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Today’s correction isn’t much like the dot-com bubble

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Re: Today’s correction isn’t much like the dot-com bubble

#111

Post by tolmasky »

code4tee wrote: post #44

There’s another often unwritten element here around companies basing their valuation on false markets. For example, if I sell $2 for $1 that’s a false market. Of course I can grow like crazy and gobble up lots of customers. I could even “disrupt” existing players like those stodgy old companies (banks) that sell $2 for $2.15 (a loan). The VC subsidies for some of these companies are so high that they are basically se…

If you just thought about the "false market" like advertising, it wouldn't seem so perverse.

Coca-Cola "wastes" millions on advertising, something that doesn't directly generate profits. From a cash flow perspective, it's giving money away to advertising agencies. The theory is that you have an indirect return through building mindshare. Same goes for "good will" deeds like charitable actions by corporations or taking a hit on a product to use a more environmentally friendly component. From a completely superficial perspective, this is a deliberately inefficient action that makes the market "more false".

You could imagine a scenario where you take in a lot of VC money to jump-start the initial production of a more environmentally friendly product while still selling it at a competitive price that really isn't justified by its production costs. Is this a false market? Perhaps, but it may serve to build out the necessary pipeline enough such that the unit economics eventually work to be self-sustaining and also build a lot of brand loyalty along the way.

These are bets. Advertising is a bet on brand recognition, one that can similarly take years to materialize (see the mattress industry). Facebook was a bet that paid off. Everyone laughed at how much they took in originally too.

Of course, like all bets, there can be bad bets, and even good bets that just don't pay off. In some sense, the WeWork story should be considered a great success: the public market did exactly what it was supposed to do, shine a light at the appropriate time on a bet that had been going on too long. The real danger is when these initial stages are funded incorrectly: if a VC Fund makes a stupid bet, well, that's the game, but if a pension fund had invested in this, then it would be dangerous.

Re: Today’s correction isn’t much like the dot-com bubble

#112

Post by chii »

tolmasky wrote: post #111
code4tee wrote: post #44

There’s another often unwritten element here around companies basing their valuation on false markets. For example, if I sell $2 for $1 that’s a false market. Of course I can grow like crazy and gobble up lots of customers. I could even “disrupt” existing players like those stodgy old companies (banks) that sell $2 for $2.15 (a loan). The VC subsidies for some of these companies are so high that they are basically se…

If you just thought about the "false market" like advertising, it wouldn't seem so perverse. Coca-Cola "wastes" millions on advertising, something that doesn't directly generate profits. From a cash flow perspective, it's giving money away to advertising agencies. The theory is that you have an indirect return through building mindshare. Same goes for "good will" deeds like charitable actions by corporations or takin…

> Coca-Cola "wastes" millions on advertising

but they don't overspend on advertising, unlike those VC funded companies. Each can makes a profit for coke, and therein lies the difference.

Re: Today’s correction isn’t much like the dot-com bubble

#113

Post by chii »

Retric wrote: post #103
sfilipov wrote: post #61

Earlier quoted context omitted.

What are good examples of Reinvest Software? My guess would be Amazon, but what others?

Facebook was a good example. They avoided excessive advertising in their growth phase, effectively spending potential profit for a huge user base. Critically, the profit was intangible as was the investment as the IRS does not care about money you never collected or the number of users you have only cash. YouTube is another, as far as we can tell it’s currently extremely profitable yet people looking at their financi…

google derives much more value from youtube's viewership data than the profit in ads it makes imho.

Youtube's profit model is only profitable at google scale - imagine the capital expenditure to build out such a large video platform (not very many other tech giants have been able to build video, and have it be free).

Re: Today’s correction isn’t much like the dot-com bubble

#114

Post by chii »

matwood wrote: post #20
corporateslave5 wrote: post #11

Earlier quoted context omitted.

The thing is I don’t think investors got deluded, I think investors new exactly what they’re doing. They were hoping some greater fool would take the investment off their hands

The greater fools in the case of We being the public market. The rejection of the We IPO was a win against this ridiculousness.

in which case, how many other companies have "fooled" the public, but just skirted the line enough to not trigger this level of checking?

Re: Today’s correction isn’t much like the dot-com bubble

#115

Post by marcusverus »

tolmasky wrote: post #111
code4tee wrote: post #44

There’s another often unwritten element here around companies basing their valuation on false markets. For example, if I sell $2 for $1 that’s a false market. Of course I can grow like crazy and gobble up lots of customers. I could even “disrupt” existing players like those stodgy old companies (banks) that sell $2 for $2.15 (a loan). The VC subsidies for some of these companies are so high that they are basically se…

If you just thought about the "false market" like advertising, it wouldn't seem so perverse. Coca-Cola "wastes" millions on advertising, something that doesn't directly generate profits. From a cash flow perspective, it's giving money away to advertising agencies. The theory is that you have an indirect return through building mindshare. Same goes for "good will" deeds like charitable actions by corporations or takin…

The poster isn't saying that companies should never buy growth by selling $2 for $1. He's saying that VC seems to be bad at avoiding companies that only grow because of this. Consider PayPal. Early on, they would pay a $20 referral fee to anyone if they could get a friend to join and use PayPal. That's insane at first glance, but it worked because those new users kept on using the product; because the product itself was viable without the subsidy. Coca-Cola is the same way. They advertise, but they turn a profit after baking that into the price of the product. MoviePass was never going to work. The subsidy was the product. That's the concern.

Re: Today’s correction isn’t much like the dot-com bubble

#116

Post by tolmasky »

marcusverus wrote: post #115
tolmasky wrote: post #111

Earlier quoted context omitted.

If you just thought about the "false market" like advertising, it wouldn't seem so perverse. Coca-Cola "wastes" millions on advertising, something that doesn't directly generate profits. From a cash flow perspective, it's giving money away to advertising agencies. The theory is that you have an indirect return through building mindshare. Same goes for "good will" deeds like charitable actions by corporations or takin…

The poster isn't saying that companies should never buy growth by selling $2 for $1. He's saying that VC seems to be bad at avoiding companies that only grow because of this. Consider PayPal. Early on, they would pay a $20 referral fee to anyone if they could get a friend to join and use PayPal. That's insane at first glance, but it worked because those new users kept on using the product; because the product itself…

Are they bad at avoiding that though? Or are we greatly extrapolating from one VC in one high profile case: because that is the actual hilarious part of WeWork, it was basically entirely funded by just one VC that kept doing more rounds.

Additionally, the nature of VC is that it is high risk: you're supposed to have 9 failures for every success. So just from an "amount" of companies perspective, they're always going to seem "bad" at this I guess. That's why I used Facebook as an example. It's unfortunate that it takes very little time for everyone to forget, but the valuation of Facebook seemed ridiculous at the time. That's the nature of the beast: it's really hard to tell the winners from the losers, and thus VC is a necessarily risky enterprise. PG talks about this here: http://www.paulgraham.com/swan.html

That's why my point is that the true problem is if the capital comes from the wrong place, namely non-traditional sources of capital funding these funds due to loss of any other viable more conservative investments.

Re: Today’s correction isn’t much like the dot-com bubble

#117

Post by sharkjacobs »

chii wrote: post #113
Retric wrote: post #103

Earlier quoted context omitted.

Facebook was a good example. They avoided excessive advertising in their growth phase, effectively spending potential profit for a huge user base. Critically, the profit was intangible as was the investment as the IRS does not care about money you never collected or the number of users you have only cash. YouTube is another, as far as we can tell it’s currently extremely profitable yet people looking at their financi…

google derives much more value from youtube's viewership data than the profit in ads it makes imho. Youtube's profit model is only profitable at google scale - imagine the capital expenditure to build out such a large video platform (not very many other tech giants have been able to build video, and have it be free).

I always understood that the viewership data was valuable because it enabled Google to earn more money selling ads.

What is the value of viewership data apart from advertising?

Re: Today’s correction isn’t much like the dot-com bubble

#118

Post by TheOtherHobbes »

dredmorbius wrote: post #26

There's a fantastic book that just came out in ... 1954 ... that I'd highly recommend. John Kenneth Galbraith's The Great Crash, 1929 . https://www.worldcat.org/title/great-crash-1929/oclc/3136579... The tech and land booms of the time involved Florida real estate, railroads (a/k/a airlines), airlines (actual aircraft involved), "Radio" (RCA), new alternative energy source and distribution plays, and of course, Goldm…

See also Anthony Trollope's The Way We Live Now.

Which was written in 1875. About the financial scandals of the 1870s.

Re: Today’s correction isn’t much like the dot-com bubble

#119

Post by chii »

sharkjacobs wrote: post #117
chii wrote: post #113

Earlier quoted context omitted.

google derives much more value from youtube's viewership data than the profit in ads it makes imho. Youtube's profit model is only profitable at google scale - imagine the capital expenditure to build out such a large video platform (not very many other tech giants have been able to build video, and have it be free).

I always understood that the viewership data was valuable because it enabled Google to earn more money selling ads. What is the value of viewership data apart from advertising?

if it wasn't google who bought youtube, the viewership data would only have been useful for the ads on youtube. But because it's google, they can leverage this data on the entire google platform, and thus derive more value from it. This means they can afford to make less money on youtube and still have it be valuable. That is why google bought it and not microsoft (or another non-advertising company).

Re: Today’s correction isn’t much like the dot-com bubble

#120

Post by jonas21 »

tolmasky wrote: post #116
marcusverus wrote: post #115

Earlier quoted context omitted.

The poster isn't saying that companies should never buy growth by selling $2 for $1. He's saying that VC seems to be bad at avoiding companies that only grow because of this. Consider PayPal. Early on, they would pay a $20 referral fee to anyone if they could get a friend to join and use PayPal. That's insane at first glance, but it worked because those new users kept on using the product; because the product itself…

Are they bad at avoiding that though? Or are we greatly extrapolating from one VC in one high profile case: because that is the actual hilarious part of WeWork, it was basically entirely funded by just one VC that kept doing more rounds. Additionally, the nature of VC is that it is high risk: you're supposed to have 9 failures for every success. So just from an "amount" of companies perspective, they're always going…

And even WeWork isn't that bad. Each new location they open has large startup costs: they have to lease a large space, build it out, hire staff, do a lot of marketing -- only then can they start collecting rent from members, and it takes time to fill the space to capacity.

There's no reason to believe that they wouldn't be profitable if they stopped growing so quickly (they opened 200 locations in 2018 alone).

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