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Who Pays the Price for Selling $10 Bills for $5?
- dsfyu404ed 8y agoTL;DR: The traditional VC backed tech startup growth curve is an exercise in giving something away for less than it's worth, such as selling a $10 bill for $5. This is done to dominate the market. You will become very popular very quickly and dominate the $10 bull market by selling them for $5. After dominating the market you must find some way to become profitable. Often when a company tries to raise prices and become profitable they find that the market evaporates, you won't sell many $10 bills for $11 even if you run a managed service that makes it convenient. For "gig-economy" startups this screws the workers because their jobs evaporate with the market. The article ends with a call to action.
- jstanier 8y agoI totally need you to write my articles in the future. :)
- jfk13 8y ago> you won't sell many $10 bills for $11 Unless you're a payday lender (or similar). Of course, they have to accept the risk that they'll sometimes be unable to collect the $11 at all.
- Udik 8y agoAlso, there seems to be no personal accountability for those who lost all that money. I can set up a business that sells 10$ notes for 9$, convince a number of VCs and/or shareholders to cover the losses, and live the sweet, exciting life of the entrepreneur until the game is over. By the time the value of the company drops to zero, I'll probably have accumulated enough cash to live comfortably ever after.
- michaelt 8y agoWhy should anyone else be accountable for sophisticated investors' failure to do their due diligence? If I go to the Kentucky Derby put $1000 on Fancy Dancy Magic Prancy, it's hardly the horse's fault if my gamble doesn't pay off.
- marcosdumay 8y agoIt's not the investor that decides to give money to the $10 bills seller. It's a third party. Now, I don't know what kind of punishment the GP wanted to see. If the question is why doesn't all the money run away from the VP's fund, I wonder about that too.
- michaelt 8y agoDon't you have to be an accredited investor to invest in venture capital and angel investments?
- tristor 8y agoYour made up horse name made me just think of (which may already exist outside my awareness) a corollary to Poe's Law. "That without a clear indicator of the author's intent, it is impossible to create a parody of race horse names so obviously exaggerated that it cannot be mistaken by some readers for a sincere and accurate name of a horse." We could call it the "Derby Law". I actually searched for "Fancy Dancy Magic Prancy" because I thought that might be an actual horse. I found out it's a reference to PBF, but nonetheless it /could/ have been a real horse.
- Radim 8y agoAnd that's perfectly fine, as long as the people paying the price (here, VCs) are the ones bearing the responsibility for their eventual losses. It only gets disgusting when such "musical chairs" scams get too popular, becoming "too big to fail". Then the society at large will cover the bill, including those actors who were more prudent and honest throughout (adding insult to their injury). The more involved and indirect the chain of responsibility, the larger the potential for scams.
- saalweachter 8y agoAs a quibble, I would say the traditional VC-backed tech startup is a technology that costs $50mm to develop, but can be sold into a market of 10 million units @ $100 with a per-unit cost of $75. "We can develop a monopoly by selling below cost" is some kind of traditional business, but I wouldn't call it a traditional tech startup.
- mannykannot 8y agoDeveloping a monopoly while selling below cost was Amazon's path, and others took note - Uber, for example, which is hoping to corner the autonomous taxi market, and is effectively offering its current services with human drivers in order to position itself for that.
- 0815test 8y ago> For "gig-economy" startups this screws the workers because their jobs evaporate with the market. Except that it doesn't. Those "jobs" were never sustainable in the first place, and in the meantime the workers make bank.
- treis 8y ago>The traditional VC backed tech startup growth curve is an exercise in giving something away for less than it's worth, such as selling a $10 bill for $5. This gets it fundamentally wrong. Only Moviepass was in the business of selling $10 for $5. Most of what appears to be $10 for $5 can be broken down into two things: (1) Software is a very high fixed cost and very low marginal cost business. If you spend a million to develop a piece of software your profit is going to look like crap for your first few customers, better for the next bunch, and so on until you are wildly profitable (or so you hope). (2) Discounting recurring revenue. Spending $10 to get $5 in revenue is stupid. Spending $10 to get a customer who will give you $5 in revenue every year is smart. If you only look at year 1 the smart move looks stupid.
- neom 8y agoA fun thought experiment: how could you go from selling $10 bills for $5 to selling $10 bills for $15?
- jfk13 8y agoMicro-engrave artwork onto the bills, and drum up publicity. https://www.changechecker.org/2016/12/07/look-out-for-these-5-notes-worth-20000-in-circulation/ https://www.changechecker.org/2016/12/07/look-out-for-these-...
- huffmsa 8y agoReplace all of the ports on the bill with a single USB-C port and call it revolutionary? Edit1: /s Slightly more seriously, you could promise to anyone who bought a $10 bill that in some x number of years they could redeem that bill for $20. This is called "being the Treasury and Federal Reserve". The hard part is finding a way to invest the $5 of profit they gave you in an asset which will appreciate faster than your promised return. Edit2: This is not advisable, see "Bernard Madoff, Ponzi Scheme".
- Razengan 8y agoThat gave me another idea which I haven't considered the implications of, but it sounds fun and video game'y: Electronic/Smart bills, that keep track of how many times they've been used to purchase stuff with. After a bill has been circulated N times, it increases in value by Y, and/or unlocks special artwork. Some bills may become highly sought-after collectibles worth far more than their face value. Would it help or harm the economy?
- Chris2048 8y agoIsn't the revenue 50k, and the loss (minus) 100k?
- oeuviz 8y agoIllustrates how VC backed startups are more of a product on their own.
- deweller 8y agoI genuinely don't understand the argument that tech companies are hurting society by providing lower paying gig-economy jobs. By providing more jobs, these companies are increasing options for workers looking for jobs. No one is forcing Uber drivers to drive passengers. If there is a shortage of labor, then the prices paid to workers will increase due to market forces. If there is not a shortage of labor, then people that need jobs are finding them.
- golergka 8y agoCopenhagen principle of moral entanglement in action: regardless of cause and effect, the most powerful actor that is somehow entangled in a situation is called the one responsible by the media.
- sideshowb 8y agoIt makes logical sense to direct efforts towards change at a body that is powerful enough to enact change. There is usually a confusion of practical and moral responsibility, of course. Moral responsibility is a heuristic based on evolutionary incentives, that sometimes is and sometimes isn't useful for enacting change.
- fabricexpert 8y agoIt’s not the volume of jobs, it’s the quality. Driving a taxi or delivering food is a pretty bad job, doing it as a self employed contractor is almost criminal. You have to cover all your own expenses and have no guarantee of work, with zero progression (ever heard of an Uber driving saving up and staring their own minicab business?). It’s a terrible economic decision. The market does not correct for this as it is entirely controlled by a small group of companies.
- countryqt30 8y agoAgain, nobody forces you to do this so what's the point?
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- golergka 8y agoSo, in the end, the analogy breaks: turns out, the companies found out a way to procure $10 bills for ~$6 and then (after initial growth phase) to get it as low as ~$3-4 and finally make a profit. Now, the logical question is to ask, why is anyone willing to provide this $10 bill for such a low price to begin with? Or, to switch from the analogy back to the subject matter, why are people singing up for the gig economy jobs? The author puts the blame on the unicorns - but they did not create the environment in which a gig worker is willing to accept such a job.
- username223 8y ago> why are people singing up for the gig economy jobs? Despair and deception. Companies have figured out how to shift costs onto their employees, then claim that those employees are "independent contractors." Uber is a global taxi company that pays millions of employees starvation wages. It sells itself as an SV "technology" company that pays a few thousand employees a few hundred thousand dollars a year to convince people to wear out their cars for less than minimum wage.
- golergka 8y agoUhm, but these are different companies that start with this proposition for workers from the beginning. That's not what's happening: the old and new models of employment are offered by different companies that compete on the same labour market. And new companies that work with the gig model did not create this labour market.
- username223 8y agoSee "deception:" most people underestimate the cost of using their car as a taxi or delivery vehicle. This is also why Uber would be much less profitable if it deployed its own self-driving cars, and probably has to convince "independent contractors" to buy and maintain its fleet.
- golergka 8y ago
- jfk13 8y agoAside: I'd suggest removing the -webkit-hyphens:auto property from the title. When I load the page in Safari it appears as: The Engineering Man- ager
- jstanier 8y agoThanks - had no idea.
- jondubois 8y agoGig workers are not the only losers. Any small business which doesn't receive VC funding is also disadvantaged because they aren't able to give consumers the same kinds of deals that these consumers have gotten used to. What some of those big VCs have been doing is criminal and has been hurting both workers and value-producers for over a decade. I hope that they'll end up in jail after it all goes belly up because this is very serious. It's not hard to see what's really happening; VCs are shoving investors' money into each others' pockets and then dumping the bi-product on the public market so that the public foots the bill... A lot of which ends up taking a chunk out of regular people's retirement funds. The crime is made even worse by the fact that many of those who end up footing the bill don't even have a choice. If I have a compulsory retirement fund like 401k or Superannuation, then I often don't have much say about where my money is invested... Maybe it goes to an index fund; part of which goes to big corps like Google which then use the money to acquire worthless VC startups from people who are friends with executives.
- TAForObvReasons 8y agoEveryone is a loser except for the investors. If you really take it to the logical conclusion, the business model is Dumping [1]: capture the market, drive out everyone else, then jack up prices when you are the only show in town. And the winners in the endgame are the investors. [1] https://en.wikipedia.org/wiki/Dumping_(pricing_policy) https://en.wikipedia.org/wiki/Dumping_(pricing_policy)
- skrebbel 8y agoI'm not doubting your point, but at the same time I struggle to name an example that did the "then jack up prices when you are the only show in town" step.
- TAForObvReasons 8y agoNo one, not even Amazon, reached the "only show in town" scale. Walmart's online presence for most popular items is competitive and many times offer lower prices. Uber, Airbnb, and other companies in this space are valued based on the assumption that they will in fact be able to reach that scale. And if they do, no doubt many of these unicorns will well exceed the trillion dollar market cap
- MayeulC 8y agoWouldn't this scheme be akin to a ponzi one, in some way? This holds true for startups as well: foster interest in the company, launch it with some initial inertia (VC funds), collect investors' (stock holders) money, and see the stock skyrocket. Little risk for everyone involved (but the buyers). Of course, that's only a pyramid scheme if the business isn't intended to turn profitable (VC firms do not care), and stock holders are placing a bet. But I wonder: if one were to look at the whole stock market, wouldn't it also look like a big pyramid scheme, if squinting a bit?
- tomohawk 8y agoMoney Quote: > I once read a tongue-in-cheek description of San Francisco as “an assisted-living community for tech workers in their thirties”. This snide jab pokes fun at the wave of Silicon Valley startups creating services and products for a stereotypical technology worker in the city. Nowhere to park your car? Uber and Lyft can get you around. Too busy working to cook and do grocery shopping? Postmates can deliver your lunch and dinner. Living in an apartment too small for a laundry room? Rinse can do your washing.
- Balgair 8y agoThis one goes back about four years: "OH: SF tech culture is focused on solving one problem: What is my mother no longer doing for me?" https://twitter.com/azizshamim/status/595285234880491521 https://twitter.com/azizshamim/status/595285234880491521
- PopeDotNinja 8y agoI get the author's point that they don't like investing in companies that hoover up investment dollars, but the selling $10 for $5 example annoys me. Any GAAP-based income statement starts off total income minus cost of that income equals gross income. Check out the income statement for Amazon... https://finance.yahoo.com/quote/amzn/financials/ https://finance.yahoo.com/quote/amzn/financials/ Amazon lost money for a bazillion years, and they continued to get investment dollars. What is one reason that Amazon could do this? Because they were selling things for less than it cost to make or acquire these things. If Amazon's business model was to buy a book for $10 at Barnes & Noble and sell that book for $5 on Amazon.com, they would never have gotten off the ground. None of the companies in this article buy something in this spend $10 make something they sell for $5. Interesting article. Bad example.
- lordnacho 8y agoI wonder what the answer is to these two questions: - Once we've driven out the competition, what prevents some other VC-backed firm from playing the same trick? If customers go for the cheapest thing -and let's face it, taxi and food delivery are not differentiable- won't there always be another disruptor? - If there's a monopoly that lets us make huge profits, wouldn't the government come and do something about that?
- nateburke 8y agoRemember that we've been here before: Groupon actually ended up BEING a straight-up ponzi scheme that is now worth a small % of what it IPO'd for as a conglomerate of all of its competitors (LivingSocial, etc.). And do not forget that some % of folks driving for Lyft and Uber are doing so in cars that are financed with subprime debt. https://usa.streetsblog.org/2019/02/13/americas-car-centric-transportation-policies-are-driving-us-to-ruin/ https://usa.streetsblog.org/2019/02/13/americas-car-centric-... $1-1.5 T in auto debt is not 2008 subprime mortgage debt, but it's important to remember that a real tie-in to the publicly-chartered banking system exists here beyond whatever LPs put into VC funds. How I see this playing out, post-ipos: Wall Street will demand profits, Uber/Lyft will raise fares because it's the only thing they can do, fewer riders will use the apps, causing fewer drivers to drive -- they will have to walk away from their car loans. GMAC will need to be bailed out again.