The Paradox of Unprofitable Companies: Why Zombie Businesses Are Winning in 2020

This episode of Economics Explained dissects the perplexing rise of unprofitable companies, often dubbed "zombie companies," which have become a significant and growing segment of the global economy, including over 10% of the S&P 500. Contrary to traditional business principles where profit is paramount, these businesses operate, and often thrive, without turning a profit, and sometimes without a clear plan to do so. The podcast explores the mechanisms by which these companies attract massive investment, allowing founders and early investors to accumulate wealth even as the core business remains in the red, challenging the fundamental tenets of capitalism and market efficiency.

The discussion distinguishes between legitimate early-stage unprofitability, where businesses are developing products or infrastructure with a clear path to break-even and eventual profit (like medical research firms), and companies like Uber or WeWork, which have achieved substantial market penetration but continue to operate at a loss without a revolutionary product on the horizon. The episode details the typical funding journey, from initial founder capital to angel investors, venture capital firms, and ultimately Initial Public Offerings (IPOs). A key nuance is how founders are often encouraged to sell personal equity during later funding rounds, creating an incentive structure that prioritizes continuous growth and investor attraction over immediate financial self-sufficiency.

The podcast raises serious concerns about the ethical implications, highlighting how the line between legitimate growth funding and a Ponzi scheme can become blurred, citing the Nikola scandal as a stark example of a company attracting investment without a working product. It argues that these profitless ventures lead to a misallocation of resources, distorting market prices (e.g., Uber rides being subsidized by investors) and creating a "dead weight loss" on society by diverting capital from genuinely profitable and sustainable businesses. The implicit insight is a call for greater scrutiny of business models that lack fundamental value and a clear strategy for long-term financial viability.

Counterintuitively, the episode reveals that economic downturns, such as the one experienced in 2020, can actually accelerate the growth and dominance of these profitless companies. Their shareholders are less sensitive to quarterly losses, and with abundant liquidity (the "money printer going brrr"), these businesses can leverage reduced consumer spending to aggressively gain market share from profit-dependent competitors. Furthermore, they can capitalize on falling asset prices, like commercial real estate, to expand their operational footprint cheaply. This phenomenon, which largely fueled the 2020 stock market rally, presents a significant challenge to conventional economic wisdom and prompts questions about the long-term health and stability of an economy increasingly shaped by such entities.

a business that doesn't turn a profit is like a freezer that doesn't make ice it's more or less pointless

over 10 percent of the s p 500 an index of the largest companies in america is now made up of these companies that don't serve the one central goal of being in business

What does concern people is companies that have no plan for profitability

investors getting rich by attracting more investors who only make money by attracting more investors you might be thinking hang on isn't this a ponzi scheme and you know what it really does blur the line

the central function of the free market and capitalism is that it can deliver goods and services to the economy according to what is demanded at an equitable price

indirectly investors are paying up to 30 percent of your uber fare for you a product that is only used because it is heavily compensated probably shouldn't exist in a regular functioning market

growth-based businesses are a more stable form of madness if delta airlines loses two billion dollars in a year it makes headlines as a corporate emergency if we work loses two billion dollars a year it's considered the cost of doing business

The idea of investing in something that doesn't make money seems like a foolish endeavor nonetheless it's a reality that we're gonna have to contend with because it's here and it has become hugely influential in our financial markets