Is a vibe shift finally coming for VC-backed startups?

The question, from journalist Kara Swisher to Sweetgreen cofounder and CEO Jonathan Neman, following a discussion on kale and robotics, was simple. “Are you profitable?” she asked, as a 2018 episode of her Recode Decode podcast drew to a close. “We are,” Neman replied. But…

when the Los Angeles-based salad chain filed to go public last October, it revealed financials that directly contradicted Neman’s response to Swisher. Sweetgreen had lost $31 million in 2018. In fact, it has lost money every year since 2014. (The company declined to comment.) Investors don’t expect young, growing companies to be profitable, but Sweetgreen is already 14 years old.

Thanks to its cheerful, health-conscious branding and slick digital-ordering system, Sweetgreen has been viewed as an innovator since its earliest days, raising $478.6 million in venture capital over 15 funding rounds and opening new locations by the dozen. And all the while, it has been losing millions a year, with losses widening to $153 million in 2021.

The salad chain is just one of many companies that have been buoyed by so much VC funding that consumers assume they’re killing it. Customers have taken rides in venture capital-subsidized taxis, accessorized with VC-backed merino wool sneakers, slept on VC-endorsed sheets, and sipped VC-supported oat milk lattes.

In the U.S. last year, more than 1,000 companies went public, surpassing the record set in 1996, according to Dealogic. But like Sweetgreen, a growing number of new public companies and IPO hopefuls are facing mounting losses. The 12-year-old eyewear maker Warby Parker lost $55.9 million in 2020 before its public debut via a direct listing in September, and a month later the 12-year-old clothing rental company Rent the Runway had its IPO after having lost $171.1 million in 2020.

After so many years in business, with revenue growth propped up by vast amounts of capital, the majority of companies in this IPO class have yet to earn a profit. It’s unclear when—or if—they ever will. Which raises the question: What are these companies really selling to Wall Street investors beyond a vibe?

There is nothing wrong with a company prioritizing growth over profits. Wall Street has long used the “Rule of 40,” for example, to evaluate software-as-a-service companies; traditionally, analysts view favorably any company with a blended growth rate and profitability margin greater than 40%, regardless of the proportions involved. In other words, a SaaS company with a 50% growth rate does not need to prioritize profitability in order to satisfy the public markets. But many of the most prominent IPOs from the last year are not traditional technology companies, and they most certainly are not SaaS companies. They are not building easily scalable software products that will result in recurring revenue. Yet…


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