The nonexistent profits Demand Media lied about

By David Goldman, staff writer


NEW YORK (CNNMoney.com) -- Demand Media CEO Richard Rosenblatt has been insisting for years that his company is profitable. But it isn't. Never was, in fact.

When the online content company filed its initial public offering last Friday, Demand revealed that it is more than $6 million in the red so far this year. Last year, it posted a net loss of $22 million -- which came on the heels of a $14 million loss in 2008 and a nearly $6 million loss in 2007.

As the Wall Street Journal pointed out Thursday, that flies in the face of consistent claims to the contrary. Rosenblatt said Demand Media was "highly profitable" in a March 2008 VentureWire interview. Three months later he told the Los Angeles Times he was expecting a "healthy profit." An October 2009 USA Today interview cast the company as "profitable" -- and earlier this year, at the Twiistup conference, Rosenblatt elaborated on that to call his venture "profitable since we started." Demand executives reiterated that claim in a Fortune story last month.

Asked Thursday about that stark discrepancy, Demand Media representatives declined to comment, citing the "quiet period" they've entered following their IPO filing.

Privately held companies don't need to disclose their finances to the world like publicly traded businesses do. We're left to take their word for it when they claim to be profitable -- but no one truly knows what's lurking under the hood until they opt for a public offering of their stock.

That's why investors pounce on IPO filings: They shine a light on how emerging companies are faring.

Demand Media's filing was especially noteworthy because it's among the first of a new wave of closely watched, venture-capital-backed technology companies to file for a public offering.

It's not the only one that has talked an impressive game. Pandora founder Tim Westergren told CNNMoney.com earlier this year that the ad-supported Internet radio company turned its first profit in the fourth quarter of 2009, and will remain profitable this year.

Zynga CEO Mark Pincus, who has rounded up an eye-popping $500 million from venture capitalists, said late last year at a Startup@Berkeley conference that the social gaming company was profitable before it started raising money.

Groupon founder Andrew Mason claims his two-year-old coupon company turned a profit within its first six months.

Business networking site LinkedIn -- widely rumored to be making plans to go public -- has been profitable since 2007, founder Reid Hoffman claims.

Two of the tech field's most closely watched trailblazers -- Facebook and Twitter -- have stayed mostly mum about their financial condition.

Facebook founder Mark Zuckerberg casually told Fortune way back in 2005 that his venture was "already profitable," but more recently executives have downplayed the company's profit projections. Operations head Sheryl Sandberg told the Guardian last year that the company was on track to be "cash-flow profitable" in 2010 -- which isn't the same thing as actually showing net income.

Meanwhile, Twitter is still pecking around for a business model that will generate sustainable revenue. It hasn't started throwing around any talk yet about the "p" word.

So which tech Silicon Valley stars are really in the black? We won't know for sure until the IPO filings hit.  To top of page

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