15 ms·

Venture Predation

331 points by miiiiiike 3y ago

source99 3y ago
There are two kinds of VC funded startups - Those that give money to customers and those that give money to employees.
cs702 3y ago
From the abstract: "A venture predator is a startup that uses venture finance to price below its costs, chase its rivals out of the market, and grab market share. Venture capitalists (VCs) are motivated to fund predation—and startup founders are motivated to execute it—because it can fuel rapid, exponential growth. Critically, for VCs and founders, a predator does not need to recoup its losses for the strategy to succeed. The VCs and founders just need to create the impression that recoupment is possible, so they can sell their shares at an attractive price to later investors who anticipate years of monopoly pricing." Everyone on HN knows this is exactly the playbook of many fast-growing VC-backed startups. No need to mention names.
- zeroxfe 3y ago
  It's the playbook of any well funded organization trying to break into a new market. This is the entire premise of loss leaders, and they're effectively risking their entire capital.
  - senko 3y ago
    Yes, but: for a profitable organization a loss-leader is expected to enable profit-making elsewhere in the org, so a total sum ought to be positive. For example, console hardware is loss leader for console makers because they make up for it for every game sold. Google Chrome and Android are loss leaders for Google, but are strategic assets protecting its revenue business. In both cases, these companies can continue to do that indefinitely (as long as it makes business sense). Venture-backed companies that are burning cash, on the other hand, are pursuing an unsustainable strategy of predatory pricing to kill off competitors and grab the most of the market. (obviously, it's not either-or, you can easily name examples from long standing companies or startups doing either)
    - boringg 3y ago
      Theres no difference between what you just described just that one has an umbrella where its funded by revenue elsewhere and the other is on VC dollars on the promise of long term ability for market share and raise prices or someone else buys organization and continues it as a loss leader for its ability to get market share. Ones higher risk but quite similar. Not sure what your point is to be honest
      - mdorazio 3y ago
        They are completely different financially. Look at this way: in a single quarter, the cash flow for a company with a loss leader strategy will still be positive because the loss product is offset by other revenue. The venture predation company will have a massive negative cash flow no matter what because there is no near-term revenue to offset the loss.
    - eastern 3y ago
      This paper is not about grabbing most of the market etc and eventually making a profit. As the abstract quoted above says, it's about creating an illusion that this can be done so as to sell stock to a greater fool. Uber was quite successful at this, as were many others. Really, from the pov of Travis Kalanick and the original funders, Uber is a fabulously successful business. The original founders and the venture predators made their money. The professional execs at the top running the business now are also making lots of money. It doesn't matter to any of them what happens to competitors, employees and current shareholders.
      - senko 3y ago
        > about creating an illusion that this can be done so as to sell stock to a greater fool. Yup, that's the entire point of the paper (and it's really clearly written and approachable by non-experts!) Parent was equating predatory pricing (in general) with loss-leaders, which have nothing to do with the subject of this paper.
  - wyre 3y ago
    That’s a bit of an exaggeration right? Facebook sold their headsets at a loss and seem to be doing fine, Uber and doordash entered into markets without charging fees and look to doing fine, OpenAI is currently doing that with ChatGPT and we will see how it goes for them. Surely, selling at a loss is a risky endeavor, but we see it time and time again that companies selling at a loss get more funding due to their inflated numbers from selling at a loss. Or, it’s only those companies that make headlines and we don’t hear about all the companies going bankrupt selling their services at a loss.
    - stubybubs 3y ago
      > Uber and doordash entered into markets without charging fees and look to doing fine These companies are not profitable. They are still in the loss-making market share acquisition phase. They might be profitable at some point, but that would likely be by increasing pricing to something far less desirable to consumers, negatively impacting growth. AirBnb recently turned a profit but is now more expensive than hotels with often worse service, and they're being regulated out of some markets, so we'll see how it works out for them. Would DoorDash with a minimum $15 delivery fee survive? Uber if it's more expensive than a cab? Don't get me wrong, I'm happy living large off of VC fund's money. But I'm not brand loyal to any of this stuff.
  - vharuck 3y ago
    >This is the entire premise of loss leaders I thought "loss leaders" were specific products sold below cost so customers would buy accessories or subscriptions that have nice profit margins. Like selling cheap printers but expensive ink.
    - bombcar 3y ago
      The technical term for "loss leader" usually refers to a place like a grocery store selling some necessity like milk at or below cost, because they know if you compare milk prices and decide to buy there, you'll get other things once you're in the store. That's different from "sell a dollar for fifty cents until all competitors are dead". There's also loss leader applied to things like consoles, where they lose money (at first) but make it back on the games.
  - hnburnsy 3y ago
    Are there any examples of successful companies doing this? Uber and Wework only cost the IPO bag holders. Have any Venture Predation companies actually reached supracompetive pricing levels and recouped the predatory losses enough to have overall harm to consumers? IPO bag holders, too bad, and I don't see any regulatory need to protect them.
- dghlsakjg 3y ago
  I think the problem is that making a user or service provider create an account on an app isn't the moat that they think it is. A lot of these market domination moves only last as long as the VC money then the competitors are more than happy to swoop back in. Consumers are super fickle, and I will happily check a different app to see if I can save a dollar on a $10 car ride
  - dumbfounder 3y ago
    You aren't the norm. If you were then Lyft would be doing much better. How many rideshare apps do you check? 5? 10? My guess is maybe once in a while you check Lyft if uber seems high. That's what I do.
    - dghlsakjg 3y ago
      I almost always check both apps, but to be honest I don’t actually rideshare much so I’m always curious about pricing and options(I don’t live in a place where there are 5 rideshare options). Or I just use google maps which gives me the full menu of available options and how much they cost including scooter and e-bikes as well as transit since I’m normally just interested in the fastest option which is frequently transit.
      - dumbfounder 3y ago
        Pricing is highly dynamic for Uber and Lyft, changes minute to minute. I can't imagine Google can predict this well. Any idea how they do this? I can't imagine Uber and Lyft make this open. I just tried it and only Lyft is available in my google maps app and they said the range for one ride was $76-90 and the actual in Lyft was $66.
bityard 3y ago
This is essentially how Carvana has decimated the private used car market in my area. Only instead of low product prices, they offer well-above market value for used cars to private sellers so that Carvana becomes the only source for a car that fits your criteria.
- lotsofpulp 3y ago
  I do not see Carvana lasting long, at least not if their only strategy is to pay above market for used cars and getting in the crosshairs of multiple state regulators. https://www.macrotrends.net/stocks/charts/CVNA/carvana/net-income https://www.macrotrends.net/stocks/charts/CVNA/carvana/net-i... https://www.macrotrends.net/stocks/charts/CVNA/carvana/market-cap https://www.macrotrends.net/stocks/charts/CVNA/carvana/marke... https://en.wikipedia.org/wiki/Carvana https://en.wikipedia.org/wiki/Carvana
  - asah 3y ago
    yyy "cornering the market" is exceptionally difficult to execute. In used cars for example, other companies could make a fortune trucking in used cars from elsewhere and selling them to Carvana...
- maerF0x0 3y ago
  if their theory holds true that means private sellers were massively under negotiating, or that there is a large arbitrage value between when a seller wants to sell and the days on market. ie assume seller is willing to pay $50 a day to have car sold today (and not have to field calls etc). That means selling a car a month faster is worth $1500. Carvana can borrow the $25K car value at ~5% to pay $100 interest to hold the asset for a month playing the time arbitrage. I'm finding one thing that seems to be happening generationally (or just in my experience) is that folks are far more willing to pay for convenience/now. That means they'd rather have the $25k and car sold today than have the $1500 in their pocket a month later (and field calls etc).
  - xp84 3y ago
    I agree completely and totally see why people do it. I am keenly aware of the big spread between trade-in value and what the dealer will turn around and sell it for -- and yet, having sold a vehicle a couple of times, I will probably never do it again. Especially when you consider the risk of getting scammed somehow in the money transferring process, a lot of people will eat the few thousand bucks. I don't know if Carvana will stick around, but definitely see myself going to them or Carmax instead of Craigslist next time I am done with a car.
davepeck 3y ago
I assume this is showing up in part because it was discussed recently in Matt Levine's Money Stuff [0]; it's an amusing (if short) discussion. [0] https://www.bloomberg.com/opinion/articles/2023-05-18/tether-bought-some-bitcoin https://www.bloomberg.com/opinion/articles/2023-05-18/tether...
- burkaman 3y ago
  It was also today's topic on Cory Doctorow's blog: https://pluralistic.net/2023/05/19/fake-it-till-you-make-it/ https://pluralistic.net/2023/05/19/fake-it-till-you-make-it/
  - wslh 3y ago
    I don't know why this is catching now since it was already obvious long time ago. I usually hate conspiracy theories but could only think that a new meme or agenda is catching up. For Cory, Matt, et al this should be obvious since the dot com era and in every investment cycle. The greater fool theory explained part of this.
yieldcrv 3y ago
[flagged]
satvikpendem 3y ago
Are there any that are actually successful with this strategy? Uber and Lyft, for one, but they still don't make profit and aren't really that sticky, honestly, given that people will use other services if they're cheaper, like Waymo and some new ride sharing upstarts I've seen around recently.
- fnord77 3y ago
  amazon did this early on
- seanhunter 3y ago
  I can't escape the feeling that it boils down to the old classic 3 stage business model: 1. collect underpants 2. ? 3. Profit Uber and Lyft are great examples. They haven't established long-term stickiness with drivers or passengers. So if either of those groups get offered a better deal they will switch. Therefore it's just a relentless race to the bottom with no sustainable business in sight.
  - satvikpendem 3y ago
    Exactly. Well, I'm not complaining at my VC funded rides though, it's a great transfer of wealth from the rich to the poor, ie me, lol.
    - version_five 3y ago
      There's an interesting article somewhere about a pizza place that iirc arbitraged VC subsidies by ordering pizza from itself through some delivery app that was buying the revenue by selling the pizza below the actual price. Edit: https://www.readmargins.com/p/doordash-and-pizza-arbitrage https://www.readmargins.com/p/doordash-and-pizza-arbitrage
      - satvikpendem 3y ago
        This was satirized in Silicon Valley too, funnily enough: https://www.youtube.com/watch?v=LYu-d6y5HRo https://www.youtube.com/watch?v=LYu-d6y5HRo https://www.youtube.com/watch?v=rdJifVNEKnE https://www.youtube.com/watch?v=rdJifVNEKnE
ivansmf 3y ago
You. don't. say. Really?!? OMG, what an insight! What are they going to say next? That startups also use the good will of the internet to create their IP to then take it private as a way to get free labor? I'm shocked! And because this is also the internet, that was sarcasm.
- ohgodplsno 3y ago
  [dead]
- cactusplant7374 3y ago
  Normally it is described as a positive practice because consumers get lower prices for an extended period of time. I personally benefited from this but I can see the drawbacks.
cm_silva 3y ago
Reminds me of the game Capitalism[0] where the player was incentivized to achieve monopoly in markets by selling below-cost, subsidized by the other parts of the business. Vertical integration was also highly encouraged. [0] https://en.m.wikipedia.org/wiki/Capitalism_(video_game) https://en.m.wikipedia.org/wiki/Capitalism_(video_game)
glutamate 3y ago
Other thing we need to talk about is when funded startups run customer service that is not sustainably financed. Everybody apparently loves this and celebrates that the great service and listening to its customers. But it is just the same thing: predatory pricing applied to a product delivered with high-end customer service. Edit: Example: $5/month Todo list SaaS that has a 24h customer support telephone helpline
- brookst 3y ago
  I don't see the problem. They apparently believe in a low margin, high volume play with support being a volume driver. They might be right or wrong, but I wouldn't want it to be illegal as a business model. Investors and companies have to be free to lose money or else we've just got a centrally planned economy where every business has to offer the same product at the same price.
  - gmd63 3y ago
    The problem is society is witnessing races between Tortoises and Hares, where the Hares are doped with venture backing. A healthy society progresses slowly like a tortoise, encountering actual tradeoffs that aren't masked by mountains of cash only to ensure cancerous returns for already rich people at the expense of skilled business owners who are actually designing their businesses to handle endgame stressors. In any healthy competition you have rules around the gear you can use, how many people are allowed in your pit crew, what dimensions your fencing saber can be etc. so that rich people cant buy their way to success to cover up lackluster execution and skill.
    - miiiiiike 3y ago
      I get your meaning, but not all competition is sport. You don't have to go horse to horse with your competition if you have an F-35.
      - miiiiiike 3y ago
        I also think this kind of VC puts some of the companies that take it to bad spots. Not all markets can support it. Look at Substack. They came in and bought out the newsletter/indie media whatever market. Unfortunately it’s not the kind of market that’s likely to make that investment back.
james-revisoai 3y ago
A flipside effect to this is advertising and PPC which has trended up so high overtime, especially in education. Strategies viable in 2019 are largely useless to bootstrapped businesses in 2023: the costs of ads even to acquire customers with low spending power is two to three times what it was (e.g. students) As someone working on a NLP product for education, the pricing and subscriptions are also dropping rapidly, lead by the funded companies entering this niche (the founders almost entirely are non technical recently). The combination of the two is like a jaw - it's unclear what to do when your technology becomes a trend, other than grab and deploy your own funding and use marketing strategies and technical efficiencies to outlast your competition.
- maerF0x0 3y ago
  This rise of PPC should be matched with targeting efficiency through tools like Segment etc that are aimed in increasing the ROI on adspend. It's a resource allocation strategy that drives the limited supply (ad space above search) to the highest bidder (ie highest return usage). Just like a competition for any other limited resource in a capitalist market driven society.
nico 3y ago
In international trade this is called “dumping”, and it’s often considered illegal and most definitely unfair It’s usually used as a reason for regulating imports/exports https://www.investopedia.com/terms/d/dumping.asp#:~:text=Dumping%20occurs%20when%20a%20country,that%20are%20often%20considered%20unfair https://www.investopedia.com/terms/d/dumping.asp#:~:text=Dum....
- brookst 3y ago
  Eh, there is alot more nuance here. Dumping is typically when an established company attacks a competitor with temporarily low prices. If you squint right, sure, VC backed low costs could be seen as dumping. But the problem is that also means virtually every startup is dumping, even bootstrapped garage efforts. And I guess any company that reports a quarterly loss is also dumping. So I think it probably makes sense to treat VC-subsidized startups as a different economic phenomenon that needs different rules than if e.g. Goodyear sells tires at far below cost in California until competitors leave and then they raise the price.
  - lesuorac 3y ago
    I don't think you have to squint very hard to see VC as dumping. It's why they all follow that common trend of low-price growth hacking and immediately follow up by raising prices.
    - derefr 3y ago
      > It's why they all follow that common trend of low-price growth hacking and immediately follow up by raising prices. The key difference is that startups are rarely selling the same product, to the same people, for different prices at different phases of growth. They're more often selling different products, with different positioning, to different market segments at different times in their growth; where they just happen to call those products "editions" of the same thing. A common startup lifecycle: 1. get seed capital to build an MVP targeting one distinct market (usually consumers or individual professionals); 2. market (or give away) your consumer-product MVP to price-sensitive early adopters (which is where the initial look of "giving it away" comes from — that's what this market segment demands); 3. wait for those early adopters to educate the rest of the market about what's cool about the product and the brand; 4. meanwhile, use the "social proof" (rather than earnings reports) from these early adopters, as leverage to get a Series A investment; and use it to build a separate, more polished product targeting the enterprise market; 5. use your enterprise product, in combination with a bunch of new sales staff, to reach the non-price-sensitive late adopters. (While continuing to sell/give away the MVP consumer version!) 6. At some point, after achieving traction in both product lines, you can also "trickle down" the benefits of the enterprise product — and integrate process, saving OpEx — by building a new version of the MVP [now "consumer/SMB" product line] using the enterprise product's technology. (It's still a separate product, though, not just a feature-limited version of the enterprise product — there are a lot of things enterprises want that actively get in the way for consumers.) This is less like Goodyear charging less for tires until they monopolize the market; and more like Goodyear starting off selling car tires, achieving brand recognition there, and then making all their real money by selling semi-truck tires. A clear example of all six phases (but with bootstrapping in place of VC investment): Microsoft built initial versions of Windows for consumers, at retail prices (or "given away" via OEM channel-partners with steep volume discounts); achieved reach; then reinvested the revenue from that to build a more polished and robust Windows NT for enterprises, and made big money from non-discounted enterprise volume licensing; then "trickled down" the technology from Windows NT to create Windows XP, with the consumer/SMB product now just an "edition" of Windows XP.
DolceVita 3y ago
[flagged]
fnord77 3y ago
I remember a game on the Apple ][ that was basically a simulation of the bicycle manufacturing business you could tweak various "fair" parameters like quality and price but I guess the makers of this were naive and never considered any "unfair" practices like getting cheap cash and wiping out the competition
frithsun 3y ago
I believe a lot of this was driven by fed rate shenanigans creating far more investment wealth than there were organic opportunities for investing it. All of these market-distorting startup deals were just symptoms of that broader systemic monetary policy error. While the mom and pop taxi companies and others impacted by it have my sympathy and support, all the regulatory alternatives other than waiting until they achieve a monopoly and then breaking them up seem to cause as many problems as they aim to solve.
- JumpinJack_Cash 3y ago
  > > I believe a lot of this was driven by fed rate shenanigans creating far more investment wealth than there were organic opportunities for investing it. All of these market-distorting startup deals were just symptoms of that broader systemic monetary policy error. The Fed is not distorting anything. It's an anomaly that you can "invest with Uncle Sam" , for the longest time if you wanted to see your money grow you had to take it from your fellow American somehow. The ability to passively invest with the government is alienating, unsatisfying and creates growth problems to the country that allows it because it subtracts participants from the creative destruction process.
  - revelio 3y ago
    Interesting perspective, thank you for that, but the issue is not merely driving bond rates to zero. The money created by central banks also flows into VC funds and the stock markets via various indirect paths and from there into the startup ecosystem.
    - JumpinJack_Cash 3y ago
      That's a problem of trust, money flows to startups because the so called capital allocators don't trust themselves with such amount of money, otherwise they'd be investing all into companies where they are at the helm. The whole family office concept is something new, back in the day if someone had money they'd just invest in themselves by expanding their own business.
  - 3y ago
zomglings 3y ago
Wasn't this dressed up and sold to the masses as blitzscaling just a few years ago? I like the term "venture predation" better.
- dbmikus 3y ago
  Yeah, Uber was a classic case study for blitzscaling and the Uber v Lyft battles are a case study of blitzscaling by using VC subsidies to try to price out competition.
- florakel 3y ago
  I talked to a fair share of late stage VCs and they like to think of themselves as “category king makers” - the term itself reflects the general sense of humbleness in the VC community. Besides the “venture predation” described in the paper “category king making” also entails cutting off potential competitors from funding. The theory is that once a Softbank or Sequoia have chosen their horse other VCs will be discouraged to invest in the same category as it “is taken”. And many times the VCs actually act behind the scenes and actively discourage their peers to seek an investment in a competitor of their “category king”. It truly is a disgusting game to watch once you have been close enough. VCs for better or worse are the essence of the tech ecosystem. Make the world a better place. my a* :)
exabrial 3y ago
Unfortunately before regulators have time to react, the intended effect: Driving out small businesses, has already taken place.
deleted 3y ago
[deleted]
WaitWaitWha 3y ago
Best part in my opinion? One of the requirements in the RFP was "Windows to View Our Home Planet and the Moon". The last sentence is "They must be present and cannot be substituted".
Robotbeat 3y ago
Pricing below costs is the opposite of a problem for consumers (in the short term…). “Predation” in this case refers to competing businesses, who often have enjoyed a long period of monopoly rents.
- likeclockwork 3y ago
  As you said "in the short term". Once the competition is destroyed the consumer is at the predator's mercy.
  - pixodaros 3y ago
    Sometimes that is true, but if the barrier to entry is low (eg. ridehailing services), as soon as the predator raises prices, competitors will appear. If the barrier to entry is high (eg. telecommunications), there is usually some antitrust regulation.
degreesoffun 3y ago
And don't forget Amazon. They aren't venture backed but they have access to capital at cheaper rates than most countries due to their position as a stock market darling. They use ultra-cheap money and a willingness to run negative margins which they refer to "reinvesting in the business" to bleed competitors dry. Few other companies on the planet have the ability to run negative or break-even margins the way Amazon does. Diapers.com example: "When Bezos’s lieutenants learned of Wal-Mart’s counterbid, they ratcheted up the pressure, telling the Quidsi founders that [Bezos] was such a furious competitor that he would drive diaper prices to zero if they sold to Bentonville. The Quidsi board convened to discuss the possibility of letting the Amazon deal expire and then resuming negotiations with Wal-Mart. But by then, Bezos’s Khrushchev-like willingness to use the thermonuclear option had had its intended effect. The Quidsi executives stuck with Amazon, largely out of fear. The deal was announced Nov. 8, 2010." https://slate.com/technology/2013/10/amazon-book-how-jeff-bezos-went-thermonuclear-on-diapers-com.html https://slate.com/technology/2013/10/amazon-book-how-jeff-be...
- abigail95 3y ago
  They have money because of AWS, which is a fantastic product in an extremely competitive market, competing against players who lose money like GCP and Azure. Amazon.com as a store makes next to nothing as profit. Who cares what he did to some diaper companies. Are consumers paying more or less because of amazon? Much less. They basically run amazon.com for no profit and consumers get fantastic deals and cheaper products and more reliable service than ever before. How much would you have to charge for same day delivery for that many products? Could you get close to Amazon? You would have to rip off you customers so badly just to stay alive.
  - paulddraper 3y ago
    > Who cares what he did to some diaper companies. Going out on a limb here, but I'd say the diaper companies.
    - lotsofpulp 3y ago
      What happened to the diaper companies? Feel like I see the same brands of diapers still. Procter and gamble, Kimberly Clark, etc.
NumberWangMan 3y ago
This feels related to the idea in "Billionaires, Surplus, and Replaceability" (1) Basically, if, say, Jeff Bezos never existed, it seems likely that someone else would have created Amazon, perhaps a few years later, and maybe not quite as good. "Big online retailer" is sort of a natural niche, with a bit of a natural monopoly. So while the classic argument for letting people keep most of their wealth gained in the free market is that they provided a lot of value, maybe that doesn't make as much sense when you consider that if they hadn't done it, somebody else probably would have soon after. It's obviously impossible to gauge exactly how much excess value someone provided compared to the world in which they never existed, but to round it up to 90% or doesn't seem very accurate. So it seems like in our current world, there's a winner-take-all effect that a lot of venture-backed startups are trying to exploit. If we were a lot more aggressive in taxing companies like Amazon, my intuition is that it would go a long way toward reducing this effect. (1) https://astralcodexten.substack.com/p/billionaires-surplus-and-replaceability https://astralcodexten.substack.com/p/billionaires-surplus-a...
- mdgrech23 3y ago
  seems more of a problem that we let monopoloies exist. hell even oligopolies. we do have laws but we all know they don't do shit.
- wslh 3y ago
  I don't think you can play the alternative universe easily. Will there be another Apple? Will there be another Microsoft? There is some uniqueness in Amazon execution that didn't enable a competitor to survive, even when they were a startup.
- Nevermark 3y ago
  Amazon is a series of several businesses created in succession, with synergy between them. It is highly unlikely that the same path would have been taken by someone else, or that they could have the repeated same results with any combination of those businesses.
- Firmwarrior 3y ago
  The counter argument is to examine how likely it is that someone actually would have created Amazon and not just a cruddy online Wal-Mart https://mattsclancy.substack.com/p/how-common-is-independent-discovery https://mattsclancy.substack.com/p/how-common-is-independent... Looks pretty unlikely to me, personally, judging by the low stats on independent discovery
revelio 3y ago
Easy to criticize but to be consistent you'd also have to consider non-VC-backed products dumped at below price by regular companies too, and that would get uncomfortable real fast: - Chrome - VS Code - LetsEncrypt - Everything open source etc. Sometimes I wonder how much this practice distorts the software industry, preventing new innovations from happening. The industry settled on this approach without being forced to, so I wouldn't want legal changes to prevent it either, but it's worth a bit of self-reflection on how much we all love free stuff.
- arcticbull 3y ago
  Recovering your costs through advertising isn't really dumping. Chrome definitely makes Google way more money than they put into it.
  - Andrex 3y ago
    Also, outside of Opera, all browsers (that I know of) have been free for over two decades.
  - revelio 3y ago
    I recall that it wasn't seen that way when Microsoft used Windows revenues to push IE and crush Netscape. It was called product tying back then. You don't hear much about it anymore.
    - wmf 3y ago
      Chrome and IE did not have the same business model. If we look back at Netscape vs. IE they both had predatory nonexistent business models.
      - revelio 3y ago
        Netscape was payware in the beginning? Not sure how that's non-existent? Even after they were forced to go free by Microsoft, they were selling servers which are the compliment of browsers.
kashkhan 3y ago
Don't airlines do this all the time to prevent new entrants? How is this not provable?
maxk42 3y ago
Funny to see nobody's mentioned Cloudflare yet. They're not making any money: This is presumably their exact plan: Offer CDN services and other web infrastructure services at a loss for a prolonged period of time until the competition is destroyed, then jack up rates and eat the market.
- refulgentis 3y ago
  +1, they really made my eyebrows raise recently. They're absurdly overaggressive on flagging requests as scraping...and will sell you a CORS proxy for scraping, with a big fat "I'm a scraper" tag on it. They get two customers and the web-as-commons and the scraper are both worse off.
- dceddia 3y ago
  This coupled with their device attestation stuff scares the hell out of me. Once enough of the internet is shielded by Cloudflare, and they only allow access to authorized (read: uniquely identifiable) devices (or else you have to answer a captcha on every request)… I just don’t see a very good future for the free internet.
- teaearlgraycold 3y ago
  Aren’t there other CDN providers like AWS that are pretty stable?
anonu 3y ago
I'm part of the problem. I always suspected my Uber ride was financed with venture money. So i always went with Uber. But i didn't think ahead to the fact that it would kill off the competition. What i don't get it is what the Uber moat is? Why does this need to be centrally planned and controlled? Would an open source and free platform work where drivers got near 100 percent of the sale instead of the 75% they get today.
- EamonnMR 3y ago
  Uber's moat is the inertia of its massive customer and not-employee base making it difficult to enforce the regulations it has historically flaunted. In that way, it's similar to why Mastodon can't kill Facebook.
- bogwog 3y ago
  It isn't the consumer's responsibility to solve this problem. That's the government's job.
- cheapsteak 3y ago
  The open source and free platform be able to handle the patchwork of regulations that are now in place that differ between city to city
- HDThoreaun 3y ago
  Uber's moat is its network. Can't get any drivers if there are no riders and can't get riders if there are no drivers. This means you need to start by offering drivers more money than you make in order for them to use the app. An open source solution wouldn't be able to get off the gorund.
  - tomatocracy 3y ago
    The direct fix for this (which I believe has happened in some countries) is to ban them from asking drivers to enter into exclusivity or minimum volume agreements with them. Then drivers can work for multiple networks.
spaceman_2020 3y ago
I'm so jaded by modern startups and venture industry. There are people who've built entire careers building unprofitable companies that only sell products to other unprofitable startups and eventually get acquired by other unprofitable startups. It's a gigantic game of hot potato that swallows up a gigantic pool of human talent, all for producing stuff that really adds little to no positive to the world. If they're not disrupting (read: destroying) local economies, they're breaking all local rules and regulations. And despite playing fast and loose with any sense of ethics or legal compliance, they still can't be profitable. Just end this ponzi.
- mdgrech23 3y ago
  This is our world right now. My wifes father was a plumber. She said as actual plumber, you know someone who provides water and ensures your shity is sanitarily drained away he didn't make really good money. He got a job working for the auto industry running pipes for hydraulics to the machines on the factory floor and made way more money. How is that worth more to our society?
  - MichaelZuo 3y ago
    Why wouldn't factory machine hydraulics for the auto industry be more important then an individual's toilet?
    - wslh 3y ago
      Also, a Zen monk will have a different perspective about value. There are people who value the entertainment from TikTok while others prefer to read a book.
    - mcdonje 3y ago
      Because poor sanitation is a disease vector that can kill people and ruin communities. A working toilet is an unmitigated good. Cars on the other hand have a much more questionable value proposition. They turn cities into parking lots shrouded in smog and significantly contribute to climate change. Even if cars only contributed in positive ways, they're still not necessary to a functioning society the way that sanitation is.
huitzitziltzin 3y ago
The response from regulators should be: Let VCs waste their money. This is an extremely weak analysis from an economics point of view. The regulator has several options to deal with monopolists if and when they emerge. If consumers realize benefits in the meantime in the form of cheap products subsidized by VC money that’s a good thing.
dumbfounder 3y ago
Very often the unit economics at smaller scales doesn't work, but then works great at a large scale. I don't think it's immoral to gamble on achieving the high scale later and investing in the company to shoot for that scale. If no one can achieve profitable unit economics early on and you aren't allowed to have unprofitable unit economics then no one will make the product. I think this is bad for innovation. Is this the same as "venture predation"? It sure seems that way. How could you tell it apart?
balozi 3y ago
Wait, it's predatory pricing traditionally understood to be aimed at consumers/customers. Applying the term to sketchy pricing practices aimed at competitors is a bit novel in my book. I feel like words are being misused here.
web3-is-a-scam 3y ago
Isn't this more or less just loss leading?
liorben-david 3y ago
Losing money while you grow isn't neccesarily bad. Venture Capital at its best allows a company to take losses until it can achieve economies of scale. I'd say it turns predatory when even after achieving scale(Like Uber or Amazon) a company still runs an unprofitable business to choke out competitors. How can you prove this in court? No clue. Maybe the company has to articulate the explicit economy of scale it hopes to achieve and how?
- rossdavidh 3y ago
  I think the difference between legit and illegit is whether or not your competitors have to go out of business for you to become profitable. If you burn through some cash to get off the ground, eventually driving your per-unit costs down so that your prices become profitable, that's legit. If on the other hand your current prices are never going to be profitable (looking at you, Uber), and your business plan requires that your can raise them a lot without losing sales (because your competitors are gone), that is not legit. The third factor in all of this is that many companies like Uber weren't really ever likely to become profitable in any scenario, and this was really about taking the cheap VC money while it was cheap. Blitzscaling was just a way of pretending that you would someday become profitable. I think higher interest rates will get rid of a lot of this.
- jwr 3y ago
  It's about unit economics: losing money while you grow isn't bad, but if you lose money on every customer, it means subsidized growth. That's usually done not to get economies of scale, but to get GROWTH GROWTH GROWTH and user numbers, so that the unprofitable business can be sold to the next buyer/investor.
joshe 3y ago
For academics I think this is fine, the whole job is to look for new extensions of the law. But it shows how very far we are from any kind of basis for "stopping tech." Gonna be hard to achieve consensus around "raising fares and lowering driver pay" which is the opposite of what Uber did. "Uber showed that venture predation works. Uber raised around $24 billion from private investors and used it to subsidize cheaper fares for riders and higher pay for drivers. Uber quickly crushed the taxi companies and acquired a dominant share of the combined taxi-and-ridehailing market.27 But it never developed a superior product or cost efficiency. Lyft, other ridehailing startups, and even taxi companies developed similar apps. Uber had to keep up its below-cost pricing to maintain its market share. In each of the three years before its IPO, Uber racked up losses of $3 billion or more.29 Uber reassured investors by explaining that, once it became dominant, it would be able to raise prices and recoup its losses. In its IPO roadshow, Uber’s executives told investors that they expected the company to earn an adjusted profit." ... "We concede that the “millennial lifestyle subsidy” was fun." ... Then a lot of handwaving. But no victims other than bad high margin businesses. (There's a theoretical driver that doesn't realize the high pay won't last forever and buys a car, but he can sell it no? And he could read the news about his livelihood and learn that his high pay is at risk). Btw, you can still take taxis. It'll cost more and pre uber they were very surly or wouldn't show when you called them. The only "regulate Uber" consequence will be higher ride costs and lower paid drivers. Amazon operates on very tight margins in it's retail business. The ideal case is lots of competition, which would lead to uh... very tight margins among competitive firms. Amazon is just smart enough to get ahead of that. And I think their long term goal has been to operate at such a low cost structure that they have a durable advantage in cost. And then to pour back all their capital back into lowering their cost structure. So why stop them? In order to subsidize the higher cost company, their private jets and sexual harassment lawsuits? Capital is very easy to get in 2023. We are not in the time when capital is so difficult to get that you'd need a 2 generation family firm just to build a single factory. At that point spending 5 years to crush your competitor might have made sense. But now it's limited to monopoly markets like cable, and cell phone service. And it might indeed be useful to create more competition there. Unlike Amazon I think Uber isn't likely to be a great business. There is just no cost structure advantage being built. So they'll either operate on low margins forever or they'll raise prices and we'll get competition in the space of a few years. In either case I would not want to hold Uber stock right now.
jasmer 3y ago
Probably more aptly named 'Venture Dumping' because 'dumping' would be a bit more like the classical term but that just doesn't have the right 'ring' to it.
jwr 3y ago
I am a founder of a bootstrapped B2B SaaS business. A VC-founded competitor that can burn through money offering subscriptions at unsustainable prices (e.g. $20/month) is the main fear keeping me up at night.

331 points by miiiiiike 3y ago

There are two kinds of VC funded startups - Those that give money to customers and those that give money to employees.

From the abstract: "A venture predator is a startup that uses venture finance to price below its costs, chase its rivals out of the market, and grab market share. Venture capitalists (VCs) are motivated to fund predation—and startup founders are motivated to execute it—because it can fuel rapid, exponential growth. Critically, for VCs and founders, a predator does not need to recoup its losses for the strategy to succeed. The VCs and founders just need to create the impression that recoupment is possible, so they can sell their shares at an attractive price to later investors who anticipate years of monopoly pricing." Everyone on HN knows this is exactly the playbook of many fast-growing VC-backed startups. No need to mention names.

zeroxfe 3y ago
It's the playbook of any well funded organization trying to break into a new market. This is the entire premise of loss leaders, and they're effectively risking their entire capital.
- senko 3y ago
  Yes, but: for a profitable organization a loss-leader is expected to enable profit-making elsewhere in the org, so a total sum ought to be positive. For example, console hardware is loss leader for console makers because they make up for it for every game sold. Google Chrome and Android are loss leaders for Google, but are strategic assets protecting its revenue business. In both cases, these companies can continue to do that indefinitely (as long as it makes business sense). Venture-backed companies that are burning cash, on the other hand, are pursuing an unsustainable strategy of predatory pricing to kill off competitors and grab the most of the market. (obviously, it's not either-or, you can easily name examples from long standing companies or startups doing either)
  - boringg 3y ago
    Theres no difference between what you just described just that one has an umbrella where its funded by revenue elsewhere and the other is on VC dollars on the promise of long term ability for market share and raise prices or someone else buys organization and continues it as a loss leader for its ability to get market share. Ones higher risk but quite similar. Not sure what your point is to be honest
    - mdorazio 3y ago
      They are completely different financially. Look at this way: in a single quarter, the cash flow for a company with a loss leader strategy will still be positive because the loss product is offset by other revenue. The venture predation company will have a massive negative cash flow no matter what because there is no near-term revenue to offset the loss.
  - eastern 3y ago
    This paper is not about grabbing most of the market etc and eventually making a profit. As the abstract quoted above says, it's about creating an illusion that this can be done so as to sell stock to a greater fool. Uber was quite successful at this, as were many others. Really, from the pov of Travis Kalanick and the original funders, Uber is a fabulously successful business. The original founders and the venture predators made their money. The professional execs at the top running the business now are also making lots of money. It doesn't matter to any of them what happens to competitors, employees and current shareholders.
    - senko 3y ago
      > about creating an illusion that this can be done so as to sell stock to a greater fool. Yup, that's the entire point of the paper (and it's really clearly written and approachable by non-experts!) Parent was equating predatory pricing (in general) with loss-leaders, which have nothing to do with the subject of this paper.
- wyre 3y ago
  That’s a bit of an exaggeration right? Facebook sold their headsets at a loss and seem to be doing fine, Uber and doordash entered into markets without charging fees and look to doing fine, OpenAI is currently doing that with ChatGPT and we will see how it goes for them. Surely, selling at a loss is a risky endeavor, but we see it time and time again that companies selling at a loss get more funding due to their inflated numbers from selling at a loss. Or, it’s only those companies that make headlines and we don’t hear about all the companies going bankrupt selling their services at a loss.
  - stubybubs 3y ago
    > Uber and doordash entered into markets without charging fees and look to doing fine These companies are not profitable. They are still in the loss-making market share acquisition phase. They might be profitable at some point, but that would likely be by increasing pricing to something far less desirable to consumers, negatively impacting growth. AirBnb recently turned a profit but is now more expensive than hotels with often worse service, and they're being regulated out of some markets, so we'll see how it works out for them. Would DoorDash with a minimum $15 delivery fee survive? Uber if it's more expensive than a cab? Don't get me wrong, I'm happy living large off of VC fund's money. But I'm not brand loyal to any of this stuff.
- vharuck 3y ago
  >This is the entire premise of loss leaders I thought "loss leaders" were specific products sold below cost so customers would buy accessories or subscriptions that have nice profit margins. Like selling cheap printers but expensive ink.
  - bombcar 3y ago
    The technical term for "loss leader" usually refers to a place like a grocery store selling some necessity like milk at or below cost, because they know if you compare milk prices and decide to buy there, you'll get other things once you're in the store. That's different from "sell a dollar for fifty cents until all competitors are dead". There's also loss leader applied to things like consoles, where they lose money (at first) but make it back on the games.
- hnburnsy 3y ago
  Are there any examples of successful companies doing this? Uber and Wework only cost the IPO bag holders. Have any Venture Predation companies actually reached supracompetive pricing levels and recouped the predatory losses enough to have overall harm to consumers? IPO bag holders, too bad, and I don't see any regulatory need to protect them.
dghlsakjg 3y ago
I think the problem is that making a user or service provider create an account on an app isn't the moat that they think it is. A lot of these market domination moves only last as long as the VC money then the competitors are more than happy to swoop back in. Consumers are super fickle, and I will happily check a different app to see if I can save a dollar on a $10 car ride
- dumbfounder 3y ago
  You aren't the norm. If you were then Lyft would be doing much better. How many rideshare apps do you check? 5? 10? My guess is maybe once in a while you check Lyft if uber seems high. That's what I do.
  - dghlsakjg 3y ago
    I almost always check both apps, but to be honest I don’t actually rideshare much so I’m always curious about pricing and options(I don’t live in a place where there are 5 rideshare options). Or I just use google maps which gives me the full menu of available options and how much they cost including scooter and e-bikes as well as transit since I’m normally just interested in the fastest option which is frequently transit.
    - dumbfounder 3y ago
      Pricing is highly dynamic for Uber and Lyft, changes minute to minute. I can't imagine Google can predict this well. Any idea how they do this? I can't imagine Uber and Lyft make this open. I just tried it and only Lyft is available in my google maps app and they said the range for one ride was $76-90 and the actual in Lyft was $66.

bityard 3y ago

This is essentially how Carvana has decimated the private used car market in my area. Only instead of low product prices, they offer well-above market value for used cars to private sellers so that Carvana becomes the only source for a car that fits your criteria.

lotsofpulp 3y ago
I do not see Carvana lasting long, at least not if their only strategy is to pay above market for used cars and getting in the crosshairs of multiple state regulators. https://www.macrotrends.net/stocks/charts/CVNA/carvana/net-income https://www.macrotrends.net/stocks/charts/CVNA/carvana/net-i... https://www.macrotrends.net/stocks/charts/CVNA/carvana/market-cap https://www.macrotrends.net/stocks/charts/CVNA/carvana/marke... https://en.wikipedia.org/wiki/Carvana https://en.wikipedia.org/wiki/Carvana
- asah 3y ago
  yyy "cornering the market" is exceptionally difficult to execute. In used cars for example, other companies could make a fortune trucking in used cars from elsewhere and selling them to Carvana...
maerF0x0 3y ago
if their theory holds true that means private sellers were massively under negotiating, or that there is a large arbitrage value between when a seller wants to sell and the days on market. ie assume seller is willing to pay $50 a day to have car sold today (and not have to field calls etc). That means selling a car a month faster is worth $1500. Carvana can borrow the $25K car value at ~5% to pay $100 interest to hold the asset for a month playing the time arbitrage. I'm finding one thing that seems to be happening generationally (or just in my experience) is that folks are far more willing to pay for convenience/now. That means they'd rather have the $25k and car sold today than have the $1500 in their pocket a month later (and field calls etc).
- xp84 3y ago
  I agree completely and totally see why people do it. I am keenly aware of the big spread between trade-in value and what the dealer will turn around and sell it for -- and yet, having sold a vehicle a couple of times, I will probably never do it again. Especially when you consider the risk of getting scammed somehow in the money transferring process, a lot of people will eat the few thousand bucks. I don't know if Carvana will stick around, but definitely see myself going to them or Carmax instead of Craigslist next time I am done with a car.

davepeck 3y ago

I assume this is showing up in part because it was discussed recently in Matt Levine's Money Stuff [0]; it's an amusing (if short) discussion. [0] https://www.bloomberg.com/opinion/articles/2023-05-18/tether-bought-some-bitcoin https://www.bloomberg.com/opinion/articles/2023-05-18/tether...

burkaman 3y ago
It was also today's topic on Cory Doctorow's blog: https://pluralistic.net/2023/05/19/fake-it-till-you-make-it/ https://pluralistic.net/2023/05/19/fake-it-till-you-make-it/
- wslh 3y ago
  I don't know why this is catching now since it was already obvious long time ago. I usually hate conspiracy theories but could only think that a new meme or agenda is catching up. For Cory, Matt, et al this should be obvious since the dot com era and in every investment cycle. The greater fool theory explained part of this.

yieldcrv 3y ago

[flagged]

satvikpendem 3y ago

Are there any that are actually successful with this strategy? Uber and Lyft, for one, but they still don't make profit and aren't really that sticky, honestly, given that people will use other services if they're cheaper, like Waymo and some new ride sharing upstarts I've seen around recently.

fnord77 3y ago
amazon did this early on
seanhunter 3y ago
I can't escape the feeling that it boils down to the old classic 3 stage business model: 1. collect underpants 2. ? 3. Profit Uber and Lyft are great examples. They haven't established long-term stickiness with drivers or passengers. So if either of those groups get offered a better deal they will switch. Therefore it's just a relentless race to the bottom with no sustainable business in sight.
- satvikpendem 3y ago
  Exactly. Well, I'm not complaining at my VC funded rides though, it's a great transfer of wealth from the rich to the poor, ie me, lol.
  - version_five 3y ago
    There's an interesting article somewhere about a pizza place that iirc arbitraged VC subsidies by ordering pizza from itself through some delivery app that was buying the revenue by selling the pizza below the actual price. Edit: https://www.readmargins.com/p/doordash-and-pizza-arbitrage https://www.readmargins.com/p/doordash-and-pizza-arbitrage
    - satvikpendem 3y ago
      This was satirized in Silicon Valley too, funnily enough: https://www.youtube.com/watch?v=LYu-d6y5HRo https://www.youtube.com/watch?v=LYu-d6y5HRo https://www.youtube.com/watch?v=rdJifVNEKnE https://www.youtube.com/watch?v=rdJifVNEKnE

ivansmf 3y ago

You. don't. say. Really?!? OMG, what an insight! What are they going to say next? That startups also use the good will of the internet to create their IP to then take it private as a way to get free labor? I'm shocked! And because this is also the internet, that was sarcasm.

ohgodplsno 3y ago
[dead]
cactusplant7374 3y ago
Normally it is described as a positive practice because consumers get lower prices for an extended period of time. I personally benefited from this but I can see the drawbacks.

cm_silva 3y ago

Reminds me of the game Capitalism[0] where the player was incentivized to achieve monopoly in markets by selling below-cost, subsidized by the other parts of the business. Vertical integration was also highly encouraged. [0] https://en.m.wikipedia.org/wiki/Capitalism_(video_game) https://en.m.wikipedia.org/wiki/Capitalism_(video_game)

glutamate 3y ago

Other thing we need to talk about is when funded startups run customer service that is not sustainably financed. Everybody apparently loves this and celebrates that the great service and listening to its customers. But it is just the same thing: predatory pricing applied to a product delivered with high-end customer service. Edit: Example: $5/month Todo list SaaS that has a 24h customer support telephone helpline

brookst 3y ago
I don't see the problem. They apparently believe in a low margin, high volume play with support being a volume driver. They might be right or wrong, but I wouldn't want it to be illegal as a business model. Investors and companies have to be free to lose money or else we've just got a centrally planned economy where every business has to offer the same product at the same price.
- gmd63 3y ago
  The problem is society is witnessing races between Tortoises and Hares, where the Hares are doped with venture backing. A healthy society progresses slowly like a tortoise, encountering actual tradeoffs that aren't masked by mountains of cash only to ensure cancerous returns for already rich people at the expense of skilled business owners who are actually designing their businesses to handle endgame stressors. In any healthy competition you have rules around the gear you can use, how many people are allowed in your pit crew, what dimensions your fencing saber can be etc. so that rich people cant buy their way to success to cover up lackluster execution and skill.
  - miiiiiike 3y ago
    I get your meaning, but not all competition is sport. You don't have to go horse to horse with your competition if you have an F-35.
    - miiiiiike 3y ago
      I also think this kind of VC puts some of the companies that take it to bad spots. Not all markets can support it. Look at Substack. They came in and bought out the newsletter/indie media whatever market. Unfortunately it’s not the kind of market that’s likely to make that investment back.

james-revisoai 3y ago

A flipside effect to this is advertising and PPC which has trended up so high overtime, especially in education. Strategies viable in 2019 are largely useless to bootstrapped businesses in 2023: the costs of ads even to acquire customers with low spending power is two to three times what it was (e.g. students) As someone working on a NLP product for education, the pricing and subscriptions are also dropping rapidly, lead by the funded companies entering this niche (the founders almost entirely are non technical recently). The combination of the two is like a jaw - it's unclear what to do when your technology becomes a trend, other than grab and deploy your own funding and use marketing strategies and technical efficiencies to outlast your competition.

maerF0x0 3y ago
This rise of PPC should be matched with targeting efficiency through tools like Segment etc that are aimed in increasing the ROI on adspend. It's a resource allocation strategy that drives the limited supply (ad space above search) to the highest bidder (ie highest return usage). Just like a competition for any other limited resource in a capitalist market driven society.

nico 3y ago

In international trade this is called “dumping”, and it’s often considered illegal and most definitely unfair It’s usually used as a reason for regulating imports/exports https://www.investopedia.com/terms/d/dumping.asp#:~:text=Dumping%20occurs%20when%20a%20country,that%20are%20often%20considered%20unfair https://www.investopedia.com/terms/d/dumping.asp#:~:text=Dum....

brookst 3y ago
Eh, there is alot more nuance here. Dumping is typically when an established company attacks a competitor with temporarily low prices. If you squint right, sure, VC backed low costs could be seen as dumping. But the problem is that also means virtually every startup is dumping, even bootstrapped garage efforts. And I guess any company that reports a quarterly loss is also dumping. So I think it probably makes sense to treat VC-subsidized startups as a different economic phenomenon that needs different rules than if e.g. Goodyear sells tires at far below cost in California until competitors leave and then they raise the price.
- lesuorac 3y ago
  I don't think you have to squint very hard to see VC as dumping. It's why they all follow that common trend of low-price growth hacking and immediately follow up by raising prices.
  - derefr 3y ago
    > It's why they all follow that common trend of low-price growth hacking and immediately follow up by raising prices. The key difference is that startups are rarely selling the same product, to the same people, for different prices at different phases of growth. They're more often selling different products, with different positioning, to different market segments at different times in their growth; where they just happen to call those products "editions" of the same thing. A common startup lifecycle: 1. get seed capital to build an MVP targeting one distinct market (usually consumers or individual professionals); 2. market (or give away) your consumer-product MVP to price-sensitive early adopters (which is where the initial look of "giving it away" comes from — that's what this market segment demands); 3. wait for those early adopters to educate the rest of the market about what's cool about the product and the brand; 4. meanwhile, use the "social proof" (rather than earnings reports) from these early adopters, as leverage to get a Series A investment; and use it to build a separate, more polished product targeting the enterprise market; 5. use your enterprise product, in combination with a bunch of new sales staff, to reach the non-price-sensitive late adopters. (While continuing to sell/give away the MVP consumer version!) 6. At some point, after achieving traction in both product lines, you can also "trickle down" the benefits of the enterprise product — and integrate process, saving OpEx — by building a new version of the MVP [now "consumer/SMB" product line] using the enterprise product's technology. (It's still a separate product, though, not just a feature-limited version of the enterprise product — there are a lot of things enterprises want that actively get in the way for consumers.) This is less like Goodyear charging less for tires until they monopolize the market; and more like Goodyear starting off selling car tires, achieving brand recognition there, and then making all their real money by selling semi-truck tires. A clear example of all six phases (but with bootstrapping in place of VC investment): Microsoft built initial versions of Windows for consumers, at retail prices (or "given away" via OEM channel-partners with steep volume discounts); achieved reach; then reinvested the revenue from that to build a more polished and robust Windows NT for enterprises, and made big money from non-discounted enterprise volume licensing; then "trickled down" the technology from Windows NT to create Windows XP, with the consumer/SMB product now just an "edition" of Windows XP.

DolceVita 3y ago

[flagged]

fnord77 3y ago

I remember a game on the Apple ][ that was basically a simulation of the bicycle manufacturing business you could tweak various "fair" parameters like quality and price but I guess the makers of this were naive and never considered any "unfair" practices like getting cheap cash and wiping out the competition

frithsun 3y ago

I believe a lot of this was driven by fed rate shenanigans creating far more investment wealth than there were organic opportunities for investing it. All of these market-distorting startup deals were just symptoms of that broader systemic monetary policy error. While the mom and pop taxi companies and others impacted by it have my sympathy and support, all the regulatory alternatives other than waiting until they achieve a monopoly and then breaking them up seem to cause as many problems as they aim to solve.

JumpinJack_Cash 3y ago
> > I believe a lot of this was driven by fed rate shenanigans creating far more investment wealth than there were organic opportunities for investing it. All of these market-distorting startup deals were just symptoms of that broader systemic monetary policy error. The Fed is not distorting anything. It's an anomaly that you can "invest with Uncle Sam" , for the longest time if you wanted to see your money grow you had to take it from your fellow American somehow. The ability to passively invest with the government is alienating, unsatisfying and creates growth problems to the country that allows it because it subtracts participants from the creative destruction process.
- revelio 3y ago
  Interesting perspective, thank you for that, but the issue is not merely driving bond rates to zero. The money created by central banks also flows into VC funds and the stock markets via various indirect paths and from there into the startup ecosystem.
  - JumpinJack_Cash 3y ago
    That's a problem of trust, money flows to startups because the so called capital allocators don't trust themselves with such amount of money, otherwise they'd be investing all into companies where they are at the helm. The whole family office concept is something new, back in the day if someone had money they'd just invest in themselves by expanding their own business.
- 3y ago

zomglings 3y ago

Wasn't this dressed up and sold to the masses as blitzscaling just a few years ago? I like the term "venture predation" better.

dbmikus 3y ago
Yeah, Uber was a classic case study for blitzscaling and the Uber v Lyft battles are a case study of blitzscaling by using VC subsidies to try to price out competition.
florakel 3y ago
I talked to a fair share of late stage VCs and they like to think of themselves as “category king makers” - the term itself reflects the general sense of humbleness in the VC community. Besides the “venture predation” described in the paper “category king making” also entails cutting off potential competitors from funding. The theory is that once a Softbank or Sequoia have chosen their horse other VCs will be discouraged to invest in the same category as it “is taken”. And many times the VCs actually act behind the scenes and actively discourage their peers to seek an investment in a competitor of their “category king”. It truly is a disgusting game to watch once you have been close enough. VCs for better or worse are the essence of the tech ecosystem. Make the world a better place. my a* :)

exabrial 3y ago

Unfortunately before regulators have time to react, the intended effect: Driving out small businesses, has already taken place.

deleted 3y ago

[deleted]

WaitWaitWha 3y ago

Best part in my opinion? One of the requirements in the RFP was "Windows to View Our Home Planet and the Moon". The last sentence is "They must be present and cannot be substituted".

Robotbeat 3y ago

Pricing below costs is the opposite of a problem for consumers (in the short term…). “Predation” in this case refers to competing businesses, who often have enjoyed a long period of monopoly rents.

likeclockwork 3y ago
As you said "in the short term". Once the competition is destroyed the consumer is at the predator's mercy.
- pixodaros 3y ago
  Sometimes that is true, but if the barrier to entry is low (eg. ridehailing services), as soon as the predator raises prices, competitors will appear. If the barrier to entry is high (eg. telecommunications), there is usually some antitrust regulation.

degreesoffun 3y ago

And don't forget Amazon. They aren't venture backed but they have access to capital at cheaper rates than most countries due to their position as a stock market darling. They use ultra-cheap money and a willingness to run negative margins which they refer to "reinvesting in the business" to bleed competitors dry. Few other companies on the planet have the ability to run negative or break-even margins the way Amazon does. Diapers.com example: "When Bezos’s lieutenants learned of Wal-Mart’s counterbid, they ratcheted up the pressure, telling the Quidsi founders that [Bezos] was such a furious competitor that he would drive diaper prices to zero if they sold to Bentonville. The Quidsi board convened to discuss the possibility of letting the Amazon deal expire and then resuming negotiations with Wal-Mart. But by then, Bezos’s Khrushchev-like willingness to use the thermonuclear option had had its intended effect. The Quidsi executives stuck with Amazon, largely out of fear. The deal was announced Nov. 8, 2010." https://slate.com/technology/2013/10/amazon-book-how-jeff-bezos-went-thermonuclear-on-diapers-com.html https://slate.com/technology/2013/10/amazon-book-how-jeff-be...

abigail95 3y ago
They have money because of AWS, which is a fantastic product in an extremely competitive market, competing against players who lose money like GCP and Azure. Amazon.com as a store makes next to nothing as profit. Who cares what he did to some diaper companies. Are consumers paying more or less because of amazon? Much less. They basically run amazon.com for no profit and consumers get fantastic deals and cheaper products and more reliable service than ever before. How much would you have to charge for same day delivery for that many products? Could you get close to Amazon? You would have to rip off you customers so badly just to stay alive.
- paulddraper 3y ago
  > Who cares what he did to some diaper companies. Going out on a limb here, but I'd say the diaper companies.
  - lotsofpulp 3y ago
    What happened to the diaper companies? Feel like I see the same brands of diapers still. Procter and gamble, Kimberly Clark, etc.

NumberWangMan 3y ago

This feels related to the idea in "Billionaires, Surplus, and Replaceability" (1) Basically, if, say, Jeff Bezos never existed, it seems likely that someone else would have created Amazon, perhaps a few years later, and maybe not quite as good. "Big online retailer" is sort of a natural niche, with a bit of a natural monopoly. So while the classic argument for letting people keep most of their wealth gained in the free market is that they provided a lot of value, maybe that doesn't make as much sense when you consider that if they hadn't done it, somebody else probably would have soon after. It's obviously impossible to gauge exactly how much excess value someone provided compared to the world in which they never existed, but to round it up to 90% or doesn't seem very accurate. So it seems like in our current world, there's a winner-take-all effect that a lot of venture-backed startups are trying to exploit. If we were a lot more aggressive in taxing companies like Amazon, my intuition is that it would go a long way toward reducing this effect. (1) https://astralcodexten.substack.com/p/billionaires-surplus-and-replaceability https://astralcodexten.substack.com/p/billionaires-surplus-a...

mdgrech23 3y ago
seems more of a problem that we let monopoloies exist. hell even oligopolies. we do have laws but we all know they don't do shit.
wslh 3y ago
I don't think you can play the alternative universe easily. Will there be another Apple? Will there be another Microsoft? There is some uniqueness in Amazon execution that didn't enable a competitor to survive, even when they were a startup.
Nevermark 3y ago
Amazon is a series of several businesses created in succession, with synergy between them. It is highly unlikely that the same path would have been taken by someone else, or that they could have the repeated same results with any combination of those businesses.
Firmwarrior 3y ago
The counter argument is to examine how likely it is that someone actually would have created Amazon and not just a cruddy online Wal-Mart https://mattsclancy.substack.com/p/how-common-is-independent-discovery https://mattsclancy.substack.com/p/how-common-is-independent... Looks pretty unlikely to me, personally, judging by the low stats on independent discovery

revelio 3y ago

Easy to criticize but to be consistent you'd also have to consider non-VC-backed products dumped at below price by regular companies too, and that would get uncomfortable real fast: - Chrome - VS Code - LetsEncrypt - Everything open source etc. Sometimes I wonder how much this practice distorts the software industry, preventing new innovations from happening. The industry settled on this approach without being forced to, so I wouldn't want legal changes to prevent it either, but it's worth a bit of self-reflection on how much we all love free stuff.

arcticbull 3y ago
Recovering your costs through advertising isn't really dumping. Chrome definitely makes Google way more money than they put into it.
- Andrex 3y ago
  Also, outside of Opera, all browsers (that I know of) have been free for over two decades.
- revelio 3y ago
  I recall that it wasn't seen that way when Microsoft used Windows revenues to push IE and crush Netscape. It was called product tying back then. You don't hear much about it anymore.
  - wmf 3y ago
    Chrome and IE did not have the same business model. If we look back at Netscape vs. IE they both had predatory nonexistent business models.
    - revelio 3y ago
      Netscape was payware in the beginning? Not sure how that's non-existent? Even after they were forced to go free by Microsoft, they were selling servers which are the compliment of browsers.

kashkhan 3y ago

Don't airlines do this all the time to prevent new entrants? How is this not provable?

maxk42 3y ago

Funny to see nobody's mentioned Cloudflare yet. They're not making any money: This is presumably their exact plan: Offer CDN services and other web infrastructure services at a loss for a prolonged period of time until the competition is destroyed, then jack up rates and eat the market.

refulgentis 3y ago
+1, they really made my eyebrows raise recently. They're absurdly overaggressive on flagging requests as scraping...and will sell you a CORS proxy for scraping, with a big fat "I'm a scraper" tag on it. They get two customers and the web-as-commons and the scraper are both worse off.
dceddia 3y ago
This coupled with their device attestation stuff scares the hell out of me. Once enough of the internet is shielded by Cloudflare, and they only allow access to authorized (read: uniquely identifiable) devices (or else you have to answer a captcha on every request)… I just don’t see a very good future for the free internet.
teaearlgraycold 3y ago
Aren’t there other CDN providers like AWS that are pretty stable?

anonu 3y ago

I'm part of the problem. I always suspected my Uber ride was financed with venture money. So i always went with Uber. But i didn't think ahead to the fact that it would kill off the competition. What i don't get it is what the Uber moat is? Why does this need to be centrally planned and controlled? Would an open source and free platform work where drivers got near 100 percent of the sale instead of the 75% they get today.

EamonnMR 3y ago
Uber's moat is the inertia of its massive customer and not-employee base making it difficult to enforce the regulations it has historically flaunted. In that way, it's similar to why Mastodon can't kill Facebook.
bogwog 3y ago
It isn't the consumer's responsibility to solve this problem. That's the government's job.
cheapsteak 3y ago
The open source and free platform be able to handle the patchwork of regulations that are now in place that differ between city to city
HDThoreaun 3y ago
Uber's moat is its network. Can't get any drivers if there are no riders and can't get riders if there are no drivers. This means you need to start by offering drivers more money than you make in order for them to use the app. An open source solution wouldn't be able to get off the gorund.
- tomatocracy 3y ago
  The direct fix for this (which I believe has happened in some countries) is to ban them from asking drivers to enter into exclusivity or minimum volume agreements with them. Then drivers can work for multiple networks.

spaceman_2020 3y ago

I'm so jaded by modern startups and venture industry. There are people who've built entire careers building unprofitable companies that only sell products to other unprofitable startups and eventually get acquired by other unprofitable startups. It's a gigantic game of hot potato that swallows up a gigantic pool of human talent, all for producing stuff that really adds little to no positive to the world. If they're not disrupting (read: destroying) local economies, they're breaking all local rules and regulations. And despite playing fast and loose with any sense of ethics or legal compliance, they still can't be profitable. Just end this ponzi.

mdgrech23 3y ago
This is our world right now. My wifes father was a plumber. She said as actual plumber, you know someone who provides water and ensures your shity is sanitarily drained away he didn't make really good money. He got a job working for the auto industry running pipes for hydraulics to the machines on the factory floor and made way more money. How is that worth more to our society?
- MichaelZuo 3y ago
  Why wouldn't factory machine hydraulics for the auto industry be more important then an individual's toilet?
  - wslh 3y ago
    Also, a Zen monk will have a different perspective about value. There are people who value the entertainment from TikTok while others prefer to read a book.
  - mcdonje 3y ago
    Because poor sanitation is a disease vector that can kill people and ruin communities. A working toilet is an unmitigated good. Cars on the other hand have a much more questionable value proposition. They turn cities into parking lots shrouded in smog and significantly contribute to climate change. Even if cars only contributed in positive ways, they're still not necessary to a functioning society the way that sanitation is.

huitzitziltzin 3y ago

The response from regulators should be: Let VCs waste their money. This is an extremely weak analysis from an economics point of view. The regulator has several options to deal with monopolists if and when they emerge. If consumers realize benefits in the meantime in the form of cheap products subsidized by VC money that’s a good thing.

dumbfounder 3y ago

Very often the unit economics at smaller scales doesn't work, but then works great at a large scale. I don't think it's immoral to gamble on achieving the high scale later and investing in the company to shoot for that scale. If no one can achieve profitable unit economics early on and you aren't allowed to have unprofitable unit economics then no one will make the product. I think this is bad for innovation. Is this the same as "venture predation"? It sure seems that way. How could you tell it apart?

balozi 3y ago

Wait, it's predatory pricing traditionally understood to be aimed at consumers/customers. Applying the term to sketchy pricing practices aimed at competitors is a bit novel in my book. I feel like words are being misused here.

web3-is-a-scam 3y ago

Isn't this more or less just loss leading?

liorben-david 3y ago

Losing money while you grow isn't neccesarily bad. Venture Capital at its best allows a company to take losses until it can achieve economies of scale. I'd say it turns predatory when even after achieving scale(Like Uber or Amazon) a company still runs an unprofitable business to choke out competitors. How can you prove this in court? No clue. Maybe the company has to articulate the explicit economy of scale it hopes to achieve and how?

rossdavidh 3y ago
I think the difference between legit and illegit is whether or not your competitors have to go out of business for you to become profitable. If you burn through some cash to get off the ground, eventually driving your per-unit costs down so that your prices become profitable, that's legit. If on the other hand your current prices are never going to be profitable (looking at you, Uber), and your business plan requires that your can raise them a lot without losing sales (because your competitors are gone), that is not legit. The third factor in all of this is that many companies like Uber weren't really ever likely to become profitable in any scenario, and this was really about taking the cheap VC money while it was cheap. Blitzscaling was just a way of pretending that you would someday become profitable. I think higher interest rates will get rid of a lot of this.
jwr 3y ago
It's about unit economics: losing money while you grow isn't bad, but if you lose money on every customer, it means subsidized growth. That's usually done not to get economies of scale, but to get GROWTH GROWTH GROWTH and user numbers, so that the unprofitable business can be sold to the next buyer/investor.

joshe 3y ago

For academics I think this is fine, the whole job is to look for new extensions of the law. But it shows how very far we are from any kind of basis for "stopping tech." Gonna be hard to achieve consensus around "raising fares and lowering driver pay" which is the opposite of what Uber did. "Uber showed that venture predation works. Uber raised around $24 billion from private investors and used it to subsidize cheaper fares for riders and higher pay for drivers. Uber quickly crushed the taxi companies and acquired a dominant share of the combined taxi-and-ridehailing market.27 But it never developed a superior product or cost efficiency. Lyft, other ridehailing startups, and even taxi companies developed similar apps. Uber had to keep up its below-cost pricing to maintain its market share. In each of the three years before its IPO, Uber racked up losses of $3 billion or more.29 Uber reassured investors by explaining that, once it became dominant, it would be able to raise prices and recoup its losses. In its IPO roadshow, Uber’s executives told investors that they expected the company to earn an adjusted profit." ... "We concede that the “millennial lifestyle subsidy” was fun." ... Then a lot of handwaving. But no victims other than bad high margin businesses. (There's a theoretical driver that doesn't realize the high pay won't last forever and buys a car, but he can sell it no? And he could read the news about his livelihood and learn that his high pay is at risk). Btw, you can still take taxis. It'll cost more and pre uber they were very surly or wouldn't show when you called them. The only "regulate Uber" consequence will be higher ride costs and lower paid drivers. Amazon operates on very tight margins in it's retail business. The ideal case is lots of competition, which would lead to uh... very tight margins among competitive firms. Amazon is just smart enough to get ahead of that. And I think their long term goal has been to operate at such a low cost structure that they have a durable advantage in cost. And then to pour back all their capital back into lowering their cost structure. So why stop them? In order to subsidize the higher cost company, their private jets and sexual harassment lawsuits? Capital is very easy to get in 2023. We are not in the time when capital is so difficult to get that you'd need a 2 generation family firm just to build a single factory. At that point spending 5 years to crush your competitor might have made sense. But now it's limited to monopoly markets like cable, and cell phone service. And it might indeed be useful to create more competition there. Unlike Amazon I think Uber isn't likely to be a great business. There is just no cost structure advantage being built. So they'll either operate on low margins forever or they'll raise prices and we'll get competition in the space of a few years. In either case I would not want to hold Uber stock right now.

jasmer 3y ago

Probably more aptly named 'Venture Dumping' because 'dumping' would be a bit more like the classical term but that just doesn't have the right 'ring' to it.

jwr 3y ago

I am a founder of a bootstrapped B2B SaaS business. A VC-founded competitor that can burn through money offering subscriptions at unsustainable prices (e.g. $20/month) is the main fear keeping me up at night.