The problem with profitless startups

Not all startups are created equal.

The biggest difference between (say) Amazon and the startups discussed in the article is that the startups in the article are aggressively local. "We deliver lunch in the Bay Area" doesn't scale to other communities as easily as "We ship books to anywhere from a giant warehouse in the middle of nowhere" does, since the former requires building up local infrastructure (meal prep, delivery, legal/regulatory compliance, etc.) for each expansion.

As John Maynard Keynes put it, "in the long run we are all dead."

I remember a coworker telling me in a condescending tone 'this is how a startup runs, you break even and try to expand market share, burning investors cash and growing without profit' when I asked about how it is that our company that has not made any profit in the past 4 years serving enterprise customers is able to still be solvent. What if investors suddenly stop injecting cash? Financials would be negative in the first quarter.

I never understood the working models of growing at the sole expense of investors money. Because I don't know but last time I checked capitalism and free market still is king, and they always have a history of major market correction. When something's not efficient or something's offplace, market has a tendency to correct itself, in a big, unexpected, ruthless sort of way and we've seen this again and again, but history seems to teach people nothing.

Wow, this article is kind of clueless.

First, the VC money isn't going to cost-cutting - it's going to growth. In theory, virtualizing the business processes should lead to higher efficiency and naturally lower costs. This model has been proven out in other fields - it's the Big Box model of retail that created giants like Wal-Mart (although a better comparison would be specialist big box retail like Guitar Center). So the VC money is going to building out the business model infrastructure, not selling a sandwich cheaper than the local shops.

Second, these businesses on the edge don't have enough market share to make a massive dent in the local market - and it's ludicrous to think that they could do so by losing money on transactions at scale. By the time they pose a real threat to local business, they will be profitable. They must be, because the markets are too large to be subsidized by VC forever.

Third, a lot of the businesses that are threatened are not "mom and pop" at all. Taxis? That's a local oligarchy protected by politics. Food delivery? Ever heard of Domino's Pizza or Jimmy John's?

Fourth, these can create new opportunities for local business. I can now get food delivered to my door by one of these startups, but the food comes from excellent local restaurants (the mom and pop ideal) that otherwise could not possibly get a delivery service working profitably. They've outsourced the business model, not the food prep.

And then there's the handwringing about how the long-term professional institutional investors who run pension funds and the like might go broke on venture capital, not realizing what a tiny sliver of that market VC is - it's a diversification strategy, not a core. The biggest concern would be if a VC collapse led to a broader stock market collapse, a la the dotcom era. Not likely.

Yeah, dumb article.

You totally missed the point of the article.

The lunch that guy described is impossible to deliver for $8 in the US, and especially in SF. That business makes no sense, ever. Losing money while making a unit profit on that lunch, ok, let's see where that goes. Getting my business by selling to me below cost? I'll do business with you all day but as soon as you raise the price, I'll switch to the next startup offering me a subsidized lunch. There's nothing 'long view' about that. No vision there.

This trend, if it's as big as the article makes it seem, is way more worrying to me in a 'bubble' sense than the color.com thing.