30 ms·

There’s another often unwritten element here around companies basing their valuation on false markets. For example, if I sell $2 for $1 that’s a false market. O

There’s another often unwritten element here around companies basing their valuation on false markets. For example, if I sell $2 for $1 that’s a false market. Of course I can grow like crazy and gobble up lots of customers. I could even “disrupt” existing players like those stodgy old companies (banks) that sell $2 for $2.15 (a loan). 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.

ethbro 7y ago
The South Park gnome episode comes to mind. For values of: 1 - Demonstrate growth 2 - ? 3 - Profit https://en.m.wikipedia.org/wiki/Gnomes_(South_Park)#/media/File%3AGnomes_plan.png https://en.m.wikipedia.org/wiki/Gnomes_(South_Park)#/media/F... Who knew it was a billion dollar business model?
rubicon33 7y ago
That's not an uncommon nor unheard of tactic in business. Fuel growth, and capture the market for your brand, by selling at a loss. The trick is always the transition to profitability. Generally, this comes through layoffs and maybe price increases.
- deleted 7y ago
  [deleted]
- tempsy 7y ago
  If you look at the scooter companies they are now charging $.29/minute (vs I think $.15/min a year ago). If you rent it for an hour, that now costs more than $20 with tax. Not exactly cheap anymore.
  - cannonedhamster 7y ago
    That sounds like it's probably cheaper in the loan long run to buy a bicycle plus you don't look like an adult using a child's toy.
- Waterluvian 7y ago
  I think the problem is that a lot of these companies are trying this strategy with Juicero-like products. The moment they pivot to profitability, anyone else can just start squeezing at a lower cost. Is Uber or We really making something that can't quickly be copied, even at a local level, once prices are doubled or tripled?
- p1necone 7y ago
  Imo this should be illegal. Taking a loss undercutting smaller competitors in a way that's only possible because you have piles of money unrelated to your actual business is going to distort the market in a way that's really bad for consumers in the long run. 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.
  - hammock 7y ago
    What you describe is illegal in certain manifestations. It's called predatory pricing.
  - barry-cotter 7y ago
    So during the expansion phase they are subsidizing consumers and as soon as the expansion phase ends they open up a space for competition again? Sounds pretty great for everyone except the owners of the independent pita places that go out of business.
  - K0SM0S 7y ago
    I know retail stores in France cannot legally sell anything at a loss, except during government-decided 'sales' periods (twice a year, usually in January then June) which are mostly aimed at emptying stocks for the new 'season' (as if that mattered in the 21st century when most stores are a on a bi-monthly product cycle, but hey, that's the inertia of law/gov). Not sure about businesses in general but I seem to recall it's a general law for commerce. The problem is that retail is thus basically unable to compete on price beyond a certain (very mild) degree, notably forbidden to say "I'll sell item X at a loss to attract customers, and then make up for it on other items they buy". It's just illegal to do it in France. A little bit too reminescent of a planned (communist) economy if you ask me, because it applies to each and every item taken individually, not the store overall or over a certain period of time. Needless to say this doesn't help thwart the collapse of retail versus online shops, especially in the way of services — and consider that foreign online businesses don't even have to follow such regulation, obviously, so... It's a very, very grey area to regulate, and government being just awful at understanding how business works makes it ill-suited (often misguided) to regulate such things. I think branch negociations (within a given sector) is a much better approach: let actors (businesses) decide how they will compete, and only regulate if there's anti-consumer (cartel) behavior, not prior to any wrongdoing! — it reeks of a view that 'capitalism is bad' yadi-yada (typical French view) and hurts consumers' purchasing power in the end.
- fgonzag 7y ago
  That's the thing about these non tech companies though. They have fixed costs per transaction, something pure tech companies don't. So tech companies can grow at a loss because their marginal cost for each customer is zero or close to zero. As long as you are selling more, you are getting closer to profitability. This does not apply to all these "unicorns" that have a non negligible marginal cost on their services.
GhettoMaestro 7y ago
I never understood the "grow fast at any cost" mentality. 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.
- SpicyLemonZest 7y ago
  Everyone agrees with that statement. The hard question is what "can't" means. Companies with a grow fast mentality always insist they could break even, and often present financial metrics indicating they do break even with the proper adjustments for purely growth-related costs. There's no obvious rule for how much you should trust a company's adjustments.
  - carapace 7y ago
    “We lose money on every sale, but make it up on volume” A bit of history of that joke: https://www.barrypopik.com/index.php/new_york_city/entry/we_lose_money_on_every_sale_but_make_it_up_on_volume https://www.barrypopik.com/index.php/new_york_city/entry/we_... > 6 February 1833, New York (NY) Evening Post, pg. 2, col. 2: > Among the business anomalies which meet the eye of a stranger visiting New-York, are the placards exhibited in the windows of the retail shops, informing passers by that the stock in trade within is selling off at prime cost, or according to the more alluring announcement which some have adopted, at fifty per cent. less than cost. A person attracted by this lure to become a purchaser, must soon come to the conclusion that either the veracity of the dealer is not of the most scrupulous description, or else that he laid in his goods at enormous prices. One in the habit of passing these shops, must at least smile to perceive that notwithstanding their owners have been selling off their goods “at less than cost” for so long a time, their shelves continue to be as well filled as ever. We have heard of one individual, who “wishing to retire in consequence of declining health,” was five years disposing of his merchandise, “at prime cost,” and at the end of this time he found his capital so much augmented that he removed into a more busy part of the city, and entered into trade on a much larger scale than before. How is it that trades-people can sell their goods at less than they paid for them, and yet realize a handsome profit, is one of those mysteries of commerce which we never could penetrate. Perhaps they are like the Irish mercer, who, having assured a lady customer that the silk he desired to dispose of to her actually cost him more per yard than he charged for it, was asked how he then could afford to sell it so low. “Ah, madam, he replied, we depend for our profit on selling a large quantity.”
TheSpiceIsLife 7y ago
The whole point of fast growing startups with ever-increasing valuations is to enable early investors to cash out at huge multiples. Everything else is a side show.
- enkid 7y ago
  Sounds like a Ponzi scheme
  - barry-cotter 7y ago
    Yeah, Amazon and Google are totally Ponzi schemes.
- Thorrez 7y ago
  How do they generally cash out? Sell to other investors? IPO?
hammock 7y ago
> if I sell $2 for $1 that’s a false market 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.
- hammock 7y ago
  Can't believe I got downvoted for this. Would be worth a whole blog post. Start with the fact that only approved banks have access to the "cheap money" that the Fed loans or are targets of the Fed's open market operations. Or, start with the phrase "bad money chases out good."
tolmasky 7y ago
If you just thought about the "false market" like advertising, it wouldn't seem so perverse. 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.
- chii 7y ago
  > Coca-Cola "wastes" millions on advertising but they don't overspend on advertising, unlike those VC funded companies. Each can makes a profit for coke, and therein lies the difference.
- marcusverus 7y ago
  The poster isn't saying that companies should never buy growth by selling $2 for $1. He's saying that VC seems to be bad at avoiding companies that only grow because of this. Consider PayPal. Early on, they would pay a $20 referral fee to anyone if they could get a friend to join and use PayPal. That's insane at first glance, but it worked because those new users kept on using the product; because the product itself was viable without the subsidy. Coca-Cola is the same way. They advertise, but they turn a profit after baking that into the price of the product. MoviePass was never going to work. The subsidy was the product. That's the concern.
treis 7y ago
>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!) 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.
- ahartmetz 7y ago
  Reportedly Uber did use money on a marginal basis and maybe still does. That's a big and important one.
mindvirus 7y ago
For a lot of these companies, they are profitable on a per customer basis, they're paying to acquire more customers. 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!
ropable 7y ago
I think that we call this sort of thing a "loss leader" in retail. Unfortunately, it seems like some of these companies' entire market is a loss leader.
krzyzanowskim 7y ago
> old companies (banks) that sell $2 for $2.15 (a loan). 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.

ethbro 7y ago

The South Park gnome episode comes to mind. For values of: 1 - Demonstrate growth 2 - ? 3 - Profit https://en.m.wikipedia.org/wiki/Gnomes_(South_Park)#/media/File%3AGnomes_plan.png https://en.m.wikipedia.org/wiki/Gnomes_(South_Park)#/media/F... Who knew it was a billion dollar business model?

rubicon33 7y ago

That's not an uncommon nor unheard of tactic in business. Fuel growth, and capture the market for your brand, by selling at a loss. The trick is always the transition to profitability. Generally, this comes through layoffs and maybe price increases.

deleted 7y ago
[deleted]
tempsy 7y ago
If you look at the scooter companies they are now charging $.29/minute (vs I think $.15/min a year ago). If you rent it for an hour, that now costs more than $20 with tax. Not exactly cheap anymore.
- cannonedhamster 7y ago
  That sounds like it's probably cheaper in the loan long run to buy a bicycle plus you don't look like an adult using a child's toy.
Waterluvian 7y ago
I think the problem is that a lot of these companies are trying this strategy with Juicero-like products. The moment they pivot to profitability, anyone else can just start squeezing at a lower cost. Is Uber or We really making something that can't quickly be copied, even at a local level, once prices are doubled or tripled?
p1necone 7y ago
Imo this should be illegal. Taking a loss undercutting smaller competitors in a way that's only possible because you have piles of money unrelated to your actual business is going to distort the market in a way that's really bad for consumers in the long run. 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.
- hammock 7y ago
  What you describe is illegal in certain manifestations. It's called predatory pricing.
- barry-cotter 7y ago
  So during the expansion phase they are subsidizing consumers and as soon as the expansion phase ends they open up a space for competition again? Sounds pretty great for everyone except the owners of the independent pita places that go out of business.
- K0SM0S 7y ago
  I know retail stores in France cannot legally sell anything at a loss, except during government-decided 'sales' periods (twice a year, usually in January then June) which are mostly aimed at emptying stocks for the new 'season' (as if that mattered in the 21st century when most stores are a on a bi-monthly product cycle, but hey, that's the inertia of law/gov). Not sure about businesses in general but I seem to recall it's a general law for commerce. The problem is that retail is thus basically unable to compete on price beyond a certain (very mild) degree, notably forbidden to say "I'll sell item X at a loss to attract customers, and then make up for it on other items they buy". It's just illegal to do it in France. A little bit too reminescent of a planned (communist) economy if you ask me, because it applies to each and every item taken individually, not the store overall or over a certain period of time. Needless to say this doesn't help thwart the collapse of retail versus online shops, especially in the way of services — and consider that foreign online businesses don't even have to follow such regulation, obviously, so... It's a very, very grey area to regulate, and government being just awful at understanding how business works makes it ill-suited (often misguided) to regulate such things. I think branch negociations (within a given sector) is a much better approach: let actors (businesses) decide how they will compete, and only regulate if there's anti-consumer (cartel) behavior, not prior to any wrongdoing! — it reeks of a view that 'capitalism is bad' yadi-yada (typical French view) and hurts consumers' purchasing power in the end.
fgonzag 7y ago
That's the thing about these non tech companies though. They have fixed costs per transaction, something pure tech companies don't. So tech companies can grow at a loss because their marginal cost for each customer is zero or close to zero. As long as you are selling more, you are getting closer to profitability. This does not apply to all these "unicorns" that have a non negligible marginal cost on their services.

GhettoMaestro 7y ago

I never understood the "grow fast at any cost" mentality. 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.

SpicyLemonZest 7y ago
Everyone agrees with that statement. The hard question is what "can't" means. Companies with a grow fast mentality always insist they could break even, and often present financial metrics indicating they do break even with the proper adjustments for purely growth-related costs. There's no obvious rule for how much you should trust a company's adjustments.
- carapace 7y ago
  “We lose money on every sale, but make it up on volume” A bit of history of that joke: https://www.barrypopik.com/index.php/new_york_city/entry/we_lose_money_on_every_sale_but_make_it_up_on_volume https://www.barrypopik.com/index.php/new_york_city/entry/we_... > 6 February 1833, New York (NY) Evening Post, pg. 2, col. 2: > Among the business anomalies which meet the eye of a stranger visiting New-York, are the placards exhibited in the windows of the retail shops, informing passers by that the stock in trade within is selling off at prime cost, or according to the more alluring announcement which some have adopted, at fifty per cent. less than cost. A person attracted by this lure to become a purchaser, must soon come to the conclusion that either the veracity of the dealer is not of the most scrupulous description, or else that he laid in his goods at enormous prices. One in the habit of passing these shops, must at least smile to perceive that notwithstanding their owners have been selling off their goods “at less than cost” for so long a time, their shelves continue to be as well filled as ever. We have heard of one individual, who “wishing to retire in consequence of declining health,” was five years disposing of his merchandise, “at prime cost,” and at the end of this time he found his capital so much augmented that he removed into a more busy part of the city, and entered into trade on a much larger scale than before. How is it that trades-people can sell their goods at less than they paid for them, and yet realize a handsome profit, is one of those mysteries of commerce which we never could penetrate. Perhaps they are like the Irish mercer, who, having assured a lady customer that the silk he desired to dispose of to her actually cost him more per yard than he charged for it, was asked how he then could afford to sell it so low. “Ah, madam, he replied, we depend for our profit on selling a large quantity.”

TheSpiceIsLife 7y ago

The whole point of fast growing startups with ever-increasing valuations is to enable early investors to cash out at huge multiples. Everything else is a side show.

enkid 7y ago
Sounds like a Ponzi scheme
- barry-cotter 7y ago
  Yeah, Amazon and Google are totally Ponzi schemes.
Thorrez 7y ago
How do they generally cash out? Sell to other investors? IPO?

hammock 7y ago

> if I sell $2 for $1 that’s a false market 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.

hammock 7y ago
Can't believe I got downvoted for this. Would be worth a whole blog post. Start with the fact that only approved banks have access to the "cheap money" that the Fed loans or are targets of the Fed's open market operations. Or, start with the phrase "bad money chases out good."

tolmasky 7y ago

If you just thought about the "false market" like advertising, it wouldn't seem so perverse. 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.

chii 7y ago
> Coca-Cola "wastes" millions on advertising but they don't overspend on advertising, unlike those VC funded companies. Each can makes a profit for coke, and therein lies the difference.
marcusverus 7y ago
The poster isn't saying that companies should never buy growth by selling $2 for $1. He's saying that VC seems to be bad at avoiding companies that only grow because of this. Consider PayPal. Early on, they would pay a $20 referral fee to anyone if they could get a friend to join and use PayPal. That's insane at first glance, but it worked because those new users kept on using the product; because the product itself was viable without the subsidy. Coca-Cola is the same way. They advertise, but they turn a profit after baking that into the price of the product. MoviePass was never going to work. The subsidy was the product. That's the concern.

treis 7y ago

>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!) 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.

ahartmetz 7y ago
Reportedly Uber did use money on a marginal basis and maybe still does. That's a big and important one.

mindvirus 7y ago

For a lot of these companies, they are profitable on a per customer basis, they're paying to acquire more customers. 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!

ropable 7y ago

I think that we call this sort of thing a "loss leader" in retail. Unfortunately, it seems like some of these companies' entire market is a loss leader.

krzyzanowskim 7y ago

> old companies (banks) that sell $2 for $2.15 (a loan). 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.