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How could they destroy hundreds of small businesses, if they themselves were not profitable? It seems like you want to have your cake and eat it. You want to

How could they destroy hundreds of small businesses, if they themselves were not profitable? It seems like you want to have your cake and eat it. You want to criticize these guys for out-competing small businesses, but you also want to claim they aren't really doing good business, that they are just wasting their investor's money.

mikeyouse 12y ago
> How could they destroy hundreds of small businesses, if they themselves were not profitable? Not OP, but small businesses have to use operating margins to make payroll and pay for capital goods. 'Startups', through what essentially boils down to predatory pricing, can burn through investor cash to acquire customers leaving the entire market at a loss. NYMag actually does a decent job explaining it a bit: http://nymag.com/daily/intelligencer/2014/04/problem-with-profitless-start-ups.html http://nymag.com/daily/intelligencer/2014/04/problem-with-pr...
- QuantumChaos 12y ago
  This is based on the unjustifiable assumption that the author knows better than the VC's and other investors. In particular, the author somehow knows that these company's won't be able to turn a profit, even though the VC's and investors surely believe the company will.
  - andrewfong 12y ago
    VCs also anticipate they'll be wrong a majority of the time about a company. That means, a substantial amount of the time (maybe a majority of the time?), they'll be throwing a lot of money at "disrupting" existing businesses with no successful alternative.
    - QuantumChaos 12y ago
      But since profitability is better thought of in terms of averages or expectations, it makes no difference if the companies in question are all moderately profitable, or a few extremely profitable companies, and some non-profitable ones. If the business fails, then it has disrupted existing businesses for no gain. But if it becomes extremely profitable, then presumably it has made some cost savings in order to be able to do so, and so deserves these profits. If the average business is profitable, then the investment is justified, both for the investors, and from the point of view of society as a whole.
  - Klinky 12y ago
    The VCs don't always believe it'll turn a profit, a lot of times they are hoping for a big buyout payday.
    - QuantumChaos 12y ago
      A big buyout is equivalent to turning a profit, since the buyer will expect to profit from their purchase.
      - Klinky 12y ago
        No it's not. A company being profitable is different than a company turning a profit specifically for it's initial investors. The profitability of a company post-buyout is murky. We're also talking about VCs getting in on profitable businesses ventures, not tech conglomerates. If a VC makes their money by finding hot trending startups that later get bought out, they're not really investing in a company that profits on the merits of the business plan alone. A lot of the big buyouts are based on buzz, and often the valuations are overblown when compared to actual ability to profit. Expected profits != actual profits.
  - gamblor956 12y ago
    It's not based on the presumption that the author knows better than the VCs. It's based on the very real fact that profitless VC-funded startups are competing based on unsustainable prices with the goal of raising prices in the future once their competition has been starved out. It's market manipulation (but not the type that rises to the level of impermissible market manipulation).
    - QuantumChaos 12y ago
      It's easy to make this allegation, but very hard to substantiate it, since there are many factors that influence profit, and just because a company isn't profitable now, doesn't mean that the only way they can become profitable is by starving out their competition and then raising prices. Can you give a single instance of a venture backed startup actually causing price increases after driving out their competition?
      - alextgordon 12y ago
        Amazon epitomises this.
        QuantumChaos 12y ago
        How does Amazon empitomise this? What goods have they raised the prices of (and why I say raise, I mean relative to the price before Amazon, not that Amazon merely increased their own prices).
        olefoo 12y ago
        You might want to take a look at http://bits.blogs.nytimes.com/2014/05/23/amazons-tactics-confirm-its-critics-worst-suspicions/ http://bits.blogs.nytimes.com/2014/05/23/amazons-tactics-con... It certainly seems like Amazon is beginning to exercise their strength as a monopsony to gain unfair advantages and extend their business into new areas without actually competing on merits.
        12y ago
tapp 12y ago
> How could they destroy hundreds of small businesses, if they themselves were not profitable? The same way venture funded startups destroy bootstrapped, profitable startups: by massively outspending them. Venture backed companies can get away with it for as long as investors will support them, regardless of how profitable their business may or may not be. Even if they're not ultimately viable and fail, the pressure can be enough to crush the viable but not venture-funded businesses in the interim.
- QuantumChaos 12y ago
  So why would VC's fund these company's?
  - deciplex 12y ago
    Already covered, but again: even if the strategy is only successful 10% of the time, if that successful 10% more than makes up for the 90% failure rate, the strategy will be attractive.
    - QuantumChaos 12y ago
      I will repeat my answer here: Your point is irrelevant because to be profitable really means to be profitable on average (or in the language of statistics, to be profitable in expectation). So a business that may be very profitable 10% of the time, and unprofitable 90% of the time, is equivalent to a business known to be moderately profitable.
      - deciplex 12y ago
        It's not irrelevant, you're just not getting the point in the first place. You (still) seem to be conflating the profitability of the VC versus the profitability of each individual venture he invests in. They are not at all equivalent, as I've helpfully pointed out for you. As such, they can 'disrupt' stable markets that are largely profitable and efficient, and that basically do not need disruption, by throwing tons of cash at them. Most of the time these ventures are not profitable (though they still disrupt the market - negatively!), but the occasional hit makes up for that and makes the strategy net profitable for the VC, even as 90% of what he invests in flames out.

mikeyouse 12y ago

> How could they destroy hundreds of small businesses, if they themselves were not profitable? Not OP, but small businesses have to use operating margins to make payroll and pay for capital goods. 'Startups', through what essentially boils down to predatory pricing, can burn through investor cash to acquire customers leaving the entire market at a loss. NYMag actually does a decent job explaining it a bit: http://nymag.com/daily/intelligencer/2014/04/problem-with-profitless-start-ups.html http://nymag.com/daily/intelligencer/2014/04/problem-with-pr...

QuantumChaos 12y ago
This is based on the unjustifiable assumption that the author knows better than the VC's and other investors. In particular, the author somehow knows that these company's won't be able to turn a profit, even though the VC's and investors surely believe the company will.
- andrewfong 12y ago
  VCs also anticipate they'll be wrong a majority of the time about a company. That means, a substantial amount of the time (maybe a majority of the time?), they'll be throwing a lot of money at "disrupting" existing businesses with no successful alternative.
  - QuantumChaos 12y ago
    But since profitability is better thought of in terms of averages or expectations, it makes no difference if the companies in question are all moderately profitable, or a few extremely profitable companies, and some non-profitable ones. If the business fails, then it has disrupted existing businesses for no gain. But if it becomes extremely profitable, then presumably it has made some cost savings in order to be able to do so, and so deserves these profits. If the average business is profitable, then the investment is justified, both for the investors, and from the point of view of society as a whole.
- Klinky 12y ago
  The VCs don't always believe it'll turn a profit, a lot of times they are hoping for a big buyout payday.
  - QuantumChaos 12y ago
    A big buyout is equivalent to turning a profit, since the buyer will expect to profit from their purchase.
    - Klinky 12y ago
      No it's not. A company being profitable is different than a company turning a profit specifically for it's initial investors. The profitability of a company post-buyout is murky. We're also talking about VCs getting in on profitable businesses ventures, not tech conglomerates. If a VC makes their money by finding hot trending startups that later get bought out, they're not really investing in a company that profits on the merits of the business plan alone. A lot of the big buyouts are based on buzz, and often the valuations are overblown when compared to actual ability to profit. Expected profits != actual profits.
- gamblor956 12y ago
  It's not based on the presumption that the author knows better than the VCs. It's based on the very real fact that profitless VC-funded startups are competing based on unsustainable prices with the goal of raising prices in the future once their competition has been starved out. It's market manipulation (but not the type that rises to the level of impermissible market manipulation).
  - QuantumChaos 12y ago
    It's easy to make this allegation, but very hard to substantiate it, since there are many factors that influence profit, and just because a company isn't profitable now, doesn't mean that the only way they can become profitable is by starving out their competition and then raising prices. Can you give a single instance of a venture backed startup actually causing price increases after driving out their competition?
    - alextgordon 12y ago
      Amazon epitomises this.
      - QuantumChaos 12y ago
        How does Amazon empitomise this? What goods have they raised the prices of (and why I say raise, I mean relative to the price before Amazon, not that Amazon merely increased their own prices).
        olefoo 12y ago
        You might want to take a look at http://bits.blogs.nytimes.com/2014/05/23/amazons-tactics-confirm-its-critics-worst-suspicions/ http://bits.blogs.nytimes.com/2014/05/23/amazons-tactics-con... It certainly seems like Amazon is beginning to exercise their strength as a monopsony to gain unfair advantages and extend their business into new areas without actually competing on merits.
        12y ago

tapp 12y ago

> How could they destroy hundreds of small businesses, if they themselves were not profitable? The same way venture funded startups destroy bootstrapped, profitable startups: by massively outspending them. Venture backed companies can get away with it for as long as investors will support them, regardless of how profitable their business may or may not be. Even if they're not ultimately viable and fail, the pressure can be enough to crush the viable but not venture-funded businesses in the interim.

QuantumChaos 12y ago
So why would VC's fund these company's?
- deciplex 12y ago
  Already covered, but again: even if the strategy is only successful 10% of the time, if that successful 10% more than makes up for the 90% failure rate, the strategy will be attractive.
  - QuantumChaos 12y ago
    I will repeat my answer here: Your point is irrelevant because to be profitable really means to be profitable on average (or in the language of statistics, to be profitable in expectation). So a business that may be very profitable 10% of the time, and unprofitable 90% of the time, is equivalent to a business known to be moderately profitable.
    - deciplex 12y ago
      It's not irrelevant, you're just not getting the point in the first place. You (still) seem to be conflating the profitability of the VC versus the profitability of each individual venture he invests in. They are not at all equivalent, as I've helpfully pointed out for you. As such, they can 'disrupt' stable markets that are largely profitable and efficient, and that basically do not need disruption, by throwing tons of cash at them. Most of the time these ventures are not profitable (though they still disrupt the market - negatively!), but the occasional hit makes up for that and makes the strategy net profitable for the VC, even as 90% of what he invests in flames out.