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.
Venture Predation
61–70 of 231 posts
Re: Venture Predation
#62Earlier quoted context omitted.
> 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 plausib…
> What's the end game to VC subsidies? I don't think VC's give a damn about long-term profitability. All they want to do is to trick later investors into buying them out. I can't think of a single one of these types of companies that has had a profitable year* let alone make enough profit to recoup their losses. *I'm excluding AirBNB because their prices are cheap by operating in a legal gray-zone.
*Citation needed-- ABNB is so expensive these days, although they won't disclose half the cost until the final phase of checkout!
Re: Venture Predation
#63This 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.
I think Zillow tried to do something like this with properties in Florida in 2021, and ended up holding the proverbial bag.
Re: Venture Predation
#64Earlier quoted context omitted.
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 an…
Circa 2015, Uber charged roughly $30 USD for a trip to the airport from my house. Now it is usually between $60 and $70. There has been significant inflation, but $30 in 2015 is only worth about $38 today.
The source of Uber's dumping wasn't chiefly VC funds, though. Uber's ability to price below market was mostly funded by the residual value of their drivers' vehicles.
Re: Venture Predation
#65This 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.
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 hol…
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.
Re: Venture Predation
#66In 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…
There's a clear difference in trade economics between eating initial losses as a risk to acquire customers (which every company does, including the one man food truck by your street), and doing it with a fat war chest backing it with the only goal being to wipe out the competition. Garage startups aren't looking to wipe out the competition (yet), unlike the likes of Google and Uber.
Re: Venture Predation
#67From 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…
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.
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.
Re: Venture Predation
#68Earlier quoted context omitted.
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 an…
The only issue is that companies like Uber are lying to themselves and their investors that costs will go down significantly in the future. Both through scale and advances in technology. Which is true. But rarely true to the extent to which they believe it.
> The only issue is that companies like Uber are lying to themselves and their investors that costs will go down significantly in the future.
did you not read the article? the entire thing premise is that is not true and there are negative externalities and incentives even if the company doesn't ever make a profit.
Re: Venture Predation
#69Earlier 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…
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 an…
There certainly is nuance. There is nothing magical about marginal costs - if someone is pricing something at break even or 1% gross margin and never have any hope of running a profitable business at that price because of their fixed costs, it's not different from a competitive perspective - the price is unsustainable.
On top of that, there is nuance as to what goes into fixed v variable, how fixed fixed really is, how good your management accounting system is, how good you are at predicting things like product recalls, or insurance losses, or loan recoveries, or whatever other variables are part of your particular business.
Re: Venture Predation
#70I 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…
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.