5 ms·

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
        I don't think most landlords have the option of convincing Masayashi Son to write an infeasibly large cheque on the grounds that that remind him of what he used to be like, and/or that they are making a "tech" company.
    - lotsofpulp 5y ago
      WeWork is not a landlord, and actual landlords would never give away their land / space so cheaply to WeWork such that WeWork could afford those losses. I do not see what kind of moat WeWork could ever have to justify being locked into it, which means they would always end up being a useless middleman if they tried to monopolize and raise prices. And even if they succeeded, then the landlord would just raise the price it charges WeWork.
- lotsofpulp 5y ago
  > Likewise it's cold comfort for the consumer during the period when the company is able to jack up prices. You mention Walmart as a good example, but their net income figures for the past few decades indicate that they have not been able to jack up prices.
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.

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
      I don't think most landlords have the option of convincing Masayashi Son to write an infeasibly large cheque on the grounds that that remind him of what he used to be like, and/or that they are making a "tech" company.
  - lotsofpulp 5y ago
    WeWork is not a landlord, and actual landlords would never give away their land / space so cheaply to WeWork such that WeWork could afford those losses. I do not see what kind of moat WeWork could ever have to justify being locked into it, which means they would always end up being a useless middleman if they tried to monopolize and raise prices. And even if they succeeded, then the landlord would just raise the price it charges WeWork.
lotsofpulp 5y ago
> Likewise it's cold comfort for the consumer during the period when the company is able to jack up prices. You mention Walmart as a good example, but their net income figures for the past few decades indicate that they have not been able to jack up prices.

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.