When growth spirals out of control

One of the core principles of Silicon Valley is growth – venture capital firms and other institutional investors are willing to invest enormous amounts of money when they see that the startup is growing quickly. This model has worked well in the past, with companies such as Facebook making large profits nowadays, but it also has its drawbacks.

More recently, there has been a large cohort of late-stage startups that have raised large sums of money to essentially burn through that money in order to acquire customers, following which the next funding round is raised. Again, this is not necessarily a bad strategy, but there has to be a long-term perspective at play in order to turn a profit.

However, with this recent cohort – including well-known names such as WeWork, Uber, and Airbnb – all of them have been struggling to turn a profit after burning through large amounts of money to acquire customers. Of course, they are among the largest players in their respective fields, but that is not a sustainable position if the company is consistently making losses.

One of the most recent examples that have been in the news for a while is WeWork, the shared co-working space provider, which has received large investments from institutional investors such as Softbank, Masayoshi Son’s investment firm. The latest news, that Softbank was to invest into The We Company, the parent company of WeWork, at a valuation of $8 billion, down nearly 83% from its all-time-high valuation just at the beginning of this year.

After the investment, SoftBank will own approximately 80% of The We Company, but will not actually hold a majority of voting rights at any stockholder or board of directors meeting due to WeWork’s ownership structure. However, with the changes also sees the appointment of Adam Neumann, WeWork’s ex-CEO, as a board observer, while Marcelo Claure, the COO of SoftBank, will take over as executive chairman of the board of directors at WeWork.

Of course, this might be an outlier that does not represent the larger philosophy that growth should be prioritised over profit in the short term. However, with expectations that WeWork will burn through $10 billion within the next year, it is difficult to see how such a strategy can be sustainable, even in the short term.

As mentioned, it is not only WeWork that is struggling to turn a profit or even find a way to profitability. Hence, it might be worth re-evaluating the priorities of venture capital firms in Silicon Valley and around the world, where profitability plays a larger role than it currently does. Of course, many venture capital firms made a large return due to Uber’s IPO, having invested heavily in the transportation startup, but the reputational damages that come with the story after that might soon catch up to them.