’t confuse profit with revenue. Valve Corporation has a very high revenue, but their profit is not disclosed anywhere. I don’t live in the US, so I don’t know how to check what their tax man knows about them, but I don’t think they have much profit and pay much taxes.
Also if you actually have a small business, then you would know, that you don’t want salary or anything that incures taxes. You will buy yourself a car without VAT from company profit, you will fill it up with petrol from company profit, you will buy yourself new laptop from company profit, etc. But you’ll keep your salary as low as possible and you’ll avoid paying any taxes, including VAT. Everything that can bought through your company legally will be bought through your company and then some.
It is stupid to buy something just to avoid taxes. If it helps you grow a business - sure. But not to avoid paying taxes. As I said it depends on your goal. If you want your business to grow, have the best seed round or in general company valuation - yeah, reinvest. But if it is business that you do to make a living, it is stupid to spend everything just to not pay taxes
No, wasting money on taxes is stupid. That’s how you end up bankrupt in a few years later.
Wasting money is not a good way to avoid taxes.
You’re not wasting money, you’re reinvesting them into the business one way or another. Paying taxes is a waste of money.
You can’t deduct dividends from profit for tax purposes. This is just wrong, the aim of companies is to eventually recognise a profit to return to shareholders.
There are certain things you can do to make sure your profit is recognised in a favourable regime (e.g. Google recognising profits in Ireland) and there are tax incentives to reinvest in the company but at the end of the day, the value of the company is the value of all profits its expected to generate in the future. If that were 0 then the value of the company is 0.
You’re confusing publicly traded companies with private companies.
Except that private companies have one or more shareholders too. In the end, they want to see a profit.
No.
Publicly traded and private companies are taxed the exact same way.
That’t not what I’m talking about here.
This is a bad explanation. Dividends are paid out of retained earnings. They are actually taxed TWICE and investing money into the business is a capitalized under GAAP not expensed.
The actual reason is that pre-IPO companies prioritize revenue growth while they are raising money over expense control. The idea is once their growth flatlines they can cut expenses while maintaining their revenue.
I don’t know how taxes work wherever you are, but here in the UK dividends are exempt from corporate tax. Additionally everyone gets dividend allowance per year making part of your dividends tax free. Everything above is taxed progressively rendering dividends up to very large sums cheaper than corporate tax or salary.
I have heard that things like this lead to various accounting finagling to lead into statements like “Star Wars was not profitable”; also so that they didn’t have to pay actors as much.
That’s pretty insightful. Kinda knew that businesses don’t want to post profits but never really knew their reasonings or the implications. Thank you for spelling it out.
Amazon are famous for this, they try and run AWS at a net loss of whatever profit Amazon Retail makes, because it’s easy to spend money quickly at the end of the year to avoid taxes on IP and contracts.
Private companies don’t have to post anything publicly, they only need to send correct numbers to the tax man.
So when the greedy little pigboy said “we’ll continue to be profit-driven until profits arrive” he was being completely and purposefully deceitful? Since it’s not that profits “haven’t arrived” it’s that they just don’t want to say so?
As a private company they can do whatever they want. But the pigboy is preparing for IPO, so this narrative is to ensure that people will actually buy their shares. Once they start trading, they MUST start produce profit. But not before that.
Business profitability is something vague.
They could have lots of unneeded expenses designed to give spez and friends money and luxuries with company money.
One thing is for sure, u/spez is swimming in money and luxuries. Probably a lot of his friends and family hired in high positions in the company are also swimming in money.
I won’t believe any company profits/losses unless they release full accountability books.
With a C Corporation, officer salaries and wages are included in their profit calculation. So, it does stand to reason that Reddit’s officers could bring in a large salary which then would affect the bottom line for the company.
Those pesky API hoggers stealing all the revenue.
er took er jebs API
A company of Reddit’s size might make hundreds of millions in ad revenue, but they also have hundreds of millions in costs. For example, spez said recently they have ~2000 employees. If we make a conservative estimate that the average salary is $50k, that’s $100 Million a year just in payroll (and given that they’re based in San Francisco, it’s definitely higher than that). And if you consider all the computers, servers, electricity and other utilities, marketing, etc, etc, it adds up quick.
I wonder what the hell are those 2000 employees even doing? Brainstorming new awards?
I assume some of them are doing ad sales, which is revenue generating. Probably a lot of HR (which 80%+ of those positions are a grift, IMO), and a lot of other make-work positions. Their product team is like 200 people and they don’t even have any accessibility engineers.
At a high level it just comes down to the company not being structured to generate profit – fundamentally it exists to justify moving money from investors to the owners of reddit. That has worked up until now but in the current economic climate investors are looking for a return and it’s exposing how many tech companies have been burning cash because of how easy it was to get with minimal accountability. Any feature reddit adds hasn’t actually had to increase revenue, it’s had to convince investors that it is going to increase revenue, which is why the few features they’ve added have basically been clones of features that attracted investors to other platforms (like the video streaming thing)
After nearly two decades of running the company that way it’s going to be hard to pivot to actually generating money directly to cover what I imagine are loads of unnecessary expenses and inflated salaries
Expenses and salaries that were surely decided upon based on the thought, “Well, OBVIOUSLY, we’re going to be a big, multi-billion-dollar tech company like the other guys, so we’d better spend like one!”
Because prioritizing growth rather than sustainability costs a shit ton of money, money which gets borrowed from investors, which has to get paid back in folds, and then the investors also want more and can control what you do, and all they want is more money, so they reinvest over and over and over, which just perpetuates debt and further and further delays profit.
In short: late-stage capitalist greed.
Deciding to host images and especially video really didn’t help, those are expensive.
Both of which, were completely unnecessary as imgur and youtube were already handling that.
Well it is if your trying to keep people on your site longer…
The video player was never any good either
Haha it was perfectly good and the same as all the others on THIRD PARTY APPS
image hosting seem like an unsolvable problem as making it profitable looks impossible
Expensive, yes, but that cost scales linearly and probably is easy to track on. If that was worth cutting in their money-making goals it would be something both immediately determined and easily addressed.
It makes no sense to me. And more, with Reddit openly stating this I don’t know why anyone would buy into the IPO.
Nobody will. All this negative sentiment and suddenly turning toward musk ahead of IPO seems almost deliberate. Keep your head on a swivel with this one.
Talking openly and positively about the current poster child for wild company valuation loss - right before an IPO - sounds fishy to me to the point of wondering where the crime angle is in the whole thing.
The whole mess reeks of a future episode of “60 minutes”.
It doesn’t pass the sniff test at all. I smell a corporate raider.
Well… if every angry ex-redditor bought a share they could take the platform down. :)
We’d need to see their financials, which is tricky since they aren’t public yet. There’s also the issue, Steve lies about everything, so should we believe he’s telling the truth?
But my guesses would go like this:
Since they’ve been spending other people’s money, they probably haven’t been watching expenses closely. Their P&L is probably dominated by payroll and rent. I can’t help but feel that programmers are drastically overpaid, which is a symptom of the same issues, that there’s a lot of other people’s money chasing a finite supply of techbros.
The reason I think programmers are probably overpaid, by the way, is the number of man-hours they allegedly put in, versus the quality of their output. Reddit is a particularly shocking example of this.
In any case, the other people’s money doctrine is to grow into profitability, which means burning money on spurious shit until some magic happens. Not exactly a winning business model.
The same data you use to say that programmers are overpaid could be seen as an indication that professional-level software development is more difficult than you think and warrants the higher salaries. Programming is one of those things that almost anyone can do, but relatively few can do well.
Either way, if there were people who could do it better or cheaper they would be.
Edit: In the interest of full disclosure, my view may be slanted because I am a developer. On the other hand, that means I’ve seen the subject from the inside.
The software industry tried that, of course: replaced tens of thousands of software developers in the US with ‘outsourcing’ to India. Eventually, after fucking up things for tons of people, they figured out that actually working with a team of 20 year olds in a different time zone across the world who don’t have perfect command of English is not worth the savings, as it takes 5 fresh Indian grads to do the work of 1 experienced US dev, and it still ends up worse.
It is difficult and good programmers deserve high compensation, but there is a reason that there is the trope of the fresh out-of-bootcamp developer working 3 hours a week and making $600k a year
True, although I’ve never run into anyone like that.
They’re absolutely overpaying. Don’t forget that the last revolt was triggered in part by them demanding that all their devs move to San Francisco (where they have to pay San Francisco sized salaries).
They had remote working teams in place PRIOR to the pandemic, and they scrapped it because all the stupid executives want their taint fondled while they look over their cubicle farm of peons like all the other tech execs.
Liars like Steve are easy to catch. We know he’s selfish and unempathic. His behaviors and accusations are clear tells. Remember how he accused the dev for Apollo of trying to extort Reddit when that’s what Steve was doing? This recent Reddit move of demanding insane prices for the API and upsetting the community is really good info. He needs money (the price increase), wants more control (API got priced out), and is willing to piss everyone off ultimately sabotaging the company. While we don’t know the specifics, we know he’s desperate for money, control, and a charade while he’s running out of time. Something on his end is blowing up in his face, he’s trying to save himself, and he could be saved if someone shows up with a ton of money. Otherwise, he’s going dress the Reddit turd up as a sausage, and fake it long enough to pass it onto someone else. I wouldn’t want to be involved with him in anyway at the moment. If I worked at Reddit, I’d be sending my resume out to other employers.
I agree with everything you said. It’s worth noting that web-based advertising has generally been getting less profitable because everyone is using effective ad-blockers, so advertisers don’t want to pay as much. Their expenses could be pretty have to maintain a lot of server farms for all the picture and video content (text doesn’t take much) and for redundancy to keep a high uptime. They also have a surprisingly large staff, given all the volunteer mods.
So for the things you and I both mentioned, it’s wouldn’t surprise me if they lose money, and I don’t begrudge them trying to become profitable, but they sure didn’t go about it well.
They’re probably overpaying people that do not contribute a ton, eh? Makes me wonder how much the top brass in general earn.
With Splez’s political views, highly likely they have some sort of tax avoidance scheme.
Common problem with IT companies they overgrow themselves under false optimism and the urgent need to innovate to keep up with competition. It doesn’t help when a bro who once had a good idea is tasked with leading the company. If they actually only did minimum like craigslist they might make a lot more profits but might eventually fail. But not worse than now.
I’m not sure whether you can trust any conclusion that they are or aren’t profitable so I’m not sure it’s worth thinking about.
For Reddit specifically I couldn’t give you a good answer, but I recently watched a video about the streaming service Nebula and its path to profitability I found interesting. It isn’t a one-to-one but is still an example of how a big business may be technically unprofitable but still appealing to investors.
The short answer is that investors have a good reason to believe that it will be profitable in the future.
So imagine a streaming service. They know the average amount of time a user will be subscribed. Let’s say 25 months. So the subscription cost multipled by that 25 months is the average amount of revenue they’ll get from a user signing up. Obviously you would not want to pay more for marketing to this user than that amount as you’d never take money (not to mention the other costs of business). No matter how you slice it, you’ll pay a good bit for marketing because it’s not about just the ad for that user because you can’t magically know who would subscribe based on one ad. So you pay a good chunk in marketing, let’s say like 10 months of subscription cost. That means you’re going to be in the red for 10 months before you ever start seeing profit from that user. That’s where investors come in. They see your growth and have been convinced by you that you just need money to stave you over until you start seeing a profit.
Now, the reason a lot of services aren’t profitable yet is because the investors and the company (rightfully or wrongfully) believe that they can still grow. So they keep doing this seemingly unsustainable practice of getting more marketing money from investors to get more users onto the platform. Now, sure, after that first round of investment they could just wait until they start seeing profit and out that towards marketing but many times there are more interested in getting more growth now. Especially because there may be a lot of hype for the service they’re trying to capitalize on.
So that’s an example. Basically you’re getting investors to give you money to get customers who should help you turn a profit later but you just continually do that and keep growing more and more.
greedy little pig boy xd
