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 they have embraced the idea that profit can be switched on or off by turning the dial on sales and marketing. If only it were so simple.

Over the past several decades, and particularly since the 2008 financial crisis, the percentage of mature companies going public while still unprofitable has undergone a dramatic shift. In 1980, more than 90% of the companies over eight years old that IPO’d were profitable. By 2008, that percentage had fallen to about half. Today, it has dropped further, to 33%—not including special purpose acquisition companies, according to an analysis by Jay Ritter, a professor of finance at the University of Florida who focuses on IPOs. He says the market may have been wrong to give these older, unprofitable companies a pass. “They’re growing, but they’re not profitable because they’re selling [their products] below cost,” Ritter says.

Many startups justify operating at a loss for many years because they say they are taking on deep-pocketed incumbents or entering sectors with winner-take-all dynamics. Pursue growth now, or so the Amazon-era logic goes, in order to see returns down the road. Private investors have been eager to fund those dreams, and they’re coming back for more. According to financial data provider Preqin, VCs and growth-stage private equity firms are sitting on $750 billion that’s ready to deploy.

Yet, with the pandemic and rising inflation squeezing profit margins, there are an increasing number of cautionary tales in this vibe-based economy. A few months after Oatly’s May IPO, for example, short seller Spruce Point Capital Management issued a report alleging that the Sweden-based company’s financial reporting could not be trusted and expressing concerns about Oatly’s exposure to soaring oat and rapeseed oil prices. (Oatly disputed the report.) By November, when the 28-year-old Oatly hosted its third-quarter earnings call, other analysts similarly focused on its vulnerability to inflation, as the company reported that its losses had nearly quadrupled compared with the same period a year earlier, even as sales rose 50%.

“We have a premium brand, and we expect to be a premium brand going forward,” Oatly CEO Toni Petersson said during the call. But the company lowered its fourth-quarter outlook, moving some analysts to downgrade its stock. In the ensuing months, Oatly’s stock price plunged further, hovering around $7 a share in late January.

Spruce Point was brutal in its assessment. Oatly’s emphasis on growth over profit, the firm wrote in its research report, is nothing more than “a decoy to provide insiders time to cash out.”

With tech stocks sinking about 10% in January and at least nine companies canceling IPOs, the vibe economy’s good times could be coming to an end. As Wall Street flips on the lights, some of the VC world’s star players are looking poorly in the harsh glare of quarterly reporting and analyst coverage. A stock index focused on IPOs is down nearly 40% from its peak in February 2021. Casper Sleep, once a direct-to-consumer darling, was acquired by a private equity firm in November at just a quarter of the $1.1 billion valuation it commanded at the time of its 2020 IPO. And Sweetgreen’s value, which reached $5.5 billion during its IPO, dropped 50% in less than three months.

Prominent venture investors such as Bill Gurley and Fred Wilson have started making comparisons between the current moment and the dotcom bubble and market dips of the past two decades. “In certain sectors you have valuations that are super tough to support using traditional analytical valuation models,” Gurley said late last year in an episode of the podcast The Twenty Minute VC. “That was true [in 1999, 2000]. I think that’s true today.”

Founders are the obvious winners in this growth-before-profits framework, thanks to equity rounds flush with secondary sales—which allow them to sell some shares before an IPO—and loosening norms about how long insiders need to hang on to their shares after an initial offering, which used to be 180 days. According to Renaissance Capital, a record number of IPO insiders were able to cash out early in 2021. If there is an obvious loser now, it’s rank-and-file employees, who often have some compensation tied up in stock options and must wait years for them to vest.

Bain Capital Ventures partner Matt Harris told a webinar audience in early January that he’s spending most of his time talking with founders about “how they communicate with their [employees], very few of whom have seen this before, and all of whom were mentally and in some cases actually spending the money” they expect to have after exercising their stock options. As stock prices drop, that money can suddenly be worth 60 or 40 cents on the dollar. “How do you keep people in their seats, how do you keep them motivated?” he added. “If [as a CEO] you weren’t recommending people not focus on the stock price, it’s a little too late to start now, when it serves you.”

With Sweetgreen’s stock price soaring on its IPO day last November, Neman appeared on CNBC. “Over time, we’re looking to build a very big and profitable company and are very confident in the investments we’ve made so far to help us get there,” he said, citing “infrastructure” investments in things like the brand and people. As for when investors might finally see Sweetgreen make money, this time he did not say.