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It (sincerely) baffles me that Fred has to make this point, and that it's not treated as obvious. People who are deeper into startup world than me, what is the

It (sincerely) baffles me that Fred has to make this point, and that it's not treated as obvious. People who are deeper into startup world than me, what is the thought process that makes you think you can scale up a money-losing venture and have the math work out? Is it based on the hope of raising prices, or being acquired before funding runs out, or pivoting? There are a lot of smart people in this game, so there has to be some intermediate mental leap that I'm not understanding.

the_watcher 11y ago
Because it has worked. That's the main reason. A related reason is the volume strategy Wilson mentioned. If you are in a business where you know that you can get discounts with bigger volume, there is a coherent business case to acquire customers at a loss until your per-unit costs fall sufficiently. The problem is that, like Fred writes, this is much harder in practice than in theory.
x0x0 11y ago
A guess: take Instacart. Plan A: They know that people spend $x billion on groceries per annum in sf. They also know that a big chunk of that has to be very expensive real estate and relatively expensive employees who have to be able to afford to live relatively close to sf. If you can build a warehouse an hour out of sf on dirt cheap land and recover the cost of grocery stores in sf, plus shave some off employee wages, maybe you can make a profitable business out of grocery delivery. This business will need a lot of volume to cover fixed costs. Why will they succeed when Webvan failed? More comfort with online shopping and delivery, cheap labor via exploiting underemployed people, including dumping infrastructure costs off onto employees by making them use their own cars. Plan B: Google is in a death match with amazon. To first approximation, G's business is taxing ecommerce by owning discovery. If people start on amazon not google, google loses. So google is building out google express because if they don't, amazon ends their business. Therefore maybe instacart is strategic to google. I don't think I believe A or B, really, but VC is a gamble. If someone can make it work, it's a $1.4T/year market [1] Oh, and people don't earn billions by taking safe bets. [1] http://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/food-prices-and-spending.aspx http://www.ers.usda.gov/data-products/ag-and-food-statistics...
- idlewords 11y ago
  Thanks for writing this out. It's food for thought. I will say that every bet is a safe bet when it's not your money.
  - x0x0 11y ago
    Gambling with OPM is the best. Heads I get rich as fuck, tails you lose.
interesting_att 11y ago
There are two ways VCs can make money from investing in companies like this: 1) Hopefully by increasing prices + slashing their own expenses (i.e. Uber reducing the driver's share), some of these cash burning companies can be instantly profitable. Idealistic for sure, but not out of the question. 2) Using the startup as a vehicle to raise more funds from investors- Remember that the VC is mainly just concerned with getting the company to the next funding round. Take this hypothetical: VC firm invest in company X at a 50m valuation. In 1 year that company raises at a 100m valuation. Even if it's an overpriced valuation and the company eventually has a huge chance of dying, the original VC firm can say that their fund already has a 2x annual return before that happens. They use that as marketing material to raise the next round. Remember that VCs get around 2% of whatever they raise for operating expenses, regardless of how the funds perform. If you are a VC in a bubble, it is in your financial interest to raise as many funds as possible in the shortest amount of time as possible. That in turn means you have to invest big and invest quick.

the_watcher 11y ago

Because it has worked. That's the main reason. A related reason is the volume strategy Wilson mentioned. If you are in a business where you know that you can get discounts with bigger volume, there is a coherent business case to acquire customers at a loss until your per-unit costs fall sufficiently. The problem is that, like Fred writes, this is much harder in practice than in theory.

x0x0 11y ago

A guess: take Instacart. Plan A: They know that people spend $x billion on groceries per annum in sf. They also know that a big chunk of that has to be very expensive real estate and relatively expensive employees who have to be able to afford to live relatively close to sf. If you can build a warehouse an hour out of sf on dirt cheap land and recover the cost of grocery stores in sf, plus shave some off employee wages, maybe you can make a profitable business out of grocery delivery. This business will need a lot of volume to cover fixed costs. Why will they succeed when Webvan failed? More comfort with online shopping and delivery, cheap labor via exploiting underemployed people, including dumping infrastructure costs off onto employees by making them use their own cars. Plan B: Google is in a death match with amazon. To first approximation, G's business is taxing ecommerce by owning discovery. If people start on amazon not google, google loses. So google is building out google express because if they don't, amazon ends their business. Therefore maybe instacart is strategic to google. I don't think I believe A or B, really, but VC is a gamble. If someone can make it work, it's a $1.4T/year market [1] Oh, and people don't earn billions by taking safe bets. [1] http://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/food-prices-and-spending.aspx http://www.ers.usda.gov/data-products/ag-and-food-statistics...

idlewords 11y ago
Thanks for writing this out. It's food for thought. I will say that every bet is a safe bet when it's not your money.
- x0x0 11y ago
  Gambling with OPM is the best. Heads I get rich as fuck, tails you lose.

interesting_att 11y ago

There are two ways VCs can make money from investing in companies like this: 1) Hopefully by increasing prices + slashing their own expenses (i.e. Uber reducing the driver's share), some of these cash burning companies can be instantly profitable. Idealistic for sure, but not out of the question. 2) Using the startup as a vehicle to raise more funds from investors- Remember that the VC is mainly just concerned with getting the company to the next funding round. Take this hypothetical: VC firm invest in company X at a 50m valuation. In 1 year that company raises at a 100m valuation. Even if it's an overpriced valuation and the company eventually has a huge chance of dying, the original VC firm can say that their fund already has a 2x annual return before that happens. They use that as marketing material to raise the next round. Remember that VCs get around 2% of whatever they raise for operating expenses, regardless of how the funds perform. If you are a VC in a bubble, it is in your financial interest to raise as many funds as possible in the shortest amount of time as possible. That in turn means you have to invest big and invest quick.