LC056: Are investors OK with losing money?

launchpeer - August 13, 2018 - 0 comments

Today’s question:

Today’s question comes from from Carl, who has a question about MoviePass. How did the company take off with such a bad business model? Why were investors OK with a strategy that has consistently lost money? Was there some original plan that didn’t pan out?

Jake’s answer:

MoviePass is a service that (originally) let you watch an unlimited number of movies in a theater for $9.99/mo. It sounds like an insane deal, because it was. They raised hundreds of millions of dollars and have been unprofitable since their first ticket sale. Yet, investors are still giving them money. Why is this?

It’s more common that you would think

MoviePass isn’t the first startup to do this. It’s pretty common for startups to be unprofitable in the beginning (e.g. Uber, AirBnB). It can take years to become profitable. But the reason investors will continue to dump money into an unprofitable startup is that profitability isn’t their only, or often, primary concern.

Investors are in the game for the big wins

The reason investors are OK with this is because they’re looking at the outcome. For example, if MoviePass can get enough users and completely take over the market, then they can later raise their prices, add more restrictions (which they’re doing right now) and still eventually make a profit.

The goal is to get so many users that they have leverage. They can leverage a massive user-base to negotiate with theaters and other film industry partners to get better deals. And theaters and distributors will be compelled to give MoviePass what they want because they comprise such a high percentage of moviegoers and ticket sales.

What has happened with MoviePass, though, is the alternative. They weren’t able to gain that market control and other companies like AMC are launching their own subscription models.

I would guess that, even now, investors are still betting on that plan working out eventually and that’s why they’re still investing.

Keep in mind what investors are really after

Remember that the goal isn’t a single, double or triple. The goal, for an investor, is bases-loaded grand slam. That doesn’t happen very often, but when it does, it’s a huge win for the investor.

Ninety percent of investors are playing the game for those big wins. They don't care that your startup gets to profitability, they're only interested in the huge win. Click To Tweet

That said, sometimes these things are really hard to quantify. Investors all have their own reasons, but they’re betting on the big win. If a startup has a massive amount of users, investors are usually willing to take the gamble.

Whether it’s right or wrong, realizing this will help you as you go through your own fundraising journey.

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