5 ms·
There's some nuggets of truth in here, but I am disappointed that this article sidesteps what I feel is the most important reason for startup success in 2020: e
by benzor 5y ago
There's some nuggets of truth in here, but I am disappointed that this article sidesteps what I feel is the most important reason for startup success in 2020: easy and abundant access to cheap capital.
- Interest rates are at all time lows, borrowing is cheap
- The Fed's balance sheet is at an all-time high. The economy is flush with cash, particularly the investor / VC class
- This excess cash creates an (arguably artificial) wealth effect and drives an appetite for risk
- Large unicorn startups that are perpetual money losers continue to operate only because they are effectively subsidized by regular capital raises. Look no further than all the Silicon Valley darlings such as Uber, Netflix, AirBnb, Tesla, and so on. All of them would cease to exist without continued capital injection from secondary share offerings or VC raises
- These companies achieve growth and put pressure on the competition by offering their services below the real cost that would be needed to achieve profit, hence driving huge share price growth
- This share price growth attracts new investment from the momentum-chasing crowd, increasing appetite for subsequent secondaries, and then the cycle repeats
I don't mean to be cynical, but it's hard to see this ending well for some of the nouveau riche. Tech has been a great avenue to riches by offering real innovation in some cases, but the article's error-by-omission really gives the wrong impression.
- heylook 5y ago> - Large unicorn startups that are perpetual money losers continue to operate only because they are effectively subsidized by regular capital raises. Look no further than all the Silicon Valley darlings such as Uber, Netflix, AirBnb, Tesla, and so on. All of them would cease to exist without continued capital injection from secondary share offerings or VC raises You should look up the financial statements of the companies in your list.
- benzor 5y agoApologies for some hastily chosen examples. I think the point still stands if you consider the following companies: WeWork, Lyft, Snapchat, Pinterest, Dropbox, Slack, Casper, Lime, Peloton, Beyond Meat, Wayfair, Zillow. More generally speaking, take a look at Goldman Sachs' Non-Profitable Technology Index: https://pbs.twimg.com/media/EsRVCiMXIAE7xlA.png https://pbs.twimg.com/media/EsRVCiMXIAE7xlA.png
- Balgair 5y agoAre the fake-meat companies tech companies? I thought they are more like contract manufacturers, brewers, or other industrial foodstuffs. No doubts on the access to cheap debt, though.
- jdgoesmarching 5y agoWeWork was also never a tech company but pushed really hard to brand themselves that way. If evaluated truthfully as a real estate company, the money they raised was hilariously idiotic. So much of this world is driven by idiotic speculation based on slick websites and charismatic presenters.
- Breza 5y agoI just finished reading Billion Dollar Loser and I think you might like it.
- SeanAppleby 5y agoI think it depends purely on your definition of "tech". Impossible engineering soybeans to produce more heme to make fake meat behave more like meat is a technology, in that it is a novel innovation applied to solve a real world problem. But in modern common parlance "tech" tends to mean either that a company's offering is either entirely or heavily augmented by new software, or that the company has ties to a specific network of talent/investors/etc, or that the company has very low incremental costs per user. In those cases, they might not be a tech company.
- technotony 5y agoThere's a ton of tech behind Beyond Meat. Their core science is based on research from an RNA professor at Stanford. That proteomics research is the reason their burger tastes so much better than previous generation veggie burgers.
- yissp 5y agoIf you're referring to Patrick O. Brown, you might be thinking of Impossible Foods, not Beyond Meat.
- sithlord 5y agoThese companies could easily cut their marketing budgets in half and basically be profitable. They could also cut their R&D and focus only on their main money streams and be profitable. There is just no reason to be profitable, when you can raise more money.
- intricatedetail 5y agoIsn't that in a way a ponzi scheme? Companies that don't bring value and need a supply of investors... that does ring a bell. Why regulator doesn't look into it?
- aliswe 5y agoNono, lots of differences. In a ponzi scheme, the early investors get paid by the new investors and the company doesnt have any real business other than gathering new investors
- fairity 5y agoYour comment leaves me wondering if we're reading the same essay. PG specifically states that the "main reason it's easier to start a startup now is that it's cheaper". And, "cheaper" comes in the form of lower infrastructure costs, lower advertising costs, and lower cost of capital. >> But the main reason it's easier to start a startup now is that it's cheaper. Technology has driven down the cost of both building products and acquiring customers...now investors need founders more than founders need investors, and that, combined with the increasing amount of venture capital available, has driven up valuations.
- greggman3 5y agoI'm not sure what your point is . The article says it "cheaper to do". The person you're responding to says "there's access to cheap capital".
- jhugo 5y ago> now investors need founders more than founders need investors, and that, combined with the increasing amount of venture capital available, has driven up valuations.
- hnick 5y ago> These companies achieve growth and put pressure on the competition by offering their services below the real cost that would be needed to achieve profit, hence driving huge share price growth Which I find weird, if I sell fruit at a loss to run a local competitor out of business as a major supermarket it's illegal predatory pricing (or at least was when I was growing up), yet do it to an entire industry and it's fine. Maybe this is just one of those US exception things. Missing (or implied) by your list is that incumbents are not an all-or-nothing gamble based on other people's money, so are reluctant to engage in such tactics themselves and will suffer for it.
- handmodel 5y agoI don't think this covers all of this - but I feel like the reason it could never be investigated is that most of these things are only unprofitable because of the administration. Not on a per item basis. Netflix may lose money on their show but clearly by giving you a month free and then charging just $12 a month they are making money on that unit. AirBNB is making money on each additional rental they do even if historically that didnt cover all marketing and tech. For a store selling berries if they buy it for $3 and sell it for $2 then it is more tangible (though Im sure today they could just call it marketing)
- hnick 5y agoI guess that makes sense and is one consequence of moving so many things to an abstract 'service' model. Many services are essentially free to provide - until you count all the other overheads any business also has to pay for. It's not as simple as buying and selling berries like you say.
- arthur_sav 5y agoI think everyone just wants to get a piece of the future. The companies of today, if successful, will become huge conglomerates given the accelerated globalisation.
- tjs8rj 5y agoNetflix and Airbnb are profitable, and as far as I can tell the others could be profitable but aren’t because they want to stay huge / have the capital access to do so. When you have unlimited money pouring in, whats the point of profit other than a checkbox for wall street? You can pay everyone their wages, compete fiercely, grow like crazy, and so on. Profit is just inefficiency - we don’t have a use for this money so we just put it in the bank. I don’t disagree that Uber and Tesla and many of these are on life support currently, but from a game theory perspective, if you have unlimited access to money, why bother being profitable when you can just spend it getting bigger and smarter?
- kqr 5y agoThere is one fairly obvious reason: survival is the great filter. Anything that's not under survival pressure is almost by definition not good in the long run. If something is bad, you want it to die quickly before it becomes too big to fail.