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.
A site like Reddit could be run on a skeleton crew of 20-50 people. That’s what Elon Musk is trying to do somewhat with Twitter, slashing unnecessary employees. (Example: How many people are working on lemmy?)
Look at it from the viewpoint of an executive. “I managed a 5 person team.” makes you sound like a loser. “I managed a 100 person division” makes you sound like a Big Important Person, even if 95 of those jobs were unnecessary.
Also look at it from the viewpoint of investors. If an investor puts $200M into Reddit, they want Reddit to be spending $100M-$200M on growth. No investor would put $200M into reddit if reddit was going to just run a barebones operation spending $20M per year and then coasting for 10 years off the investment money.
greedy little pig boy xd
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.
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.
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.
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?
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
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.
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.
Those pesky API hoggers stealing all the revenue.
