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The rise of the “successful” unsustainable company

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Re: The rise of the “successful” unsustainable company

#81

Post by drumdance »

patmcguire wrote: post #46
api wrote: post #2

This is diplomatic and charitable. When I see a repeat pattern of GroupOn and Zynga type companies I see someone who knows how to pump and dump. It's not quite fraud but it's getting close, given how loose these sorts of people typically play the truth.

Groupon may never make money, but some company with a similar business model will eventually make a profit. What deal of the day sites offer that no one did before is an immediate and essentially limitless supply of customers. Even if most companies lose their shirt on that, there are going to be some industries and situations where infinite customers at a temporary loss makes business sense, and once the market for…

It was many years before Amazon.com made a profit. Compared to them Groupon is ahead of schedule.

Re: The rise of the “successful” unsustainable company

#82

Post by arbuge »

Pump and dump works very well in tech unfortunately. Few VCs apply Buffetesque expectations of company durability to their investments, and (morals aside) objectively they don't need to. Alot of it is about selling to a greater idiot - either the hoi polloi on the stock exchange after an IPO, or an acquirer with rose-colored glasses if that's too much of a stretch.

Re: The rise of the “successful” unsustainable company

#83

Post by ahi »

staunch wrote: post #75
ahi wrote: post #71

Earlier quoted context omitted.

Pincus and Mason may still be running them, but they both already cashed out big time.

Don't you see how that defies the notion that it was a pump and dump? Why would they (with tens of millions of dollars) stick around? No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.

Not really. There's still money on the table so they are still playing.

Re: The rise of the “successful” unsustainable company

#84

Post by ahi »

drumdance wrote: post #78
tatsuke95 wrote: post #72

Earlier quoted context omitted.

> "Mark Pincus and Andrew Mason are both still running these companies." Because, at least in Pincus' case, he can't be removed . It would be pretty hard to argue that he wouldn't have been canned under different circumstances. "Pump and dump" may be a bit much. But I'm glad that it's coming to light that business shadiness doesn't start and stop with the financial industry; it occurs everywhere there are substantial…

Yes, but he can cash in and quit. Why hasn't he? I've never run a public company but I know some who did during the first dot-com crash and it was not pleasant.

It's not easy to liquidate a majority stake in a large public company into cash. At least, not quickly.

Re: The rise of the “successful” unsustainable company

#85

Post by ahi »

drumdance wrote: post #80
roc wrote: post #36

Earlier quoted context omitted.

That's like saying Pets.com could have worked out -- given how readily people took to buying pet meds, food and accessories over the internet -- if only they hadn't grown so fast. Growing so fast is not only a problem of expectation, it's a problem of massive overhead that competitors don't have. That's going to harm their competitiveness in anything they do.

The reason I said they grew too fast is I experienced this myself in the late 90s. I was with a public company that did email marketing services. That sector has turned out to be a massively profitable business. ExactTarget just went public about 6 months ago, and I know a lot of other private players who are doing very well. The company I was with failed because they bought into the "get big fast" meme that was driv…

As far as I can tell, the cash in the bank isn't theirs, it belongs to the SMBs. They don't have 3-4 years.

Re: The rise of the “successful” unsustainable company

#86

Post by nkohari »

wtvanhest wrote: post #61
jasonlotito wrote: post #58

Earlier quoted context omitted.

> Actually it does work that way. And then you go on to provide an example completely opposite of what he was saying.

I took both the poster I replied to and the poster above his under consideration when I replied. Finance doesn't require all companies be sustainable, only that some companies grow enough to offset losses taken on unsustainable companies. It is a general principal of how investments work.

In my understanding, the person I was replying to was saying that the actual value of equity isn't relevant, because capital cycles through the economy. I was saying that was absolutely not true, because the only reasons anyone would buy equity is to either 1) because they expect the equity to appreciate in value, or 2) to receive dividends or profit-sharing of some kind.

The situation you described is a reasonable diversification strategy, but you had the expectation of appreciation with each purchase. You hedged your bet, and lost less, but you still believed that each position would appreciate in value.

Re: The rise of the “successful” unsustainable company

#87

Post by brc »

hammock wrote: post #35

Why does this idea exist that every company needs to be sustainable? Is it not the natural way of markets that 1) an opportunity is identified, 2) exploited for profit, until 3) competition drives profitability away? So long as capital stays productive, from a societal point of view it shouldn't matter whether it stays in one company for 20 years or moves from company to company every three.

I agree in a way - while it's unfortunate to those involved, there is an efficiency at work when capital is moved from those with no idea to those with some idea. Obviously the less idea someone has, the faster the capital departs them (a fool and his money are one big party).

However, I think the problem here is one of time horizons - many people invest in companies expecting them to be longer-term sustainable entities rather than harvest-the-craze entities. But as long as that's a function of lack of investor chops rather than market disinformation, ultimately it's a good thing.

Re: The rise of the “successful” unsustainable company

#88

Post by corford »

staunch wrote: post #75
ahi wrote: post #71

Earlier quoted context omitted.

Pincus and Mason may still be running them, but they both already cashed out big time.

Don't you see how that defies the notion that it was a pump and dump? Why would they (with tens of millions of dollars) stick around? No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.

These guys obviously aren't the sort of people that are happy to lie by the beach reading a book, quietly enjoying their millions.

They're alpha dogs in the absolute worst sense of the word. They thrive off ego, winning, power, greed, narcissism and all those other lovely traits most people pulling similar moves seem to have.

Think Gordon Geko. Remove the pin stripe suit, fast forward 30 years and change the modus operandi from cynical asset stripping to cynical stock hyping and you get...

Edit: a more charitable view, in Pincus' case, is he isn't THAT evil and instead simply made a hugely expensive mistake buying OMGPOP. That wrecked the balance sheet and he's holding in there trying to recover.

Re: The rise of the “successful” unsustainable company

#89

Post by jonnathanson »

pron wrote: post #79
jonnathanson wrote: post #74

Earlier quoted context omitted.

"So, who loses? I'm not sure anyone is." Well, if you factor in the opportunity costs of the capital and talent allocated to unsustainable companies, then there's a good argument that the US economy loses. Every dollar invested in Zynga or Color is a dollar that could have been invested in something productive over the long haul. Every talented programmer that goes to work at a flash-in-the-pan, overhyped startup cre…

Well, I don't know. Suppose all those engineers were working for a company like IBM or Google, doing research. Much of their work would go to waste, too, as most research does not turn into successful products. I think this is an interesting cultural change rather than a loss. Engineers are willing to sacrifice job security for a small chance for a big payoff. The winner-takes-all approach has long been part of the A…

I don't think there's anything wrong, per se, with engineers wanting to gamble on bigger, riskier projects. Nor do I necessarily see the "productive vs. hypey" dichotomy as a strict dichotomy between startups and the IBMs and Googles of the world.

But I do think that there's a major opportunity cost incurred when dollars and talent get shuttled into hypey, bullshit-driven companies instead of legitimate ones. Including legitimate startups.

Of all the risky startups who could potentially get funded and attract talent, it's better for the good ones to get the money and the talent if possible.

To put it another way: the VC system should be selecting for the next Google, not the next Color. But to whatever extent it's selecting for the next Color, it is sub-optimized. That degree of sub-optimization is the opportunity cost / inefficiency inherent to the system.

Re: The rise of the “successful” unsustainable company

#90

Post by pron »

antr wrote: post #4
api wrote: post #2

This is diplomatic and charitable. When I see a repeat pattern of GroupOn and Zynga type companies I see someone who knows how to pump and dump. It's not quite fraud but it's getting close, given how loose these sorts of people typically play the truth.

Agree on GroupOn and Zynga, and there are still plenty of popular services which are far from being economically sustainable and yet everybody says what a "great company" that is, when in reality all it is is a "great product/service" with no revenue proposition (still, kudos for building it). See Path, Foursquare, Turntable.fm, Tumblr, etc. If the liquidity from large companies such as FB, Google, AOL, Yahoo, etc. d…

To reiterate what I've said in my comment above, I'm not sure this is a downturn. A downturn implies some shift in the market, while this phenomenon is intrinsic to the particular startup economy. There might be a downturn in investment, though, as this inherent behavior gives rise to investment cycles.
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