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The problem with profitless startups

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Re: The problem with profitless startups

#11

Post by hagbardgroup »

arbuge wrote: post #3
dalek2point3 wrote: post #2

tl;dr the author argues that the ultra-cheap venture backed services are a problem because while they're using money from VC firms and being patient, they're driving out local businesses, and they'll ultimately fail, leaving a hole in the local service ecosystem.

If that's the problem, it should eventually autocorrect when the investors give up permanently and local businesses return.

Not impossible. Private equity is itself young. Venture capital is even younger. It may be an artifact of our particular time, place, set of tax policies, and financial system.

Re: The problem with profitless startups

#12

Post by bowlofpetunias »

arbuge wrote: post #3
dalek2point3 wrote: post #2

tl;dr the author argues that the ultra-cheap venture backed services are a problem because while they're using money from VC firms and being patient, they're driving out local businesses, and they'll ultimately fail, leaving a hole in the local service ecosystem.

If that's the problem, it should eventually autocorrect when the investors give up permanently and local businesses return.

You do realize that those local business are run by people with families to feed, and that "eventually autocorrect" does not "autocorrect" the ruining of their lives?

Re: The problem with profitless startups

#13

Post by sharemywin »

Their workers aren't independent contractors because they don't offer their services to multiple companies. The IRS will figure this out and get their taxes. Next, eventually when the employee count is big enough they will sue for things like minimum wage, breaks etc.

also, it takes nothing to start one of these businesses and compete therefore profits can't get too big. The business doesn't really scale.

Re: The problem with profitless startups

#14

Post by wmf »

couradical wrote: post #4
dalek2point3 wrote: post #2

tl;dr the author argues that the ultra-cheap venture backed services are a problem because while they're using money from VC firms and being patient, they're driving out local businesses, and they'll ultimately fail, leaving a hole in the local service ecosystem.

They also argue that this poses a long-term potential problem for VC as well. Eventually an institutional investor wants their money back. Eventually they have to settle up and see who the Amazons are vs. the Pets.com. That forces businesses to transition towards exit in some fashion, if they move to IPO, this shift forces them to make a shift (to become profitable) which will kill some. I don't see how that's a cont…

I don't think we need to worry about VCs robbing their investors. Both sides of that transaction are pretty smart people who can take care of their own interests.

As for the startups, I think your comparison of Amazon and Pets.com is astute. For each of these companies, are we looking at an unprofitable early stage of a company that will eventually become profitable (e.g. Amazon, probably Uber) or are we looking at a company that can probably never become profitable? The former seems fine even if it causes some temporary disruption, but the latter is just waste.

Re: The problem with profitless startups

#15

Post by PublicEnemy111 »

As someone who recently accepted a job in silicon valley, I've started to become concerned that there is a bubble. I feel there are many parallels between 1999 and today. I would love to be convinced otherwise because I am concerned with job security, but I can't escape the feeling that the "music" will soon stop. At the very least I'd like to hear people's opinions on whether there is a bubble or not

Re: The problem with profitless startups

#16

Post by highace »

PublicEnemy111 wrote: post #15

As someone who recently accepted a job in silicon valley, I've started to become concerned that there is a bubble. I feel there are many parallels between 1999 and today. I would love to be convinced otherwise because I am concerned with job security, but I can't escape the feeling that the "music" will soon stop. At the very least I'd like to hear people's opinions on whether there is a bubble or not

If it looks like a bubble and acts like a bubble...

Re: The problem with profitless startups

#17

Post by Edmond »

PublicEnemy111 wrote: post #15

As someone who recently accepted a job in silicon valley, I've started to become concerned that there is a bubble. I feel there are many parallels between 1999 and today. I would love to be convinced otherwise because I am concerned with job security, but I can't escape the feeling that the "music" will soon stop. At the very least I'd like to hear people's opinions on whether there is a bubble or not

It is unlikely that those who stand to profit from a bubble would acknowledge it....up until the housing market came crashing down there was a continuous stream of people on CNBC talking up the market....the same happened in the first dot com bubble, you can expect the same now.

The new excuse is that even if there is a bubble it will be contained. It does seem an entire bubble economy has been created in SV where bogus companies provide bogus products and services for other bogus companies. Maybe in this case any collapse would be contained, but I guess we'll have to wait and see.

As the expression goes: Anything that can't go on will stop.

Re: The problem with profitless startups

#18

Post by pbreit »

There's possibly some decent arguments in there but they are shrouded by inanity. They aren't "profitless-on-purpose". They understand the simple fact that a dollar is better spent building the business than sitting in a bank account. The author simultaneously degrades startups for not having other business lines to fund them while also degrading the VCs that do. The retirement funds care about returns not portfolio business model nuances. Pretty much every credible "money losing" business I've seen needs to be able to project out profitability at modest scale. Google Shopping Express and Ebay Now are far more perplexing form a cost perspective. If physical businessed can't compete on cost then rents need to come down or they need to figure out how to benefit from their advantages (location, service, etc).

Re: The problem with profitless startups

#19

Post by 001sky »

arbuge wrote: post #3
dalek2point3 wrote: post #2

tl;dr the author argues that the ultra-cheap venture backed services are a problem because while they're using money from VC firms and being patient, they're driving out local businesses, and they'll ultimately fail, leaving a hole in the local service ecosystem.

If that's the problem, it should eventually autocorrect when the investors give up permanently and local businesses return.

The purpose of predatory pricing is remove the auto-corrective components of the ecosystem. It follows that it should eventually autocorrect is wholly speculative: b/c The markets can remain irrational--longer than you can remain solvent

Re: The problem with profitless startups

#20

Post by LandoCalrissian »

PublicEnemy111 wrote: post #15

As someone who recently accepted a job in silicon valley, I've started to become concerned that there is a bubble. I feel there are many parallels between 1999 and today. I would love to be convinced otherwise because I am concerned with job security, but I can't escape the feeling that the "music" will soon stop. At the very least I'd like to hear people's opinions on whether there is a bubble or not

So the biggest difference to me is that the 1999 bubble was completely built on the backs of everyday investors. It was a rush to IPO and easy money, and eventually the market got wise and the whole thing fell apart.

The new paradigm is far more interesting, since it's almost all the investment comes from VC and Angel Investors. I think these entities can leverage risk far better, since they may lose a few million here and there, but when they hit a whale they really hit big.

I think there might be 'micro bubbles' within the industry that may implode under their own weight (F2P mobile games companies come to mind), but I think that's largely separating the wheat from the chaff.

I know some will disagree with me on this analysis, but I don't really subscribe to the sky is falling theory. The tech industry is now big business, that's not going to change.

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