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The problem with profitless startups

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Re: The problem with profitless startups

#31

Post by lauradhamilton »

Interesting argument, but I sort of doubt that local small businesses and bootstrapped startups really need to worry too much about VC-backed startups that truly lose money on the the margin.

In general startups that lose money on the margin do not last very long.

Anyway, if the theory is that this food delivery service is selling under cost in order to get rid of the competition, well, then they are going to be displeased to discover that the barriers to entry for a food-delivery service are not particularly high.

Re: The problem with profitless startups

#32

Post by beat »

jbooth wrote: post #30
beat wrote: post #28

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).…

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…

No, I got that. You missed the point of my critique.

It is impossible to scale that $8 delivery lunch large enough to provide any significant threat to local business. There simply isn't enough VC money for the hundreds of millions that would take. The scruffy little startup trying that model will either raise prices long before profitability, or will run out of money and disappear.

But a standardized delivery model that is a straightforward service charge, made possible by modern tech? Hell yeah, that's a good business model - and it's good for the mom and pop restaurants too.

Now, if you can point me to the mom and pop food delivery service...

Re: The problem with profitless startups

#33

Post by ForHackernews »

beat wrote: post #28

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).…

It sounds like for a lot of these companies, their idea for "growth" is cost-cutting. This isn't even economics 101, it's simple common sense: if something is cheap, more people will buy it.

It turns out selling at below-cost prices is a fantastic (though ultimately futile) "growth hack".

Re: The problem with profitless startups

#34

Post by jbooth »

beat wrote: post #32
jbooth wrote: post #30

Earlier quoted context omitted.

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…

No, I got that. You missed the point of my critique. It is impossible to scale that $8 delivery lunch large enough to provide any significant threat to local business. There simply isn't enough VC money for the hundreds of millions that would take. The scruffy little startup trying that model will either raise prices long before profitability, or will run out of money and disappear. But a standardized delivery model…

Whether or not you want to call it 'significant', every $15 meal they sell for $8 is either $15 or $8 in revenue that a legitimate business didn't get.

This phenomenon literally breaks capitalism, by routing money from those who can create a product for that price to those who are subsidized, because they're 'innovative' enough to make a cookie cutter mobile app and wear skinny jeans with fashionable glasses.

Now, a standardized delivery model, with a straightforward service charge, and all that? Yeah, great business model. Seamless web is around. They're doing great, and add value to the economy. What value do these clowns add?

You don't seem to disagree with any of this.. your position is that since they'll be out of business soon, the damage is limited? It's still damage, and still stupid.

Re: The problem with profitless startups

#35

Post by anoncow »

aantix wrote: post #23
rdudek wrote: post #8

How do we know that some of these businesses are losing money? Looking at the menu of SpoonRocket that the author listed, you could make the same meal for less. I have a feeling that the profit margins are very low, but I do not think they're in the negative.

Paying employees, executives, money for the car leases, gas, all while located in SF? An $8 meal, they make it at $4. With one avg engineer on salary at 125K, (~10K a month), you'd have to sell 2500 lunches with a $4 profit to cover just his salary. I'd bet they're losing money.

Outsource the engineer. At 30-40k salary per annum, they can scrape by on 625 to 833 deliveries a month. 20-28 deliveries a day. You still have to look at paying the delivery guys and managers.

Re: The problem with profitless startups

#36

Post by beat »

jbooth wrote: post #34
beat wrote: post #32

Earlier quoted context omitted.

No, I got that. You missed the point of my critique. It is impossible to scale that $8 delivery lunch large enough to provide any significant threat to local business. There simply isn't enough VC money for the hundreds of millions that would take. The scruffy little startup trying that model will either raise prices long before profitability, or will run out of money and disappear. But a standardized delivery model…

Whether or not you want to call it 'significant', every $15 meal they sell for $8 is either $15 or $8 in revenue that a legitimate business didn't get. This phenomenon literally breaks capitalism, by routing money from those who can create a product for that price to those who are subsidized, because they're 'innovative' enough to make a cookie cutter mobile app and wear skinny jeans with fashionable glasses. Now, a…

By the same token, you could argue that investment screws up the software market, because companies operating at a loss hire employees they couldn't otherwise afford.

Again, a: they cannot sell at a loss at scale, and b: venture capital is invested with the expectation of building business model infrastructure, not being a fly trying to beat whales on cost. If they're actually blowing VC money on underpricing commodities like food rather than hiring programmers and marketing, their VCs should be ripping them a new one.

Re: The problem with profitless startups

#37

Post by beat »

ForHackernews wrote: post #33
beat wrote: post #28

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).…

It sounds like for a lot of these companies, their idea for "growth" is cost-cutting. This isn't even economics 101, it's simple common sense: if something is cheap, more people will buy it. It turns out selling at below-cost prices is a fantastic (though ultimately futile) "growth hack".

If that's true, then they will find out why it's a losing strategy when they run out of money, and their VCs will hopefully learn not to fund companies whose business model starts with loss-leading commodities against established market giants.

But I find it hard to believe VCs are that stupid.

Re: The problem with profitless startups

#38

Post by waterlesscloud »

ritchiea wrote: post #29
Edmond wrote: post #17

Earlier quoted context omitted.

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 bo…

Isn't the crazy thing that it can go on? There's enough money at the top of the economy that the rich can keep investing in startups as an asset class and not really feel the losses even though they seem huge to those of us who get by on a salary from a job. The real question is: will the investments keep coming? My guess is it continues. Hedge funds as a whole also perform below market but see continued investment b…

So it's a new paradigm and it's different this time?

Re: The problem with profitless startups

#39

Post by al2o3cr »

beat wrote: post #28

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).…

"They must be, because the markets are too large to be subsidized by VC forever."

cough Salesforce cough

Re: The problem with profitless startups

#40

Post by ajiang »

LandoCalrissian wrote: post #20
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 he…

Regardless of my opinion on whether or not we're in a bubble, the argument of "it's different this time because..." is used in the build up of every bubble we've ever experienced.

Stock bubble? Economic stability and the wonderful controls the Fed has on monetary policy. No more economic cycles.

First tech bubble? The internet is a wonderful thing we haven't had before - new opportunities, etc.

Everything is different until it isn't.

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