Why Companies With Zero In Revenue Get Valued At Billions Of Dollars

If there's one thing that vexes people, it's when hot, growing startups fail to generate revenue.

It's somehow seen as a sign of failure if a company isn't making money on day one. Twitter was dogged by the revenue question for years. Today it's doing billions in sales, and it's publicly traded at a ~$38 billion valuation. Same with Facebook, which faced the revenue question. It's making plenty of money.

Despite the lesson of these companies, people have the same sorts of questions about companies like Snapchat, and Pinterest, which have been valued at billions of dollars despite the fact that they have zero in revenue.

Venture capitalist Marc Andreessen addressed this topic in an interview with the Wall Street Journal. As someone that invests in no-revenue companies, his answer is worth reading. Basically, he says, some companies know how to make money, they just haven't done it yet. Other companies are trying to figure it out, and you have to be careful with those companies, because they might figure it out and be huge (or they might fail).

Here's Andreessen:

There are two categories of companies like this. You can guess which one I think Pinterest is in.

There are the ones where everybody thinks they don't know how they're going to make money but they actually know. There's this kind of Kabuki dance that sometimes these companies put on where we're just a bunch of kids and we're just farting around and I don't know how we're going to make money. It's an act. They do it because they can. They don't let anyone else realize they have it figured out because that would just draw more competition. Facebook always knew, LinkedIn always knew, and Twitter always knew.

They knew the nature of the valuable product they were going to be able to offer and they knew people were going to pay for it. They hadn't defined it down to the degree of being ready to ship it, or they didn't have a sales force yet, so there were things that they hadn't yet done. But they knew. They had a high level of confidence and over the passage of time we discovered they were correct.

Now, there are other companies that honestly have no idea. Like, they really honestly have no idea. You need to be very cautious on these things because one of the companies that had no idea how it was going to make money when it first started was Google.

Read the whole interview >