On-Demand Startups Are Hemorrhaging Tens of Billions a Year • Hacker News Board

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#131

Post by subjectHarold » Wed, Apr 03, 2019, 1:02 AM UTC

digitaltrees wrote: post #79

pitaj wrote: post #43

Earlier quoted context omitted.

It's called malinvestment, and it's tied to monetary policy. When the central bank churns out money, the lower interest rates discourage banks from lending, making it harder for small businesses to collect capital that way. The lower interest rates simultaneously drive investment from bonds into the stock market and real estate. Look up Business Cycle Theory

This does not explain why VCs are willing to invest in business models tha light cash on fire for growth in the hope of reaching a dominant market share and establishing a moat around the business. VCs believe in network effects, VCs believe monopolies are worth burning cash to achieve, VCs believe operating businesses can achieve what software businesses like google and Facebook achieved. Question their belief but d…

Monetary policy is everything. Read financial history.

VCs aren't some unique species that have cracked investing. Human nature is the same as always: people will do stupid stuff. If someone turns up with a check for $100m, you don't check to see whether you can invest it safely. You become a true believer, you gather assets, and if you weren't a true believer at the start you will be after you make enough...it always ends badly but this is why cycles happen.

In fact, the last cycle has been particularly unusual because we have actually see the bad firms driving out the good ones (I don't know about VC but it is happening everywhere else). And this is definitely due to monetary policy.

You are right. At the level of the investment, people aren't saying we should seed this company because of monetary policy...but no-one says this in any bubble. Rather what happens is that the demand for securities goes up and finance finds ways to fill this demand. Human nature being what it is, this always ends badly.

To say this another way: people will find endless ways to rationalise a bad decision. And if someone is paying you to make bad decisions sound good...well then, what do you think will happen?

Btw, just generally, I think VCs are less sophisticated than the average investor. The current environment has just been very forgiving. I don't think we will see anything like this again (if central bankers lose control which seems inevitable), literally firms with billions in cumulative losses trading for $10bn+. These IPOed firms will probably destroy hundreds of billions in capital alone.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#132

Post by _bxg1 » Wed, Apr 03, 2019, 1:05 AM UTC

I don't see how this can be anything but a bubble unless fully-autonomous cars come around, which it's seeming more and more likely that they're further off than expected, if they're possible at all. From what I've read the economics simply don't work otherwise.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#133

Post by b_tterc_p » Wed, Apr 03, 2019, 1:11 AM UTC

subjectHarold wrote: post #122

b_tterc_p wrote: post #6

I asked in the recent thread how Meituan could possibly be affording to subsidize restaurant meals to be significantly below cost at restaurant as that didn’t make any sense. Turns out according to this article that it’s simply that. It doesn’t make sense. They lost $17 Billion in 2018 for a shallow moat around an ugly castle. The next recession is going to hit hard, and I’m guessing a lot of the gig economy jobs wil…

I am confused. Is Meituan's ticker 3690? This looks like the company referred to and the actual operating loss is 11bn RMB (so about ~$1.5bn)...which is a lot but revenue doubled, and this is kind of a scale-ish business...so? The number quoted by Bloomberg (quoting from Nikkei) is comprehensive income including the conversion of pre-IPO securities...so not really reflective of operations. What is kind of staggering…

Are you sure?

https://www.bloomberg.com/quote/3690:HK

This says net income was -137B HKD or about 17b usd

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#134

Post by noelsusman » Wed, Apr 03, 2019, 1:14 AM UTC

lordnacho wrote: post #33

It's a strange age to be living in. On the same day I've visited people in a WeWork, been driven around in an Uber, and had food delivered by Deliveroo. All of them blowing a huge load of money for the privilege. If they don't make back this money, it will represent a huge waste of resources. It's private money behind, but I still wonder whether this a reasonable way for the economy to run. For one, it means the litt…

I won't pretend to understand the world of unicorn startups, but it's important to remember that this isn't how the economy is run. For all the billions being set on fire here it's still a relatively small piece of the technology sector, much less the economy as a whole.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#135

Post by repsilat » Wed, Apr 03, 2019, 1:17 AM UTC

patmcc wrote: post #116

lordnacho wrote: post #33

It's a strange age to be living in. On the same day I've visited people in a WeWork, been driven around in an Uber, and had food delivered by Deliveroo. All of them blowing a huge load of money for the privilege. If they don't make back this money, it will represent a huge waste of resources. It's private money behind, but I still wonder whether this a reasonable way for the economy to run. For one, it means the litt…

>>If they don't make back this money, it will represent a huge waste of resources. Hardly; it'll just be a transfer from VCs with too much money to everyone else in the economy. We could probably use more of that.

It's a lossy transfer, though.

Profitable companies are typically win/win/win for customers, employees and investors. Unprofitable companies are win/win/lose at best.

Take all the money the investor had lost, and if you had simply paid the employees the same for doing nothing and given the rest to the customers it would be a Pareto dominating outcome. The difference is destroyed wealth -- it's how much worse off society is because those investors didn't invest in profitable companies. Aside from the transfer of wealth, they really are setting fire to money.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#136

Post by noelsusman » Wed, Apr 03, 2019, 1:19 AM UTC

Johnny555 wrote: post #4

Where does the money go for Lyft/Uber? The software platform can't be that expensive amortized across a million+ drivers. It's not like the drivers are overpaid (and in many cases, they are barely (or not even) paid enough to cover costs) What else do they spend it on? Marketing? Bribing...err... lobbying politicians for favorable treatment?

Lot of marketing, but mostly low prices. The whole reason why Uber and Lyft took off wasn't because people were amazed at ordering a ride on their phones. It was because they were cheaper than taxis.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#137

Post by jamestimmins » Wed, Apr 03, 2019, 1:29 AM UTC

maxxxxx wrote: post #130

noobermin wrote: post #126

Earlier quoted context omitted.

More like a transfer from VCs and from desperate gig workers in the form of cheap labor to founders who get to write medium posts about how entrepreneurial they are.

VCs are not investing their own money.

Indeed, it's more likely that they're investing money from pension plans.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#138

Post by empath75 » Wed, Apr 03, 2019, 1:29 AM UTC

noelsusman wrote: post #134

lordnacho wrote: post #33

It's a strange age to be living in. On the same day I've visited people in a WeWork, been driven around in an Uber, and had food delivered by Deliveroo. All of them blowing a huge load of money for the privilege. If they don't make back this money, it will represent a huge waste of resources. It's private money behind, but I still wonder whether this a reasonable way for the economy to run. For one, it means the litt…

I won't pretend to understand the world of unicorn startups, but it's important to remember that this isn't how the economy is run. For all the billions being set on fire here it's still a relatively small piece of the technology sector, much less the economy as a whole.

A lot of that money gets funneled into Facebook, google and aws, though. Once these unicorns crash and burn it won’t be contained to one segment of the tech industry.

Engineer salaries will decline, companies like atlassian, datadog and elastic search will take a hit, etc.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#139

Post by roenxi » Wed, Apr 03, 2019, 1:39 AM UTC

generated wrote: post #125

roenxi wrote: post #94

Earlier quoted context omitted.

If they aren't making a profit they aren't creating value. They are destroying some value and transferring other value from investors to customers. The difference here is when you add everything up you have less, when for a good investment the total should go up. In principle, in a fair market economy, that is OK because someone has to take the risk of being wrong about what is a good idea. The concern being voiced i…

It is possible to create value and not profit. Economic value exceeds or matches market value. Market value drives revenue. Profit is a function of revenue and cost. These are well defined terms; please be careful saying things like "If they aren't making a profit they aren't creating value." It detracts from your otherwise strong argument. If that line were true, non-profit organizations wouldn't exist.

Now that you have pointed it is obvious that, say, a non profit can create value without creating a profit or that there might be externalities.

But we aren't really talking about that sort of concern here, we are talking about for-profit companies that aren't doing research and any externalities are tenuous.

It is completely unreasonable to say that such a company could be creating value. They are clearly a wealth transfer mechanism from who-knows-where to consumers. It doesn't make sense if it isn't malinvestment. People love to pull out hypothetical externalities to justify things they like that just aren't worth doing; they aren't going to justify running a corporation at a loss.

Re: On-Demand Startups Are Hemorrhaging Tens of Billions a Year

#140

Post by mlthoughts2018 » Wed, Apr 03, 2019, 1:41 AM UTC

repsilat wrote: post #135

patmcc wrote: post #116

Earlier quoted context omitted.

>>If they don't make back this money, it will represent a huge waste of resources. Hardly; it'll just be a transfer from VCs with too much money to everyone else in the economy. We could probably use more of that.

It's a lossy transfer, though. Profitable companies are typically win/win/win for customers, employees and investors. Unprofitable companies are win/win/lose at best. Take all the money the investor had lost, and if you had simply paid the employees the same for doing nothing and given the rest to the customers it would be a Pareto dominating outcome. The difference is destroyed wealth -- it's how much worse off soci…

This assumes two things (at least) that are reasonably questionable:

- that alternative investments with predictably better profitability characteristics existed

- that customers would have preferred wealth transfer in the form of cash or financial assets instead of in the form of goods or services.

For example, maybe I don’t mind forgoing a direct cash transfer from Lyft investors because what I really need is on-demand transportation. If, in response to my ride requests, they told me what the real fare would have been and transferred to my bank account the real fare minus what I would have been charged, I’d still be left without the ride I wanted (and the whole infrastructure and network of drivers to ensure future rides). It could be perfectly rational for me to value receiving that wealth transfer in the form of a ride and operated ride service more highly than receiving it as cash.