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Venture Predation

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Re: Venture Predation

#41
post #32
post #20

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=Dum... .

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 t…

> 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.

What's the end game to VC subsidies?

There are many VC-backed businesses where 'Scale until you become profitable' is the end goal.

But there are also many where 'Outlast until competitors leave and then raise the price' is the only plausible profitable future.

Re: Venture Predation

#43
post #32
post #20

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=Dum... .

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 t…

No, there isn't much nuance here. Accounting has notions of fixed costs and marginal costs. The startups you are referring almost all lose money on fixed costs, but sell things at per-unit economics which make sense at scale because they are below marginal cost/COGS.

Things like Uber are a typical dumping cases. For years, they charged below their COGS and eventual profitability depended on driving out competition and raising prices.

Re: Venture Predation

#44
post #32

Earlier quoted context omitted.

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 t…

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.

> 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.

Re: Venture Predation

#45
post #10
post #4

Earlier quoted context omitted.

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 t…

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

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.

Re: Venture Predation

#46
post #6

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...

It was also today's topic on Cory Doctorow's blog: https://pluralistic.net/2023/05/19/fake-it-till-you-make-it/

Re: Venture Predation

#47
post #2

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 suc…

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

Re: Venture Predation

#48

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

If your product is good enough, this might not actually be a money loser. If I never have to call support then its a win for everyone.

Re: Venture Predation

#49
post #29
post #4

Earlier quoted context omitted.

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 t…

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 pr…

> 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.

Re: Venture Predation

#50

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 ac…

> > 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.

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