4 ms·

Keeping loss-making giants like WeWork flush with VC cash is killing competition

32 points by ekpyrotic 3y ago

throwawaysleep 3y ago
> If you operated an office business, how could you possibly have competed with this rate of burning money? If you were an ambitious entrepreneur, why would you choose to compete against such a well-funded, absurd competitor? Raise money in a similar way?
- michaelhoney 3y ago
  yep, just pop out and get $22bn to flush down the drain
RansomStark 3y ago
warning: cynicism incoming, but... isn't this just the VC playbook: 1. enter market 2. undercut incumbents by burning VC cash 3. wait until the incumbents fail a. if you're getting close to burning all the available cash, sell to an incumbent and try a different market. 5. you are now a de facto monopoly a. if you fail to reach monopoly status plan an exit (SPAC) before it all comes crashing down 6. increase prices a. if your product is free, harvest more of your customers data 7. keep increasing prices a. harvest all the data you can get away with 8. cash out (IPO)
- catchnear4321 3y ago
  hang on, you said there was going to be cynicism…
- LastWeekendWas 3y ago
  Except harvesting your customers [personal] data isn't just scummy, it is no longer a legitimate business model in Europe. There is no excuse for VCs not getting up to speed on the GDPR.
  - tticvs 3y ago
    American VCs don't care much about EU regulations despite what the Europeans wants you to believe.
    - LastWeekendWas 3y ago
      They can say goodbye to the European market then. (And the privacy conscious segment of the US market.)
      - tticvs 3y ago
        Not a very good threat since the EU market is just a distraction for all but the largest American companies, and only becoming more so every year. Privacy conscious segment of the US market is a rounding error, despite what HN would have you believe.
        LastWeekendWas 3y ago
        And in keeping out the parasites, nothing of value was lost :-)
        tticvs 3y ago
        Remains to be seen
- rchaud 3y ago
  Previously they didn't have the money or risk appetite to actually follow through on that plan. ZIRP gave them that last push. The sums that have been sunk into the WeWorks and Ubers of the world are staggering, on par with what giant infrastructure projects (with all the pork) cost.
SilverBirch 3y ago
It seems odd to me to take WeWork as the example - it's the worst example. The market worked fine with WeWork, they burned a load of money in a business model that had no moat with no real plan of how they'd make the business profitable. The business wasn't profitable and so it went bankrupt. The interesting thing about WeWork is that they essentially took a silicon valley playbook - which is normally applied to products that have high fixed, low variable costs - and applied it to an industry where their entire costs were variable. I don't see why you would try to solve this problem on the front end. It is perfectly fine for WeWork or Uber to throw money at customers and give the average consumer a free lunch. What is failing is on the back end. The whole premise of these business models is "If we get to monopoly scale, we're going to exploit our monopoly". But... we already know monopolies are bad, there's nothing unique to start ups here. The simple answer is just enforce monopoly law. If it turns out that Uber has a huge market share and is using that to price gouge then step in with anti-monopoly laws. I think the closest thing you can come to this being a start up thing is the Softbank model, where Softbank owns stakes in so many different players in a single market that they effectively are operating a cartel. What you really want is a healthy market regulator that tackles monopolies so that Venture Capitalists don't think "Grow this until we can exploit our monopoly" is a good strategy.
- ckdarby 3y ago
  I believe WeWork could have worked well, but they raised money on valuations of being like a tech company. They have a moat, their locations and global convenience. Same feel, same badge, same almost everything regardless of location. I wasn't a Wework user until about 5 months ago where I decided to start working from there with a coworker twice a month. Has been a positive game changer! The sense I get in Toronto is that more & more employers would like to do a model or having employees sync up at co-working locations, but are stuck with their 10 year leases. Maybe Wework won't survive but I feel like someone will buy them when they go under and be able to operate profitable under normal real estate returns.
  - tonyedgecombe 3y ago
    >The sense I get in Toronto is that more & more employers would like to do a model or having employees sync up at co-working locations, but are stuck with their 10 year leases. Regus has been around for a long time. https://www.regus.com https://www.regus.com
hliyan 3y ago
I see a point here: > it seems sensible to recommend that if a start-up raises a certain amount of collective funding, say $1bn, the competition regulator needs to take a look at how that money is being used, and ensure it is not being leveraged to undermine the market. In international trade, I understand this to be the same as the practice called "dumping".
kgbcia 3y ago
Isn't that the point
DuctTapeAI 3y ago
That's literally the entire point of VC funding. Folks love to talk about the network or advice VCs can give but the real value prop is the ability to operate at questionable/negative margins for longer than your competitors.
- toomuchtodo 3y ago
  In international trade, this is usually referred to as “dumping.” VCs simply adopted it domestically in a low regulation environment.
  - BizarroLand 3y ago
    Imagine the kind of carnage that would happen if China ceased its shipping subsidies and started charging Western World prices for labor and materials. They could throw the world economy into a massive recession and would probably trigger WW3 by simply paying their workers American minimum wage.

32 points by ekpyrotic 3y ago

> If you operated an office business, how could you possibly have competed with this rate of burning money? If you were an ambitious entrepreneur, why would you choose to compete against such a well-funded, absurd competitor? Raise money in a similar way?

michaelhoney 3y ago
yep, just pop out and get $22bn to flush down the drain

RansomStark 3y ago

warning: cynicism incoming, but... isn't this just the VC playbook: 1. enter market 2. undercut incumbents by burning VC cash 3. wait until the incumbents fail a. if you're getting close to burning all the available cash, sell to an incumbent and try a different market. 5. you are now a de facto monopoly a. if you fail to reach monopoly status plan an exit (SPAC) before it all comes crashing down 6. increase prices a. if your product is free, harvest more of your customers data 7. keep increasing prices a. harvest all the data you can get away with 8. cash out (IPO)

catchnear4321 3y ago
hang on, you said there was going to be cynicism…
LastWeekendWas 3y ago
Except harvesting your customers [personal] data isn't just scummy, it is no longer a legitimate business model in Europe. There is no excuse for VCs not getting up to speed on the GDPR.
- tticvs 3y ago
  American VCs don't care much about EU regulations despite what the Europeans wants you to believe.
  - LastWeekendWas 3y ago
    They can say goodbye to the European market then. (And the privacy conscious segment of the US market.)
    - tticvs 3y ago
      Not a very good threat since the EU market is just a distraction for all but the largest American companies, and only becoming more so every year. Privacy conscious segment of the US market is a rounding error, despite what HN would have you believe.
      - LastWeekendWas 3y ago
        And in keeping out the parasites, nothing of value was lost :-)
        tticvs 3y ago
        Remains to be seen
rchaud 3y ago
Previously they didn't have the money or risk appetite to actually follow through on that plan. ZIRP gave them that last push. The sums that have been sunk into the WeWorks and Ubers of the world are staggering, on par with what giant infrastructure projects (with all the pork) cost.

SilverBirch 3y ago

It seems odd to me to take WeWork as the example - it's the worst example. The market worked fine with WeWork, they burned a load of money in a business model that had no moat with no real plan of how they'd make the business profitable. The business wasn't profitable and so it went bankrupt. The interesting thing about WeWork is that they essentially took a silicon valley playbook - which is normally applied to products that have high fixed, low variable costs - and applied it to an industry where their entire costs were variable. I don't see why you would try to solve this problem on the front end. It is perfectly fine for WeWork or Uber to throw money at customers and give the average consumer a free lunch. What is failing is on the back end. The whole premise of these business models is "If we get to monopoly scale, we're going to exploit our monopoly". But... we already know monopolies are bad, there's nothing unique to start ups here. The simple answer is just enforce monopoly law. If it turns out that Uber has a huge market share and is using that to price gouge then step in with anti-monopoly laws. I think the closest thing you can come to this being a start up thing is the Softbank model, where Softbank owns stakes in so many different players in a single market that they effectively are operating a cartel. What you really want is a healthy market regulator that tackles monopolies so that Venture Capitalists don't think "Grow this until we can exploit our monopoly" is a good strategy.

ckdarby 3y ago
I believe WeWork could have worked well, but they raised money on valuations of being like a tech company. They have a moat, their locations and global convenience. Same feel, same badge, same almost everything regardless of location. I wasn't a Wework user until about 5 months ago where I decided to start working from there with a coworker twice a month. Has been a positive game changer! The sense I get in Toronto is that more & more employers would like to do a model or having employees sync up at co-working locations, but are stuck with their 10 year leases. Maybe Wework won't survive but I feel like someone will buy them when they go under and be able to operate profitable under normal real estate returns.
- tonyedgecombe 3y ago
  >The sense I get in Toronto is that more & more employers would like to do a model or having employees sync up at co-working locations, but are stuck with their 10 year leases. Regus has been around for a long time. https://www.regus.com https://www.regus.com

hliyan 3y ago

I see a point here: > it seems sensible to recommend that if a start-up raises a certain amount of collective funding, say $1bn, the competition regulator needs to take a look at how that money is being used, and ensure it is not being leveraged to undermine the market. In international trade, I understand this to be the same as the practice called "dumping".

kgbcia 3y ago

Isn't that the point

DuctTapeAI 3y ago

That's literally the entire point of VC funding. Folks love to talk about the network or advice VCs can give but the real value prop is the ability to operate at questionable/negative margins for longer than your competitors.

toomuchtodo 3y ago
In international trade, this is usually referred to as “dumping.” VCs simply adopted it domestically in a low regulation environment.
- BizarroLand 3y ago
  Imagine the kind of carnage that would happen if China ceased its shipping subsidies and started charging Western World prices for labor and materials. They could throw the world economy into a massive recession and would probably trigger WW3 by simply paying their workers American minimum wage.