8 ms·

The fundamental problem with Silicon Valley’s favorite growth strategy

139 points by tsechin 8y ago

zby 8y ago
The craziness of recent Uber and WeWork and other unicorn valuations (with SoftBank just doubling their bets to show valuation growth) looks like a peak in the investment euphoria and what we should expect next is a swing back ala https://www.oaktreecapital.com/docs/default-source/memos/2004-07-21-the-happy-medium.pdf?sfvrsn=2 https://www.oaktreecapital.com/docs/default-source/memos/200... This article adds to that notion.
trhway 8y ago
>Would incumbent transportation companies have had more time to catch up, leading to a more competitive market? i'm not sure that in general incumbents catching up leads to increased competition, i think it leads instead to the incumbents protecting their position and using it to stop the innovation and the resulting threat of disruption. In case of Uber it wasn't about incumbents per.se., it was about regulators. The blitzkrieg allowed to crush regulators and thus increase competition by adding "ridesharing" into the mix. Similar thing of using your huge weight to crush a chokehold on the industry happened when Jobs took control over phone apps away from the telecom companies.
thebokehwokeh2 8y ago
The fundamental problem with capitalism (not just in silicon valley) is that access to capital is what defines winners and losers. Of course I'm being simplistic and there will always be underdog stories, but the reason any company becomes as big as it is, is capital, plain and simple. The immediate effect of gaining massive capital is tremendous. Outcompeting for both workers as well as getting to market sooner is an obvious benefit. The ability to lobby in government against potential roadblocks of whatever it is that you're doing is another. Just from the word itself, capitalism is rigged for those with capital. Further down the line though, you are now beholden to this immediate level of investment, and as this article shows, this is where problems arise.
- jiveturkey 8y ago
  > The fundamental problem with capitalism (not just in silicon valley) is that access to capital is what defines winners and losers. Well yeah, it's fundamental because that's the definition! So it's not a problem. Capitalism works as designed.
  - hannasanarion 8y ago
    Working as designed is not the same as working as intended or working well.
- mcrad 8y ago
  So there's no problem with Silicon Valley, just with "capitalism" itself? Yes, access to capital is good business. But I think they are saying that the stock market is what determines winners and losers in a properly functioning piece of the capitalist economy. IPO is supposed to get you started in the game. These blitzkrieg idiots want to declare victory before they even enter the race. Then convincing their minions that's it's "capitalism's" fault. What a joke!
l3robot 8y ago
On Monopoly: It has been a though I have for some time. I wonder how could they not form monopolies. Who has 4-5 taxi apps on their phone? Who has 2-3 social profiles? Who has the habits of jumping from a searching engine to another? A minority. Their product are almost natural monopolies. They are very difficult to fight against monopolies because when they have user commitment, the need for the product is filled entirely by one company. In addition, it is very difficult to make the user change, it's part of a habbit. I might be wrong there. Just a though I had, but interesting to discuss. Is it really possible to avoid monopoly with these products?
- 52-6F-62 8y ago
  Interesting thoughts, really. But maybe change contexts—would you call Coca Cola a monopoly? Certainly Pepsi gives them a good run for their money, even if they aren't as large technically speaking (I have no idea). I mean, people will always have their preferences. I'm not sure if that makes for a monopoly on its own. How much that preference is formed by the company's inherent pursuit of a monopoly, well... I'm not sure if it's that different from other contexts, or if it is.
  - velp 8y ago
    FWIW - PepsiCo is far bigger than CocaCola
    - 52-6F-62 8y ago
      Thanks. I started to assume it was Coke, then realized it's probably in the holdings. Anyway I think it still makes sense, yeah?
- moosey 8y ago
  There are a number of options, and not all of them are splitting the company into a bunch of fully co-equal units, which is a process that works better when things cover an area. In telecom, it was typical, due to regulation, that you'd have different parts of the business that couldn't interact at all. I wasn't permitted to talk to people with certain badges because of their business unit. You could easily do this with the advertising business for each of these large companies, or split it off entirely, and force that ad exchange to work with their competitors, for instance. You could regulate the news feed so that the pipe was a lot dumber and configurable, so that the company would no longer be allowed to experiment on human psyches. There are tons of options that don't result in breaking facebook into 12 facebooks. Pulling the advertising out, and regulating advertising in general, is the best solution I've been able to spitball though.
nostrademons 8y ago
There's a broader historical perspective that's missing in this article. The Second Industrial Revolution (1870-1914) was much like today. You had extremely rapid growth of new industries fueled by widespread availability of capital; a pervasive bubble economy punctuated by massive stock market panics & depressions; rapid development of new technologies; widespread fraud & corruption; a feeling that the common man was missing out on these developments (hence the term "The Gilded Age", a reference to it being shiny on the surface but dull & black inside); a widespread populist movement; political discontent; and globalization. And these technologies proceeded in overlapping waves: ironclads were replaced by steel ships; steel made steam engines possible; steam paddleboats replaced sailing clipper ships; propellers replaced paddles; steam turbines replaced triple-expansion engines; oil replaced coal in boilers. It was not uncommon for a ship to become obsolete before she entered service in the early 1900s. The effect of the mass availability of capital during this time period (other than in destabilizing society) was to dramatically increase the rate of adoption of these new technologies. Without the massive capital influx into railroads, it's doubtful that there'd be enough of a market to drive widespread adoption of the Bessemer process, which made steel cheap enough to use in ships & skyscrapers. Without the mass capital investment in shipping, it's doubtful that there'd be an impetus to develop & perfect the steam turbine or switch from coal to oil as a fuel. Without demand first from the kerosene lighting industry and then from the shipping industry, it's doubtful that there would be gasoline (then a waste byproduct of petroleum refining) to fuel the automobile industry. Similarly, O'Reilly's looking at Uber and Lyft at this snapshot in time and lamenting that their market power is preventing new ridesharing companies from entering. But the point is not to perfect ridesharing; it's to replace it. Uber and Lyft are arguably already obsolete, with Waymo in active testing in Arizona and California, and will be replaced shortly by self-driving cars. It's doubtful that self-driving cars are the endgame either; I suspect that we'll see intermodal transportation pods that move people & cargo through and between cities automatically. The point of massive capital investment is to get us to the future faster. It'll be wrenching and cause massive societal dislocation - the first industrial revolution gave us wars of nationalism for the US/Italy/Germany, and the second gave us 2 world wars, the fall of centuries-old dynasties, Communist revolutions, and eventually the Holocaust. But we don't really have a choice.
- 8y ago
Animats 8y ago
"blitzscaling isn’t really a recipe for success but rather survivorship bias masquerading as a strategy." That says it all. Really, that's how YC works - fail fast and cheap, profit from the survivors. Great for VCs, not so much for the cannon fodder. "We have reserves."
- jiveturkey 8y ago
  Why pick on YC? All angel/VC investment works this way.
- s17n 8y ago
  It's not masquerading as a strategy, it is a strategy. There's no "bias" - the fact that the same strategy was employed by a lot of companies that didn't survive doesn't make it a bad strategy, since the whole point of the strategy is to optimize for a small probability of massive success.
- ergothus 8y ago
  > That says it all. Does it? Competition and survivorship have long been accepted as the premise of capitalism. What I find more disturbing is that we've been told competition will be to the benefit of the consumer, and this focus on network effects means that companies are looking for a way to stay on top WITHOUT the virtue of providing the best benefit. This leads to Comcast-like situations, with customers that hate their provider but want the product and have no real options. Or Facebook, where people can join get disgusted and join an alternative...that can't provide the desired service because the desired service requires that everyone else be there.
  - WalterBright 8y ago
    Comcast's dominance is propped up by regulatory capture, not free market capitalism.
    - WalterSear 8y ago
      The difference is debatable.
new_here 8y ago
I’ve read and listened to quite a bit of stuff from Reid Hoffman (Masters of Scale, LinkedIn’s pitch deck etc) and have never found him or any of his advice particularly convincing. Maybe I’m speculating wildly here but it feels like the main thing that made LinkedIn successful was that it was a first mover in the business social network space that used every dark pattern and email notification they could conceive of at a time when users were less cautious about their privacy. Now they have their moat and defend it with every trick they have. Their social auth API provides watermarked profile pics and they drop attributes without any notice. If that’s the way you want to do it, I guess that’s your choice. But the professional social networking space could seriously use a breath of fresh air.
- ardit33 8y ago
  If everything was "just timing and luck", then we would be using friendster, myspace, ICQ, AOL Chat, and bebo today, instead of facebook/twitter/instagram/snapchat/linkedin There is something more than that, and good execution is crucial, and it is good to know on what worked well, and what didn't work out for both the current winners and past losers. I think Reid has good things to say about what worked for them back than, and take it like that. There is no rulebook on startups, as all of them have different patterns, but reading on what worked 2003-2010 (pre-mobile times), is not going to hurt anyone. Dismissing the success as just being merely 'dark patterns' + timing, seems a bit short sighted.
  - alkibiades 8y ago
    you proved that not everything is just timing and luck but you didn’t prove that nothing is. The difference between it and myspace is something so much better than it came out that is surpassed the network effect. while there isn’t really anything compelling to replace linkedin in its base feature set that it started with.
PhasmaFelis 8y ago
I read the headline and thought "Step 1 collect users, step 3 profit," and yep, that's it. > their enormous valuations are based on the premise that if a company grows big enough and fast enough, profits will eventually follow.
deleted 8y ago
[deleted]
mark_l_watson 8y ago
I know a few people who became very wealthy by starting companies or businesses but entrepreneurship is not the only path to success. IMO, the world is better off with a good mix of long shot bets to build large scale businesses and also many people being very happy to run solo or small businesses providing services or selling products on a small scale. I am sometimes critical of Google, FB, Microsoft, and Amazon - sometimes they deserve criticism - but except for FB all of these companies also enrich my life and I am happy they are in business. I am also happy personally to have been a consultant, very well paid wage slave for large companies, and have a small business as an author and sometimes selling niche AI software products. I never got very rich, but I have usually just worked 25 to 32 hours a week, with several times in my life taking many years of mostly leisure time. There are many ways to be successful in life - choose wisely!
- ackbar03 8y ago
  What kind of niche ai products do you work with? Curious to know if your ok to share
  - mark_l_watson 8y ago
    A natural language processing toolkit that I wrote in Common Lisp about 15 years ago and converted to Ruby about 10 years ago. A simplified version in Haskell is in my Haskell book and a simpler version is also in my Common Lisp book - all the book code is on github https://github.com/mark-watson?tab=repositories https://github.com/mark-watson?tab=repositories
chubot 8y ago
As someone who's lived and worked in the Bay Area for 16+ years, this is a fantastic article. It's just spot on in its characterization of the old and new Microsoft, the old and new Google, Lyft/Uber, and many other companies. I worry that many won't read it because it's so long. Now I need to go look up everything else Tim O'Reilly has written. He is a wise man. I of course know who he is -- mainly through books and conferences I suppose -- but I didn't know about his other experience in business. It's interesting that in the early days of the web he started a Yahoo-like company before Yahoo and sold it to AOL, and a Windows web server company that competed with Netscape.
adz_6891 8y ago
> what is happening today is that the market has almost entirely turned into a betting machine. Not only that, it’s a machine for betting on a horse race in which it’s possible to cash your winning ticket long before the race has actually finished. In the past, entrepreneurs got rich when their companies succeeded and were able to sell shares to the public markets. Increasingly, though, investors are allowing insiders to sell their stock much earlier than that. And even when companies do reach the point of a public offering, these days, many of them still have no profits. According to University of Florida finance professor Jay Ritter, 76% of all IPOs in 2017 were for companies with no profits. By October 2018, the percentage was 83%, exceeding even the 81% seen right before the dotcom bust in 2000. I thought the end of the article had some of the most interesting content. Amazing how many companies IPO without being profitable!
BoiledCabbage 8y ago
This is an absolutely incredible article. Possibly the best I've seen on HN in 6mo to a year. Normally I wouldn't post a comment just to say that but the amount of true insight ORiley provides is impressive. Understating of the web, of SV of business, of growth of IPOs and well reasoned analysis and predictions of what's coming next in funding. It is long and absolutely worth the read.

139 points by tsechin 8y ago

zby 8y ago

The craziness of recent Uber and WeWork and other unicorn valuations (with SoftBank just doubling their bets to show valuation growth) looks like a peak in the investment euphoria and what we should expect next is a swing back ala https://www.oaktreecapital.com/docs/default-source/memos/2004-07-21-the-happy-medium.pdf?sfvrsn=2 https://www.oaktreecapital.com/docs/default-source/memos/200... This article adds to that notion.

trhway 8y ago

>Would incumbent transportation companies have had more time to catch up, leading to a more competitive market? i'm not sure that in general incumbents catching up leads to increased competition, i think it leads instead to the incumbents protecting their position and using it to stop the innovation and the resulting threat of disruption. In case of Uber it wasn't about incumbents per.se., it was about regulators. The blitzkrieg allowed to crush regulators and thus increase competition by adding "ridesharing" into the mix. Similar thing of using your huge weight to crush a chokehold on the industry happened when Jobs took control over phone apps away from the telecom companies.

thebokehwokeh2 8y ago

The fundamental problem with capitalism (not just in silicon valley) is that access to capital is what defines winners and losers. Of course I'm being simplistic and there will always be underdog stories, but the reason any company becomes as big as it is, is capital, plain and simple. The immediate effect of gaining massive capital is tremendous. Outcompeting for both workers as well as getting to market sooner is an obvious benefit. The ability to lobby in government against potential roadblocks of whatever it is that you're doing is another. Just from the word itself, capitalism is rigged for those with capital. Further down the line though, you are now beholden to this immediate level of investment, and as this article shows, this is where problems arise.

jiveturkey 8y ago
> The fundamental problem with capitalism (not just in silicon valley) is that access to capital is what defines winners and losers. Well yeah, it's fundamental because that's the definition! So it's not a problem. Capitalism works as designed.
- hannasanarion 8y ago
  Working as designed is not the same as working as intended or working well.
mcrad 8y ago
So there's no problem with Silicon Valley, just with "capitalism" itself? Yes, access to capital is good business. But I think they are saying that the stock market is what determines winners and losers in a properly functioning piece of the capitalist economy. IPO is supposed to get you started in the game. These blitzkrieg idiots want to declare victory before they even enter the race. Then convincing their minions that's it's "capitalism's" fault. What a joke!

l3robot 8y ago

On Monopoly: It has been a though I have for some time. I wonder how could they not form monopolies. Who has 4-5 taxi apps on their phone? Who has 2-3 social profiles? Who has the habits of jumping from a searching engine to another? A minority. Their product are almost natural monopolies. They are very difficult to fight against monopolies because when they have user commitment, the need for the product is filled entirely by one company. In addition, it is very difficult to make the user change, it's part of a habbit. I might be wrong there. Just a though I had, but interesting to discuss. Is it really possible to avoid monopoly with these products?

52-6F-62 8y ago
Interesting thoughts, really. But maybe change contexts—would you call Coca Cola a monopoly? Certainly Pepsi gives them a good run for their money, even if they aren't as large technically speaking (I have no idea). I mean, people will always have their preferences. I'm not sure if that makes for a monopoly on its own. How much that preference is formed by the company's inherent pursuit of a monopoly, well... I'm not sure if it's that different from other contexts, or if it is.
- velp 8y ago
  FWIW - PepsiCo is far bigger than CocaCola
  - 52-6F-62 8y ago
    Thanks. I started to assume it was Coke, then realized it's probably in the holdings. Anyway I think it still makes sense, yeah?
moosey 8y ago
There are a number of options, and not all of them are splitting the company into a bunch of fully co-equal units, which is a process that works better when things cover an area. In telecom, it was typical, due to regulation, that you'd have different parts of the business that couldn't interact at all. I wasn't permitted to talk to people with certain badges because of their business unit. You could easily do this with the advertising business for each of these large companies, or split it off entirely, and force that ad exchange to work with their competitors, for instance. You could regulate the news feed so that the pipe was a lot dumber and configurable, so that the company would no longer be allowed to experiment on human psyches. There are tons of options that don't result in breaking facebook into 12 facebooks. Pulling the advertising out, and regulating advertising in general, is the best solution I've been able to spitball though.

nostrademons 8y ago

There's a broader historical perspective that's missing in this article. The Second Industrial Revolution (1870-1914) was much like today. You had extremely rapid growth of new industries fueled by widespread availability of capital; a pervasive bubble economy punctuated by massive stock market panics & depressions; rapid development of new technologies; widespread fraud & corruption; a feeling that the common man was missing out on these developments (hence the term "The Gilded Age", a reference to it being shiny on the surface but dull & black inside); a widespread populist movement; political discontent; and globalization. And these technologies proceeded in overlapping waves: ironclads were replaced by steel ships; steel made steam engines possible; steam paddleboats replaced sailing clipper ships; propellers replaced paddles; steam turbines replaced triple-expansion engines; oil replaced coal in boilers. It was not uncommon for a ship to become obsolete before she entered service in the early 1900s. The effect of the mass availability of capital during this time period (other than in destabilizing society) was to dramatically increase the rate of adoption of these new technologies. Without the massive capital influx into railroads, it's doubtful that there'd be enough of a market to drive widespread adoption of the Bessemer process, which made steel cheap enough to use in ships & skyscrapers. Without the mass capital investment in shipping, it's doubtful that there'd be an impetus to develop & perfect the steam turbine or switch from coal to oil as a fuel. Without demand first from the kerosene lighting industry and then from the shipping industry, it's doubtful that there would be gasoline (then a waste byproduct of petroleum refining) to fuel the automobile industry. Similarly, O'Reilly's looking at Uber and Lyft at this snapshot in time and lamenting that their market power is preventing new ridesharing companies from entering. But the point is not to perfect ridesharing; it's to replace it. Uber and Lyft are arguably already obsolete, with Waymo in active testing in Arizona and California, and will be replaced shortly by self-driving cars. It's doubtful that self-driving cars are the endgame either; I suspect that we'll see intermodal transportation pods that move people & cargo through and between cities automatically. The point of massive capital investment is to get us to the future faster. It'll be wrenching and cause massive societal dislocation - the first industrial revolution gave us wars of nationalism for the US/Italy/Germany, and the second gave us 2 world wars, the fall of centuries-old dynasties, Communist revolutions, and eventually the Holocaust. But we don't really have a choice.

8y ago

Animats 8y ago

"blitzscaling isn’t really a recipe for success but rather survivorship bias masquerading as a strategy." That says it all. Really, that's how YC works - fail fast and cheap, profit from the survivors. Great for VCs, not so much for the cannon fodder. "We have reserves."

jiveturkey 8y ago
Why pick on YC? All angel/VC investment works this way.
s17n 8y ago
It's not masquerading as a strategy, it is a strategy. There's no "bias" - the fact that the same strategy was employed by a lot of companies that didn't survive doesn't make it a bad strategy, since the whole point of the strategy is to optimize for a small probability of massive success.
ergothus 8y ago
> That says it all. Does it? Competition and survivorship have long been accepted as the premise of capitalism. What I find more disturbing is that we've been told competition will be to the benefit of the consumer, and this focus on network effects means that companies are looking for a way to stay on top WITHOUT the virtue of providing the best benefit. This leads to Comcast-like situations, with customers that hate their provider but want the product and have no real options. Or Facebook, where people can join get disgusted and join an alternative...that can't provide the desired service because the desired service requires that everyone else be there.
- WalterBright 8y ago
  Comcast's dominance is propped up by regulatory capture, not free market capitalism.
  - WalterSear 8y ago
    The difference is debatable.

new_here 8y ago

I’ve read and listened to quite a bit of stuff from Reid Hoffman (Masters of Scale, LinkedIn’s pitch deck etc) and have never found him or any of his advice particularly convincing. Maybe I’m speculating wildly here but it feels like the main thing that made LinkedIn successful was that it was a first mover in the business social network space that used every dark pattern and email notification they could conceive of at a time when users were less cautious about their privacy. Now they have their moat and defend it with every trick they have. Their social auth API provides watermarked profile pics and they drop attributes without any notice. If that’s the way you want to do it, I guess that’s your choice. But the professional social networking space could seriously use a breath of fresh air.

ardit33 8y ago
If everything was "just timing and luck", then we would be using friendster, myspace, ICQ, AOL Chat, and bebo today, instead of facebook/twitter/instagram/snapchat/linkedin There is something more than that, and good execution is crucial, and it is good to know on what worked well, and what didn't work out for both the current winners and past losers. I think Reid has good things to say about what worked for them back than, and take it like that. There is no rulebook on startups, as all of them have different patterns, but reading on what worked 2003-2010 (pre-mobile times), is not going to hurt anyone. Dismissing the success as just being merely 'dark patterns' + timing, seems a bit short sighted.
- alkibiades 8y ago
  you proved that not everything is just timing and luck but you didn’t prove that nothing is. The difference between it and myspace is something so much better than it came out that is surpassed the network effect. while there isn’t really anything compelling to replace linkedin in its base feature set that it started with.

PhasmaFelis 8y ago

I read the headline and thought "Step 1 collect users, step 3 profit," and yep, that's it. > their enormous valuations are based on the premise that if a company grows big enough and fast enough, profits will eventually follow.

deleted 8y ago

[deleted]

mark_l_watson 8y ago

I know a few people who became very wealthy by starting companies or businesses but entrepreneurship is not the only path to success. IMO, the world is better off with a good mix of long shot bets to build large scale businesses and also many people being very happy to run solo or small businesses providing services or selling products on a small scale. I am sometimes critical of Google, FB, Microsoft, and Amazon - sometimes they deserve criticism - but except for FB all of these companies also enrich my life and I am happy they are in business. I am also happy personally to have been a consultant, very well paid wage slave for large companies, and have a small business as an author and sometimes selling niche AI software products. I never got very rich, but I have usually just worked 25 to 32 hours a week, with several times in my life taking many years of mostly leisure time. There are many ways to be successful in life - choose wisely!

ackbar03 8y ago
What kind of niche ai products do you work with? Curious to know if your ok to share
- mark_l_watson 8y ago
  A natural language processing toolkit that I wrote in Common Lisp about 15 years ago and converted to Ruby about 10 years ago. A simplified version in Haskell is in my Haskell book and a simpler version is also in my Common Lisp book - all the book code is on github https://github.com/mark-watson?tab=repositories https://github.com/mark-watson?tab=repositories

chubot 8y ago

As someone who's lived and worked in the Bay Area for 16+ years, this is a fantastic article. It's just spot on in its characterization of the old and new Microsoft, the old and new Google, Lyft/Uber, and many other companies. I worry that many won't read it because it's so long. Now I need to go look up everything else Tim O'Reilly has written. He is a wise man. I of course know who he is -- mainly through books and conferences I suppose -- but I didn't know about his other experience in business. It's interesting that in the early days of the web he started a Yahoo-like company before Yahoo and sold it to AOL, and a Windows web server company that competed with Netscape.

adz_6891 8y ago

> what is happening today is that the market has almost entirely turned into a betting machine. Not only that, it’s a machine for betting on a horse race in which it’s possible to cash your winning ticket long before the race has actually finished. In the past, entrepreneurs got rich when their companies succeeded and were able to sell shares to the public markets. Increasingly, though, investors are allowing insiders to sell their stock much earlier than that. And even when companies do reach the point of a public offering, these days, many of them still have no profits. According to University of Florida finance professor Jay Ritter, 76% of all IPOs in 2017 were for companies with no profits. By October 2018, the percentage was 83%, exceeding even the 81% seen right before the dotcom bust in 2000. I thought the end of the article had some of the most interesting content. Amazing how many companies IPO without being profitable!

BoiledCabbage 8y ago

This is an absolutely incredible article. Possibly the best I've seen on HN in 6mo to a year. Normally I wouldn't post a comment just to say that but the amount of true insight ORiley provides is impressive. Understating of the web, of SV of business, of growth of IPOs and well reasoned analysis and predictions of what's coming next in funding. It is long and absolutely worth the read.