The VC subsidies for some of these companies are so high that they are basically selling $2 for $1 in some cases (WeWork was basically losing nearly $1 for every $1 of revenue!)
Ride share companies grew fast when they sold VC subsidized rides but have struggled to maintain that market share dominance without subsidies (lots of other players quickly move in). MoviePass sold lots of subsidized movie tickets until the money ran out.
Thus the fallacy of the whole “it’s ok that we’re unprofitable because look at how fast we’re growing” is that in many cases these companies were only growing BECAUSE they were grossly unprofitable in the form of their investors massively subsidizing purchases.
Everything else is a side show.
Coca-Cola "wastes" millions on advertising, something that doesn't directly generate profits. From a cash flow perspective, it's giving money away to advertising agencies. The theory is that you have an indirect return through building mindshare. Same goes for "good will" deeds like charitable actions by corporations or taking a hit on a product to use a more environmentally friendly component. From a completely superficial perspective, this is a deliberately inefficient action that makes the market "more false".
You could imagine a scenario where you take in a lot of VC money to jump-start the initial production of a more environmentally friendly product while still selling it at a competitive price that really isn't justified by its production costs. Is this a false market? Perhaps, but it may serve to build out the necessary pipeline enough such that the unit economics eventually work to be self-sustaining and also build a lot of brand loyalty along the way.
These are bets. Advertising is a bet on brand recognition, one that can similarly take years to materialize (see the mattress industry). Facebook was a bet that paid off. Everyone laughed at how much they took in originally too.
Of course, like all bets, there can be bad bets, and even good bets that just don't pay off. In some sense, the WeWork story should be considered a great success: the public market did exactly what it was supposed to do, shine a light at the appropriate time on a bet that had been going on too long. The real danger is when these initial stages are funded incorrectly: if a VC Fund makes a stupid bet, well, that's the game, but if a pension fund had invested in this, then it would be dangerous.
but they don't overspend on advertising, unlike those VC funded companies. Each can makes a profit for coke, and therein lies the difference.
The trick is always the transition to profitability. Generally, this comes through layoffs and maybe price increases.
Is Uber or We really making something that can't quickly be copied, even at a local level, once prices are doubled or tripled?
If you rent it for an hour, that now costs more than $20 with tax. Not exactly cheap anymore.
Anecdotally I noticed this with Pita Pit in New Zealand. There used to be lots of independent pita places that had decent pricing, then pita pit started buying them out and replacing them with pita pit chains, while still competing on price relatively well. But as soon as they'd bought out all the competitors in the area they immediately almost doubled their prices.
This does not apply to all these "unicorns" that have a non negligible marginal cost on their services.
1 - Demonstrate growth
2 - ?
3 - Profit
https://en.m.wikipedia.org/wiki/Gnomes_(South_Park)#/media/F...
Who knew it was a billion dollar business model?
Effectively none of these companies lose money on a marginal basis. In other words, an additional customer making an additional transaction helps their bottom line. There's always two major questions. (1) Can the company grow to where their overhead is covered in that marginal revenue and (2) can they acquire the customers cheap enough.
Your statement that WeWork loses $1 for every $1 illustrates a common misinterpretation. Those two numbers have basically no relationship with each other and don't tell us anything. Imagine that WeWork wasn't a total fraud. They set up their first 10 locations for $500,000, have annual revenues of 1 million and profit of 500,000. A VC comes along and says "Shit dawg, here's 50 million set up 100 more locations". So WeWork takes that money, spends 50 million and a year setting up new locations. \
What's their financial statement going to say? That they lost 49.5 million dollars on revenue of 1 million. Obviously that's an eye popping loss, but assuming they can replicate their success it's a smashing investment. The latter part of that last sentence is the important thing. Whether or not the money these companies is investing is going to see returns or if they're wildly optimistic in their long term projections.
If you can't make your shit break-even or near-profitable at small scale, there is a big chance you will not be able to make it work at large scale.
As a result their business grew quickly and the other stores were unable to compete and went out of business. Then with the market to themselves they raised their prices to increase their margins. They also used access to adjacent markets (TVs, PCs, Radios, Appliances, Office Supplies) to supplement their margin which specialty retailers like Quement or Jade did not.
Their strategy was essentially to lose money on something that brought in customers, and to make extra money on other things once the customer had been acquired and was in the store.
The "grow fast at any cost" mentality is predicated on the understanding that the most difficult step of any new business is to change consumer behavior such that they go to the new business first. Once they have established that pattern they can then manipulate the pricing of their offerings in order to achieve the highest sustainable level of margin before they lose customers.
You don't understand why people want to copy those models of growths and get those big payouts? Which part confuses you?
For example, if it costs you $10 in marketing, promotions, etc. to acquire a customer, but on average those customers will pay you $20 over their lifetime, what should you do? Raise money and spend as much as you can to acquire more customers, if you think it scales!
banks sell $0.15 for $2.15, nobody can beat this business model. Bank only need $0.15 to give you a $2 loan and ask for $2.15 in return.
You're assuming that there is some objective value of a dollar, and that all dollars are worth that same. These assumptions are not necessarily true. Rather, they are myths that are propping up the current system.
Or, start with the phrase "bad money chases out good."
Suppose you have a small software company, Reinvest Software with big margins and lots of opportunities to expand. You can take home that profit and pay taxes. Or you can invest in growth. That investment in growth is an investment in intangible assets with insanely good tax treatment. But it looks bad on the financial statements.
Suppose an investor, Smart Capital, sees your business potential and invests even though your GAAP income is low or negative. Smart Capital does very well for itself.
Suppose another investor, Sucker Capital, sees Smart Capital doing well, decides that profits don't matter and invests in Negative Margin Software, which never has hope of making money.
I think a lot of people can't distinguish between Negative Margin Software and Reinvestment Software. For many years, I didn't realize that they were separate things and I thought tech was mostly a Ponzi scheme.
At first glance, I see more Reinvestment Software vs Negative Margin Software compared to the dot-com era.
YouTube is another, as far as we can tell it’s currently extremely profitable yet people looking at their financials where laughing at the sale price when Google Snatched it up. Part of this is from ever more advertising coupled with ever lower bandwidth costs.
https://mattstoller.substack.com/p/wework-and-counterfeit-ca...
Now, though, companies that are going public are already large and have gobbled up a lot of their market due to VC funding. What's happening is that they are at the point where that profitability signal has to be in view - you can no longer say "it will be just around the corner". This flamed out most spectacularly with WeWork, but it's a bit of just desserts that private investors wanted to gobble up all the big early gains, only to find that the additional time just gives public investors more reason to be skeptical.
https://www.worldcat.org/title/great-crash-1929/oclc/3136579...
The tech and land booms of the time involved Florida real estate, railroads (a/k/a airlines), airlines (actual aircraft involved), "Radio" (RCA), new alternative energy source and distribution plays, and of course, Goldman Sachs.
I'd first read it following the 2007-8 global financial crisis. It's still relevant now. Short, highly readable, entertaining, and informative.
Which was written in 1875. About the financial scandals of the 1870s.
This sums it up nicely.
Investors got deluded enough to think that if they threw enough money at a non-software company it would magically start making software company levels of profits.
Hopefully the real economy won’t be affected too much when this bubble finally bursts.
[1] http://www.nagellen.com/2009/12/high-tech-venture-capital-fi...
Even software companies fail and don't make much profit to speak of. Just look at all that cryptocurrency/blockchain nonsense.
If your business is losing money and, worse, has no meaningful way to stop losing money, it makes no difference whether you are selling software, services or renting office space or running a taxi business. It will fail.
Instagram got bought by Facebook and eventually became an ad network.
Twitter eventually, after nearly a decade of not making a profit, made a profit.
It's just that the described path to success is close to impossible in any other space except for pure tech companies, preferably with a software-only product, which means that any company not fitting that description, but boasting absurd high valuations justified by assuming the company will go the path described above does most likely mislead investors.
It would not be uncommon for an inferior product to win a significant market share. Especially when it comes to Enterprise software.
I say this as a slack stock holder who lost money, so I clearly know what I'm talking about ;-)
This is ultimately a good thing for companies with real businesses that were for much of recent history valued far less than those that had no clear prospects of making a profit. See all the writings about IWG vs WeWork on some of the previous insanity there.
As if delivering pure software was a sign that the company is worth investing in. Just look at all the cryptocurrency/blockchain startups from about two years ago. Most of them literally didn't have anything else but a whitepaper and some hacked up "coin" - a derivative of the open source Ethereum code. And 99.9% of them has gone bust already, disappearing with all the investor's money.
This is about investors finally wising up that a start-up with no path to profitability is not a viable business, regardless of the explosive growth fueled by cheap VC dollars and undercutting the competition ("disrupting the market") by ignoring existing laws (Uber, ...).
At least not for public investors - it is still immensely profitable for the founders and early investors of those "unicorns".
However, their goal is not to make a profitable company but to grow fast, attract a lot of VC money and then recoup the investment in an inflated IPO when the entire Potemkin village gets sold off to a lot of naive suckers who end up footing the bill once the house of cards finally collapses.
This is what needs to called out, not some BS talk about "not-com" bubbles.
Well, this generation of investors, at least. ;) We had much the same thing happening 20 years ago, and I have no doubt that we will again.
C# and .Net Core are miles away from unsexy, enterprise technologies. Microsoft has been doing an amazing job on the C# language in recent years, open-sourcing everything, making .Net Core run on every platform, being totally open about future updates, and pushing the .Net core framework to be more performant than about every other language other than C++, C, and Rust.
I work for a 2B valuation "startup" and we are fully .net core, all running in orchestrated Docker clusters and I perceive that choice as one of the reasons behind our success. The tooling and libraries, documentation, performance, etc, are in my opinion ahead of any other languages we could use: e.g. Java, Python, Haskell etc.
If however, you use whatever good or average off the shelf tech and build tools that leverage the tech then apply it to your business then you're a tech company. You can't just make the app you have to build tech to build the company. This is your advantage. The tech you build can be software or it can be patents or it can be proprietary processes but it has to be leveraged. My way to estimate this is to count the number of employees that build product or tools. The size of sales/marketing can vary but excessive numbers of devs isn't a good sign for a tech company and might just be a consultancy.
With mostly a Linux, python / slightly FP background I "should" be the skeptic. But a recent project had me on a dotnet core app developed mostly on OSX and deployed on Linux. It was honestly pretty neat and while I no longer work on it, I am bullish on this space.
(Of course I'm overlooking that most new software biz that is doing well is B2B unlike my projects... but still.)
If a company is not losing money on gross margins--if they are losing money in total 'unit economics' because the customer acquisition cost is high--does it really mean they are subsidizing usage?
An example is Casper, the mattress company. They are still selling mattresses to consumers for more than the mattresses cost to them. They are losing money on ads. If I see/hear a Casper ad, is that ad really a subsidy to me?
PS. Saw an interesting Twitter thread from Tren Griffin: "Whenever you read or hear the phrase 'losing money' you should ask yourself: what does this person mean?"[2]
1) https://www.theatlantic.com/ideas/archive/2019/10/say-goodby...
2) https://threadreaderapp.com/thread/1184981449172144128.html
All of those are also down significantly from their all time high though.
But it turned out the charts were right, and Zscaler is now profitable, although they still aren't making as much as investors at the all-time high expected.
What is the relation of the gig economy to a cloud hosting service, other than most gig economy apps are built on cloud servers? Also, how does looking at the problem this way enlighten us?
But somehow everyone concurred that it is, indeed, a tech company. How or why, no one bothered to ask.
Then it got into the asset game leveraging their revenue, but mostly leveraging some meaningless sociological/technological gibberish to skewer an investor.
I think this speaks to the state of the kind of people making decisions about things they don't even try to understand.
Google investing in Juicero comes to mind.
It's like any semblance of due diligence is just an afterthought.
Look at any article written about WeWork in the last 4 years. Every single article will regurgitate the Real Estate company pretending to be a tech company thing.
Because WeWork's margins and revenue are similar to another very similar company - Regus - yet their valuation is more than 10x
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