8 ms·

Debt to scale up is one thing; operating for years operating/selling at a loss leading to ever increasing debt to choke out competitors and maintain a monopoly,

Debt to scale up is one thing; operating for years operating/selling at a loss leading to ever increasing debt to choke out competitors and maintain a monopoly, fueling it with the expectation of a market valuation that will offset those losses, itself fueled by choking out those competitors, and all reliant on either getting out before it comes crashing down, or jacking up prices to profitable levels once there are no competitors left, is something else.

dantheman 5y ago
I question if that actually happens. Most companies don't actually have that large a moat.
- lostcolony 5y ago
  Long term it probably doesn't very often. That's cold comfort for the businesses that perhaps had better utility and better profit models, but couldn't compete because they couldn't debt finance as well. Likewise it's cold comfort for the consumer during the period when the company is able to jack up prices. And it's cold comfort for the retail investor who loses money should the company go under because it was unsustainable but had grown such market share it was included in index funds and things. It's not necessarily a permanent thing; little related to industry is. But the seemingly permanent cases are telling (Walmart being a great example). But even the impermanent ones; 20 years, say, of suboptimal outcomes for everyone except the already rich (the VCs), and the founders playing a flawed system well, is a reason to re-examine the system. Fundamentally being able to continually debt finance something that has no profitability, and possibly no path to profitability, or which leverages market inequalities to expand (again, Walmart; profits from one area enable predatory pricing in another to choke out competition, then you can raise prices, and repeat the cycle elsewhere), breaks a lot of the assumptions a 'free market' rests on. Or more succinctly, the practice is what enables digging the moat. The size of the moat is entirely controlled by how much financing you can get. We're seeing a lot of companies focusing on building moats rather than competing fairly.
  - lumost 5y ago
    at 0% interest rates a lot of dumb investment ideas that could eventually earn money become surprisingly practical as long as the pitch that the firm could eventually become net profitable is even remotely viable. 0% interest effectively means there is no time cost to money - As a large LP you could probably hold open a money burning position in a firm for decades as long as each year it looked like you would turn a profit within N years (conveniently far enough away that its beyond the funds horizon). At 5% interest N years gets a lot closer.
  - nradov 5y ago
    That is implausible in the general case. If a business actually had a better profit model then they would be able to attract financing. Capital is about as cheap now as it has ever been.
    - lumost 5y ago
      Many profitable business models do not survive competition with unprofitable ones without becoming unprofitable. If WeWork subsidizes all office space with ~50 billion dollars, all other profitable landlords will need to lower prices to compete. To the investor the only viable business is the one that grows so large as to not have any unprofitable competition.
      - nradov 5y ago
        Other landlords can borrow money the same way that WeWork borrowed money. There is literally a whole specialized financial services industry which arranges such financing for landlords.
        microtherion 5y ago
        Yes, but in order to attract tenants, they would have to offer lease terms competitive with WeWork and thus lock themselves into a similarly unprofitable business model.
        native_samples 5y ago
- abriosi 5y ago
  I bet every bootstrapped startup is feeling this on their skin. I know we do and we are operating in Europe. I can only imagine that in the US is worse.
DougN7 5y ago
Isn’t that what Amazon did early on? If so, looks like it worked.
- hoppyhoppy2 5y ago
  I don't think they're arguing that it doesn't work for the company doing it. I think they're arguing along the the lines that it's unfair or unethical (anticompetitive) and comes with costs for the broader society.
  - ideamotor 5y ago
    For example companies like door dash that run at a loss while forcing restaurants to take in less profits (because restaurants must pay door dash and can’t raise prices just for door dash users). It’s a ponzi scheme of investors. The real business for many SV companies is keeping the investor money flowing in.
    - ddtrafficking 5y ago
      And on top of that some of these companies work by exploiting labor while not being held accountable for that. I recently learned from a doordash courier that he and other Bangladeshi men had paid tens of thousands of dollars to a human trafficking organization to work doordash in exchange for getting to the United States. Of course he didn't have this money, it was debt to the organization, and he has to pay it out of his DoorDash wages, plus interest, to the organization. He lived in an apartment with dozens of other men in the same situation. He had a gps tracker around his ankle and everything. How are you supposed to compete with a company that uses modern slavery in order to deliver your meal for $5 or less?
    - lotsofpulp 5y ago
      > because restaurants must pay door dash and can’t raise prices just for door dash users All the restaurants I know charge higher prices if you order online than if you call directly or go in person. I do not use food delivery apps, but I assume prices are similarly inflated there since people willing to purchase online or via app are amenable to paying more. It is absolutely crazy to me the amount of premium people are willing to pay just to not have to pick up the phone or drive 5 min.
tunesmith 5y ago
See: the music streaming industry

dantheman 5y ago

I question if that actually happens. Most companies don't actually have that large a moat.

lostcolony 5y ago
Long term it probably doesn't very often. That's cold comfort for the businesses that perhaps had better utility and better profit models, but couldn't compete because they couldn't debt finance as well. Likewise it's cold comfort for the consumer during the period when the company is able to jack up prices. And it's cold comfort for the retail investor who loses money should the company go under because it was unsustainable but had grown such market share it was included in index funds and things. It's not necessarily a permanent thing; little related to industry is. But the seemingly permanent cases are telling (Walmart being a great example). But even the impermanent ones; 20 years, say, of suboptimal outcomes for everyone except the already rich (the VCs), and the founders playing a flawed system well, is a reason to re-examine the system. Fundamentally being able to continually debt finance something that has no profitability, and possibly no path to profitability, or which leverages market inequalities to expand (again, Walmart; profits from one area enable predatory pricing in another to choke out competition, then you can raise prices, and repeat the cycle elsewhere), breaks a lot of the assumptions a 'free market' rests on. Or more succinctly, the practice is what enables digging the moat. The size of the moat is entirely controlled by how much financing you can get. We're seeing a lot of companies focusing on building moats rather than competing fairly.
- lumost 5y ago
  at 0% interest rates a lot of dumb investment ideas that could eventually earn money become surprisingly practical as long as the pitch that the firm could eventually become net profitable is even remotely viable. 0% interest effectively means there is no time cost to money - As a large LP you could probably hold open a money burning position in a firm for decades as long as each year it looked like you would turn a profit within N years (conveniently far enough away that its beyond the funds horizon). At 5% interest N years gets a lot closer.
- nradov 5y ago
  That is implausible in the general case. If a business actually had a better profit model then they would be able to attract financing. Capital is about as cheap now as it has ever been.
  - lumost 5y ago
    Many profitable business models do not survive competition with unprofitable ones without becoming unprofitable. If WeWork subsidizes all office space with ~50 billion dollars, all other profitable landlords will need to lower prices to compete. To the investor the only viable business is the one that grows so large as to not have any unprofitable competition.
    - nradov 5y ago
      Other landlords can borrow money the same way that WeWork borrowed money. There is literally a whole specialized financial services industry which arranges such financing for landlords.
      - microtherion 5y ago
        Yes, but in order to attract tenants, they would have to offer lease terms competitive with WeWork and thus lock themselves into a similarly unprofitable business model.
      - native_samples 5y ago
abriosi 5y ago
I bet every bootstrapped startup is feeling this on their skin. I know we do and we are operating in Europe. I can only imagine that in the US is worse.

DougN7 5y ago

Isn’t that what Amazon did early on? If so, looks like it worked.

hoppyhoppy2 5y ago
I don't think they're arguing that it doesn't work for the company doing it. I think they're arguing along the the lines that it's unfair or unethical (anticompetitive) and comes with costs for the broader society.
- ideamotor 5y ago
  For example companies like door dash that run at a loss while forcing restaurants to take in less profits (because restaurants must pay door dash and can’t raise prices just for door dash users). It’s a ponzi scheme of investors. The real business for many SV companies is keeping the investor money flowing in.
  - ddtrafficking 5y ago
    And on top of that some of these companies work by exploiting labor while not being held accountable for that. I recently learned from a doordash courier that he and other Bangladeshi men had paid tens of thousands of dollars to a human trafficking organization to work doordash in exchange for getting to the United States. Of course he didn't have this money, it was debt to the organization, and he has to pay it out of his DoorDash wages, plus interest, to the organization. He lived in an apartment with dozens of other men in the same situation. He had a gps tracker around his ankle and everything. How are you supposed to compete with a company that uses modern slavery in order to deliver your meal for $5 or less?
  - lotsofpulp 5y ago
    > because restaurants must pay door dash and can’t raise prices just for door dash users All the restaurants I know charge higher prices if you order online than if you call directly or go in person. I do not use food delivery apps, but I assume prices are similarly inflated there since people willing to purchase online or via app are amenable to paying more. It is absolutely crazy to me the amount of premium people are willing to pay just to not have to pick up the phone or drive 5 min.

tunesmith 5y ago

See: the music streaming industry