Q: Is Silicon Valley a giant Ponzi scheme, given that so many of the hottest startups are not able to generate a profit?
Look, I mean, there may be an element of that here. But it’s a very existential one.
Why is a share of a public company worth anything at all?
No one is quite sure. Literally, no economist or banker can say for sure. But the theory is that it represents a share of present and future profits, discounted to a current value.
Since a share price includes the net value of expected future profits, it may be just fine if there are no profits today — if lots of them come later. It’s a bet. We are all making bets.
And if you look at the Top 5 Tech Companies that now comprise $5,000,000,000,000+ (That’s 5 TRILLION) in market cap, they are very profitable.
And yet … and yet … many tech companies get to $1b+ in ARR or more with very, very few profits. Will they ever come?
Revenues do predict future profits. You need revenues to produce profits, of course. But does revenue alone predict enough future profits to justify the valuations we see?
But when it works, it really works.