5 ms·

It works brilliantly. It's called dumping. It created major businesses like Standard Oil, prior to antitrust laws. Indeed, it's #1 on Wikipedia's list of antico

It works brilliantly. It's called dumping. It created major businesses like Standard Oil, prior to antitrust laws. Indeed, it's #1 on Wikipedia's list of anticompetitive strategies: https://en.wikipedia.org/wiki/Anti-competitive_practices#Types https://en.wikipedia.org/wiki/Anti-competitive_practices#Typ... I have mixed feelings about some of the big money SV strategies. Antitrust concerns aside: - They do allow some types of long-term transformative businesses, which would otherwise be impossible. - They don't allow many forms of sustainable businesses to exist. If you and I have the same idea and ability to execute, whichever of us raises more money (and in an ideal free market, this means whichever of us is willing to accept less favorable terms) wins. This drains value from entrepreneurs to capital. Perhaps it speeds things up a little bit, but it's a net lose. It also leads to businesses with unsustainable debt and burn rates, and many viable business models crash-and-burn.

taurath 5y ago
It basically describes most of the biggest companies coming out of tech. Imagine thinking that an individual or a group of normal people can be competitive in an economy like this.
Jeff_Brown 5y ago
> whichever of us raises more money (and in an ideal free market, this means whichever of us is willing to accept less favorable terms) wins I went through an entire economics PhD program, and had never before now heard of this founders' race to the bottom of investment terms. What a remarkable insight. Is there already a name for it?
- woofie11 5y ago
  It's my own insight. I have about a half-dozen similarly remarkable insights each week. If you're interested in writing an econ paper about it, I'm glad to let you take first authorship. We can call it the "Founders Race to the Bottom" or the "Brown Effect." :) If it goes viral, you'll be famous. I've made that offer before on similar insights, and so far, no one has taken me up on it. And a few of them were really insightful. Who knows? Perhaps you'll get a Nobel Prize for it. Econ give them out for less. Some of those insights were, er, less than deep. The real insight behind this came in the Wealth of Nations. Adam Smith walks through this exact logic market-by-market, and for example, his section on rents leads to a similar degeneracy, where rents rise to match what the market can bare, and working people are driven to poverty by spending all excess income on rent. It's a great read. This is very directly applying exactly his logic, just to a modern market.
  - photojosh 5y ago
    It is a good insight indeed. As a fan of Henry George, I think the greatest trick pulled in economics was rentiers successfully getting Smith's concepts of capital and rent to be lumped together as "capital".
  - ec109685 5y ago
    I heard Facebook has a newsletter platform you could use :)
toss1 5y ago
It also eliminates a key benefit of capitalism: competition. It is probably what allows Amazon to continue to exit as such a cesspool of fraudulent reviews counterfeit goods, shady sellers, and painfully bad search functionality. A near competitor could have pushed them to improve, but their moat is now too big except for certain niches, so we're stuck.
- native_samples 5y ago
  Is Amazon the best example of this? Their retail arm was never long term loss making in the way e.g. Twitter was, if I recall correctly, but rather more like break even because all profits were ploughed into growth. I don't know how much money Amazon raised but back when Bezos started out there weren't the same kinds of insane sums being tossed about by VCs. Also Amazon's moat isn't really its website, which is mediocre at best, but its backend systems like fulfillment. Plus brand recognition, size, general efficiency etc.
  - CheezeIt 5y ago
    Amazon raised $54 million in its IPO in 1997.
  - useryman 5y ago
    What amazon did to diapers.com is a very good example of burning money to kill a rival. Especially because they launched their campaign while trying to buy them.
  - mnowicki 5y ago
    In Amazon's case it's not using VC money to outcompete similar businesses, it's using their own money to demolish any competitors in the thousands of niche categories they sell products for. The diaper.com thing is the most popular example, Amazon tried to buy daipers.com, daipers.com said no, amazon sold their own diapers for such a low price they were losing money on each sale in order to put diapers.com out of business or nearly out of business. Forget how it ends, either diapers.com went out of business, or they had to sell to Amazon in the end for a small percentage of the original offer
zozbot234 5y ago
> This drains value from entrepreneurs to capital. ISTM that it's draining value from entrepreneurs to the early adopters (on the consumption side) that make up the first-mover's market, and that the investors are just providing capital at competitive conditions, so they're not capturing any rent. Of course later-stage consumers can be seen as losers, if only because they must ultimately defray the increased cost of the initial excess-capacity building that results from imperfect competition. There's nothing that suggests this is unique to the tech sector, BTW. It ought to apply whenever scale is sufficiently large and first-mover advantages sufficiently high.
- saimiam 5y ago
  ISTM is “It seems to me”. I had to look it up so thought I’d post it for other Luddites like me.

taurath 5y ago

It basically describes most of the biggest companies coming out of tech. Imagine thinking that an individual or a group of normal people can be competitive in an economy like this.

Jeff_Brown 5y ago

> whichever of us raises more money (and in an ideal free market, this means whichever of us is willing to accept less favorable terms) wins I went through an entire economics PhD program, and had never before now heard of this founders' race to the bottom of investment terms. What a remarkable insight. Is there already a name for it?

woofie11 5y ago
It's my own insight. I have about a half-dozen similarly remarkable insights each week. If you're interested in writing an econ paper about it, I'm glad to let you take first authorship. We can call it the "Founders Race to the Bottom" or the "Brown Effect." :) If it goes viral, you'll be famous. I've made that offer before on similar insights, and so far, no one has taken me up on it. And a few of them were really insightful. Who knows? Perhaps you'll get a Nobel Prize for it. Econ give them out for less. Some of those insights were, er, less than deep. The real insight behind this came in the Wealth of Nations. Adam Smith walks through this exact logic market-by-market, and for example, his section on rents leads to a similar degeneracy, where rents rise to match what the market can bare, and working people are driven to poverty by spending all excess income on rent. It's a great read. This is very directly applying exactly his logic, just to a modern market.
- photojosh 5y ago
  It is a good insight indeed. As a fan of Henry George, I think the greatest trick pulled in economics was rentiers successfully getting Smith's concepts of capital and rent to be lumped together as "capital".
- ec109685 5y ago
  I heard Facebook has a newsletter platform you could use :)

toss1 5y ago

It also eliminates a key benefit of capitalism: competition. It is probably what allows Amazon to continue to exit as such a cesspool of fraudulent reviews counterfeit goods, shady sellers, and painfully bad search functionality. A near competitor could have pushed them to improve, but their moat is now too big except for certain niches, so we're stuck.

native_samples 5y ago
Is Amazon the best example of this? Their retail arm was never long term loss making in the way e.g. Twitter was, if I recall correctly, but rather more like break even because all profits were ploughed into growth. I don't know how much money Amazon raised but back when Bezos started out there weren't the same kinds of insane sums being tossed about by VCs. Also Amazon's moat isn't really its website, which is mediocre at best, but its backend systems like fulfillment. Plus brand recognition, size, general efficiency etc.
- CheezeIt 5y ago
  Amazon raised $54 million in its IPO in 1997.
- useryman 5y ago
  What amazon did to diapers.com is a very good example of burning money to kill a rival. Especially because they launched their campaign while trying to buy them.
- mnowicki 5y ago
  In Amazon's case it's not using VC money to outcompete similar businesses, it's using their own money to demolish any competitors in the thousands of niche categories they sell products for. The diaper.com thing is the most popular example, Amazon tried to buy daipers.com, daipers.com said no, amazon sold their own diapers for such a low price they were losing money on each sale in order to put diapers.com out of business or nearly out of business. Forget how it ends, either diapers.com went out of business, or they had to sell to Amazon in the end for a small percentage of the original offer

zozbot234 5y ago

> This drains value from entrepreneurs to capital. ISTM that it's draining value from entrepreneurs to the early adopters (on the consumption side) that make up the first-mover's market, and that the investors are just providing capital at competitive conditions, so they're not capturing any rent. Of course later-stage consumers can be seen as losers, if only because they must ultimately defray the increased cost of the initial excess-capacity building that results from imperfect competition. There's nothing that suggests this is unique to the tech sector, BTW. It ought to apply whenever scale is sufficiently large and first-mover advantages sufficiently high.

saimiam 5y ago
ISTM is “It seems to me”. I had to look it up so thought I’d post it for other Luddites like me.