Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The problem with profitless startups

nymag.com

Post reply on HN
Print view View original

41–50 of 52 posts

Re: The problem with profitless startups

#41

Post by jbooth »

beat wrote: post #36
jbooth wrote: post #34

Earlier quoted context omitted.

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 commodi…

No, you can't make that same argument. Software is fundamentally scalable, due to incremental copies being free after the first copy costs a lot of money to produce. Food service is about as far towards the other end of the scale as you can get.

Like I said, if they were making a unit profit and an overall loss due to building out their infrastructure, that would be fine and normal capitalism. They're not.

I agree that their VCs should be ripping them a new one, or should not have invested in this plan in the first place. It's one thing for a 22yo to think you can make easy money in food service, the VCs should know better. What's next, the VCs investing in kids starting a bar with their friends?

Re: The problem with profitless startups

#42

Post by ForHackernews »

beat wrote: post #37
ForHackernews wrote: post #33

Earlier quoted context omitted.

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.

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

I don't.

Re: The problem with profitless startups

#43

Post by GFK_of_xmaspast »

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

Of course it's a bubble. Stack that paper now.

Re: The problem with profitless startups

#44

Post by GFK_of_xmaspast »

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…

Right now there's so much money sloshing around here because (a) there's nowhere else for it to go and (b) everybody's doing it. What happens when there is somewhere else for it to go?

Re: The problem with profitless startups

#45

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…

Out of curiosity, I did some research on SpoonRocket. First, I caught the article author deliberately misrepresenting the Series A:

"it’s just raised $10 million in venture capital expressly so it can keep its prices low". The linked article said nothing of the sort. It said Series A, yes, but not that it was to subsidize pricing. Second, that Series A just happened on April 9 - this week. They haven't had time to even cash the checks yet! (they had a $2.5M seed in 2013, per Crunchbase. If VC thought that money was wasted on cost-cutting, they wouldn't be paying Series A)

Second, SpoonRocket differs in a couple of ways. First, they're a food+delivery service. They don't drive for other restaurants, and they don't have a restaurant space (and associated costs for service and location-driven rent). They only do two meal choices a day, and those are driven by ingredient availability. They're much more like a wholesale bakery than a restaurant.

Their technical edge isn't just communication, either. They have heating systems built into the cars. So I'm assuming they simply fill the cars with meals and send them out, using software to track closest car to the customers, in a high-density urban area. When a car runs out of meals, just come back for a refill.

This is an extremely efficient model, for both food production and delivery, outstripping the benefits of restaurants that have to offer a diverse choice-driven menu, and delivery services that have to do one-off deliveries to support that consumer customization of their food.

So I think it is absolutely reasonable that they could profitably deliver $8 meals.

Re: The problem with profitless startups

#46

Post by beat »

ForHackernews wrote: post #42
beat wrote: post #37

Earlier quoted context omitted.

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.

But I find it hard to believe VCs are that stupid. I don't.

Well, yeah. But snark aside, I did a little research on the startup shamed in the article, and their business model actually looks viable to me. They have a couple of serious efficiency advantages over the existing models (no restaurant + limited menu + software managed delivery). I don't think an $8 delivered meal is out of the realm of possibility with their model.

Re: The problem with profitless startups

#47

Post by ritchiea »

waterlesscloud wrote: post #38
ritchiea wrote: post #29

Earlier quoted context omitted.

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?

I don't think I said anything like that. All I said is there is a culture that embraces the sort of risky investment that VCs make & that hedge funds are comparable investments.

Let's take a reasonable definition of a bubble: when the price of an asset has risen much higher than what is justified by the market. By that definition I don't think we're in a bubble, I believe investors are logical and they know they are taking risks chasing a large return. I also believe investors will continue to chase big returns from tech companies and that there is precedent for this behavior in other types of investments.

Re: The problem with profitless startups

#48

Post by beat »

jbooth wrote: post #41
beat wrote: post #36

Earlier quoted context omitted.

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 commodi…

No, you can't make that same argument. Software is fundamentally scalable, due to incremental copies being free after the first copy costs a lot of money to produce. Food service is about as far towards the other end of the scale as you can get. Like I said, if they were making a unit profit and an overall loss due to building out their infrastructure, that would be fine and normal capitalism. They're not. I agree th…

Look at their business model (at least for SpoonRocket). They're directly addressing the production cost of food - limited menu (two choices a day), menu driven by availability (seasonalize ingredient cost), highly automated delivery (meals loaded in car before sale - use the car as the warming bin).

Limiting to two meal choices a day isn't an option for most restaurants. This is a significant efficiency optimization in manufacturing that also drives significant optimization in delivery. This doesn't strike me as a dumb hack at all. Quite the contrary, I'm very impressed. I wouldn't be surprised at all if they're actually profitable from a production/delivery standpoint, and the losses are just software and market development.

(I have many years of restaurant experience in addition to software experience. I see the optimizations. Wow!)

Re: The problem with profitless startups

#49

Post by jbooth »

beat wrote: post #45
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…

Out of curiosity, I did some research on SpoonRocket. First, I caught the article author deliberately misrepresenting the Series A: "it’s just raised $10 million in venture capital expressly so it can keep its prices low". The linked article said nothing of the sort. It said Series A, yes, but not that it was to subsidize pricing. Second, that Series A just happened on April 9 - this week. They haven't had time to ev…

Once they've built the app, almost every one of their costs aside from executive salaries (!) is a recurring per-unit cost -- paying the drivers, buying the food, the gas, etc.

Still sounds more like 100k bank-loan material than 10M VC material to me. The only way that 10M makes sense is if they're running a per-unit loss. Doesn't cost 10M to build that app.

Re: The problem with profitless startups

#50

Post by mathattack »

smacktoward wrote: post #22
mathattack wrote: post #21

Remember that Priceline had a history of loss leaders. Amazon was patient in making money too. A couple million here or there is pennies if you're funding the next big thing. This turns into a way for companies to subsidize early adopters. Yes, the interface may not be perfect, and you never know what will appear in the box, but if you'll give us a go, you'll get an $8 lunch that might just be good... Sounds fair.

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, de…

Fair enough. If a VC wants to toss money at them, why not?
Post reply on HN