How is this article on the front page of HN? It conflates cash flow with net income, and shows a lack of understanding of the business models of these companies.
Also... "why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?"
This shows a fundamental misunderstanding of how public markets work.
Because many of the businesses are profitable, but spend money to grow.
Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1].
The original author says that these companies "dump" stocks at IPO, but fails to recognize that (1) institutional investors who purchase most of the supply of stock at IPO are highly sophisticated and (2) there is a lot of regulation around proper disclosure of financials of public offerings.
Hell, the one recent tech company which tried to "dump" stock at IPO got laughed out of the public markets (WeWork).
I agree with the above poster that this article is nonsense and shows a complete misunderstanding of how markets and valuations work. Of course you would expect companies that are not profitable because they are investing in growth to lay off employees in tough times!
> Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary.
A lot of people say these things, but:
We don’t know if that’s true. If they turn off the hype and marketing juice and stop spending more money acquiring customers than the revenue they accrue, do we know that they’ll become profitable?
We really need something more specific than, “just lay off all the expensive tech workers and bam, instant profitability.”
What we need is a specific plan, that we then go over with a fine-tooth comb looking for unintended consequences that could bite our “rightsizing” plan in the ass.
Many a company has set out to cut costs and drive towrds profitability, but very few make it. Honestly, very few make it. Most of the time, when a CEO sets out to make a systemically unprofitable company profitable, they end up in Chapter 11.
It’s really, REALLY hard to pull off, and it’s not for lack of trying or inexperience on the part of management. It turns out that for most companies, the right way to become profitable is to grow your revenues, not cut your costs by 80+.
Yes, minus engineering and marketing, they are profitable for now (https://news.ycombinator.com/item?id=23382477), but it's not a good idea. Growing revenues is much better, especially since Uber has competitors who are also trying to grow.
I don't know what companies you've been working for, but even if you do zero product research and development, a company as tech-focused as Uber is still going to need a substantial engineering department just to keep the lights on. Not to mention a tech company that isn't developing new products and features, and isn't marketing, isn't going to remain profitable for long no matter how much they've cut labor costs.
I understand that they're investing in growth, but the key points still stands - money is flowing down the drain with the promise that it'll all be worth it "some day."
This is all speculative, of course, so you are entitled to your beliefs based on your views and experience.
In my case, I have often seen the case that companies have certain stable modes, and many unstable modes. It could easily be that after slashing 80% of their engineering workforce, and cutting their marketing, they subside into becoming a slightly higher-tech taxi company.
But what about the remaining 20% of engineering? Do they want to work for a company that has let go 80% of its engineers, and has given up on self-driving cars and drones and whatever else they were dreaming of?
Or will the rest of the talent head for the exits, their options hopelessly underwater forever, because investors have no interest in the faded hulk of a company that was once a Unicorn?
It could be that if they try to shrink to 20% of their engineering talent, they keep on shrinking involuntarily, shedding their best talent in all areas, not just engineering.
I don't know for a fact what will happen, but for the moment, if I had to bet, my bet is that if they try to cut 80% of their engineering and most of their marketing, they will keep on shrinking until they become a penny stock.
It would probably be easier for them to have Private Equity come in and take the company private first. If they have to cut that much flesh off the bones in public, it's going to be brutal.
The problem with Uber et al, is not that they cannot become profitable, but that they cannot become sufficiently profitable to justify their valuations.
Uber has burned through many billions of investor cash. To show a reasonable return on that cash it would need to generate not just profit, but a lot of it.
Whether it can do that in markets like taxi's and food delivery is a quite debatable point as competitors will continue to spring up quickly especially when Uber tries to put the prices up enough to generate the kind of profts needed at their scale.
> Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1].
Do you have a citation for that bold assertion or want to prove it?
[EDIT: The linked chart shows Uber losing 8.5 billion in FY 2019. This 80% figure implies approximately 10 billion in engineering salaries, or 10k engineers making 1 million a year.]
Sorry, you're right that Uber would have to do more than lay off engineering staff. It would also have to scale down marketing, promotions, etc. This would of course screw over any long term growth prospects they might have. But my general point still stands — if it were not for chasing growth, Uber is just barely profitable right now.
The original article cites revenue numbers without understanding the business fundamentals. In Uber's case, its 2019 losses are severely misleading. $3.6 billion of those losses were losses associated with performance-based equity compensation around its IPO [1, p. 55]. According to GAAP, they losses for 2019, but in reality they should be amortized across the previous few years.
The costs associated with engineers (I assume "research and development") are listed as $4.8 billion. This means by just cutting engineering Uber still is in the hole by around $3.7 billion per year. But if you throw away all the engineers, your growth prospects are screwed anyway, so you might as well throw away most of marketing as well ($4.6 billion), at which point you're in the green by $0.5 billion [1, p. 64]. You could also save much of the $0.5 billion you're spending on administrative overhead, so maybe Uber is profitable by $1 billion or so.
>>Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary.
But that would not be sustainable as you point you, as they could not compete, the Author talked about profitable SUSTAINABLE businesses, not just profitable
> This shows a fundamental misunderstanding of how public markets work.
I disagree. Most importantly, what we are seeing with so many companies being unprofitable is historically unusual. Now, I guess in 2020 everything feels "historically unusual", but it's kind of BS to denigrate someone by saying "they fundamentally misunderstand how public markets work" when the public markets didn't work this way until quite recently.
I agree that mixing cash flow and profits is confusing. But that doesn't change the point: not turning a profit means you lose money on every sale (which was not the case of Amazon, the profits were just small compared to the sales volume), it's by definition unsustainable unless there is a very strong plan mid-term (like not "self-driving cars" for example). The question is legitimate, though the word "allow" is maybe not the best choice.
On a purely emotional level, people are not happy about the layoffs (among other things going on in the tech industry) and this validates conceptions of this tech bubble being built on creative accounting, revealing hyper-growth hype to be nothing but lies. There is schadenfreude in calling out the emperor for having no clothes.
There's an adverse selection problem with today's public markets. If you're profitable, in a solid and sustainable business, you a.) usually don't need more cash b.) if you do need more cash, there are plenty of private investors that will give it to you, c.) don't want to disclose your profitability to attract competitors and d.) don't want to spend the multi-millions per year for SOX compliance. So the only reason you have for going public is to unload your shares in an unsustainable business before the rest of the world realizes it's unsustainable. Hence, that's what we get on the public markets.
There are definitely profitable tech companies out there which are still hiring, but they are largely private. Some may have $35B valuations and a few thousand employees, but don't find it worthwhile to go public.
At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine. Further, SOX makes this a lot more complicated.
If you give out stock (say, an employee stock ownership plan or options), you are already subject to SOX. https://www.bradley.com/insights/publications/2004/03/sarban... shows an older article about some of the other reasons you might be subject to SOX.
Further, if you give out options, your employees might expect to be able to sell those. So, once you normalize options, you have set yourself on the path to either acquisition or IPO. Once you take venture capital, they will want a way to sell their shares at the highest price, which means acquision or IPO. So, while you can point to ESRI or Basecamp or any number of private companies, they are in the minority.
If you can bootstrap a company (or rely on alternative funding sources to VC), and you can make it profitable enough to hire employees at market rate without the lure of options, and you can fend off any VC-backed competitors who can undercut you on cost and hire a larger team, then you're golden. However, there's more than an adverse selection problem going on here.
Amazon is also the apotheosis of the growth model tech companies build on. I was working in finance in the early 2010s, and it was then fashionable for analysts to point out that Amazon's classic profitability metrics were flashing red.
However, the Amazon model (and to a lesser extent the Uber model, etc.) was to continue penetration pricing as well as plowing every dime made over costs into growth. It made the company look overvalued but the share price was in retrospect justified.
Other than maybe 2 or 3 years, Amazon has been cash flow positive pretty much throughout its existence (and the negatives in those 3 years added up to less than a couple of millions).
That’s absolutely not true for these companies.
One of the most underrated aspects of Amazon is Bezos’s realization that he didn’t need profits to make a lot of money as long as his cash flow was positive. It gave him tremendous flexibility because he could spend a lot more than his competitors, and as an added bonus, it reduced his tax bill significantly.
Amazon was plowing money into physical assets like huge fulfillment centers (132 of them) and automated systems for them. Uber barely owns anything; they were just buying market share.
I think this was and still is a common misconception, and the interesting thing is that Bezos has talked for a long time about how they are not (and should not) be optimizing for profit, and that they are looking at free cash flow as their One Metric That Matters. Here's an old shareholder letter from 2004 where Bezos explains his reasoning:
I've been trying to build a mental model around this i.e., what options do companies have to utilize profit?
1. Distribute to shareholders -- dividends.
2. Distribute amongst employees -- salary increase, bonuses.
3. Add it to their pile of cash.
4. Invest in growing the business.
5. Something else!?
Perhaps a combination of all four?
I guess Apple does mostly #3 which is how they are now sitting on a huge pile of cash. Perhaps it's a signal that they don't need cash to grow their business or maybe they don't see how to grow either.
Whereas Amazon genuinely believe that investing in growth is the best return the cash from profit can earn. I guess it makes sense, e-commerce is still about 10% of retail in US alone. So there's a big room for growth.
There's really two options under the first item: 1a. dividends, 1b. stock buybacks.
Apple does all of these things. Recently their cash hoard has declined, while they continue to buy back stock, and increased their dividend. They also do acquisitions all the time, but since they usually buy technology and talent, most of those have a small price tag. The biggest exception since NeXT is probably Beats, which was $3 billion.
Apple has occasionally used their cash reserves to spur growth by cornering the market on new technologies. The two I can recall are the time they prepurchased almost the entire global supply NAND flash memory while launching the iPod Nano, and buying up almost every new copy of a certain CNC machine when they launched the "unibody" Macbooks.
Imagine you own the company, and the company has an ability to grow.
(1) Show profit: distribute it, put it into a bank, etc. You pay the tax on the profit; if you pay yourself a few million, this is taxed at 40-50%. Assume that your shares grow, too.
(2) Do not show profit: invest everything! Always be a wee bit in the red. Assuming your company actually grows from the investment, Your market share increases, your cash flow grows. Most likely your shares grow comfortably with that, too, at least in the long term. But you don't pay the tax on the profit. You pay the tax on the capital gains, but it's much lower. You don't pay yourself anything, because you can sell a small bit of shares to get these few millions you need.
Now, who in their right mind would show profit if they can show more growth instead?
Apple would be happy to do that, too, but they have no room to grow, it seems. Same with Google; though they invest a lot, they don't seem to find another seriously growing niche. Amazon can pull that off, though, and they gladly do. When Amazon becomes predictably profitable, it would mean they ran out of fruitful growth / investment ideas.
Indeed! I think another option is financialization through investment banks wherein the money is used in all sorts of investment vehicles such as forex trading, futures/options, bonds, hedge funds and whatnot. There's been a steady increase of such companies it seems.
Yeah, the key is the Amazon still _makes money_ on the services it provides, it just spends it all on some project. Contrast that with even Uber which has some very unhealthy indicators even in mature offerings. It is actually kind of amazing that Uber can't or doesn't make money even while taking a 20% cut of every ride sold. (I assume they must make money in some cities and not in others) That is a substantial margin for a middleman, especially one in a market with only one other real player.
Exactly. The difference between Amazon and Uber is immense. Amazon's core business has been comfortably profitable for over a decade now. They invest those profits to diversify their business. However, Uber's core business has never been profitable.
At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine.
Summary: exception proves the rule?
A lot of these companies are probably run by assholes, too. But just like being an asshole doesn't make you a Steve-Jobs-like-company-savior, being unprofitable doesn't make you Amazon. All it means is that you work for an asshole, and your options won't likely ever be worth anything.
"exception proves the rule" means "exception tests the rule" and calls for clarification of the rule. So what is the clarification that explains Amazon?
(It's that Amazon was always profitable at margin, and invested profits into real growth not bribing customers.)
I personally think that the only meaningful use of "exception proves the rule" is in its original meaning: spelling out a specific rule means that there exists a general opposite rule, i.e. "parking prohibited on Sundays" implies that parking is not prohibited on other days. Every other use of this phrase sounds to me bizarre and nonsencial, contradicting the basics of logic.
It's because the exception is 'exceptional' or low probability that the rarity of the exception proves the general trend that everyone is expecting. Otherwise it wouldn't be called an exception, correct?
"If there wasn't a rule, then you wouldn't call that an exception."
I believe you underestimate the constraints that come with VC money. VCs tend to expect a high ROI so that one good investment can make up for multiple bad ones. That, naturally, leads to a go big or go home attitude.
A business model that yields a reliable 10% profit margin, but with a low overall volume and low growth is not suitable for any VC-backed company. So that's a space where bootstrappers only have to compete against other bootstrappers.
> At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine.
Well, one of the reasons we throw around the "fake it until you make it" term is that some companies don't "make it", and if they're big enough it's a big deal (e.g. Theranos). That an extremely changed market causes a lot of these companies to start having problems sooner isn't really a surprise.
honest question, why don't the funding partners agree to buy-back shares on a schedule while the company is private? it would be an effective mechanic for providing deferred compensation while also providing employees liquidity and methods for VCs, PEs, and other funding partners to increase holdings.
Can't Amazon simply be the one major exception that proves the rule? What other tech company reached profitability after years of not, post-IPO? Using an industry giant as an example seems to be suggesting that such a case can be replicated, let alone replicated multiple times.
That's the wrong way to look at it. Amazon shows that it is important to differentiate between business that can be profitable but are reinvesting their profits to achieve long-term goals and business where the core business is simply not profitable.
Amazon's bottom line might not have been that great, but most of the difference from the top-line regularly consisted of dumping money into expenditures in areas that were pushing huge revenue growth.
It seems like people are suggesting analysts are dumb and didn't really dig beyond a basic top-line vs bottom-line glance when discussing Amazon's business model.
> regularly consisted of dumping money into expenditures in areas that were pushing huge revenue growth
Why do you say this? I find it unlikely that building out 2-day delivery was a major short-term driver of revenue. It was developing their moat. Similarly, building out a fulfillment service that directly cannibalized existing business was not a short-term revenue generator.
Virtually any business can eventually be profitable by operating at a loss until their competitors go out of business. Once the competition is gone profit is easy.
This is the theory that airline companies have followed since forever. Cliff notes version, thanks to chapter 11 bankruptcies, the competitors never will go out of business.
For another counter-example, take any business with low barriers to entry. Sure, one set of competitors go out of business, but you have new ones. Retail outlets tend to be a good example. Top retail brands change regularly as new ones come in and push old ones out. This has been going for as far back as I have looked. Therefore any retail brand should operate as if it will happen in the future as well.
That theory implies a significant barrier to entry for new competitors.
In some markets that is justified. Those where significant infrastructure is needed to compete. For example Amazon's network of warehouses and datacentres would be hard for a competitor to replicate at scale.
For other markets, that's not justified. For example Uber, a small scale competitor can operate with some taxi's and an app. They won't have all of Uber's capabilities for sure, but they can compete in a locality.
That's wrong. You are assuming a barrier to entry for a new competitor that is higher than the future profits for entering the market. Sometimes that exists (Google search?), but sometimes it doesn't.
As a thought exercise, imagine WeWork drove every office rental company out of business in the United States by running at a loss. To make a profit, they would have to raise their rents. When they do, any company can re-enter the market by buying or building office space to compete with them.
I don't have any dog in this fight, but listing Netflix is not correct. They went public in 2002, and were profitable in 2003, so not in the same camp as Amazon and Twitter at all.
(If you want to be pedantic, they were unprofitable for "year", not "years" after IPO)
Netflix is an interesting example. Every time they've approached profitability the market shifted and most of their investment was for naught. Now they look profitable because they can play with depreciation to book a profit. Cash flow is still negative and it remains to be seen if it every becomes positive.
In their 20 years they've managed to burn 10s of billions of dollars and they're still burning cash. Best case scenario they are still a decade away from generating more cash than they've consumed.
There’s a parsing ambiguity I think. Is it “(reached profitability after years of not) && (reached profitability post-IPO)” or “reached profitability after (years of not, all of which were post-IPO)?
Ebiester’s initial comment on becoming profitable after IPOing with losses allows for either as a follow-up. We seem to have taken opposite readings without ill intent on either side.
> At the same time, Amazon was not cash flow positive when it IPOed and it figured out its profitibility just fine.
That’s not a fair statement. Amazon is an online retailer but only achieved profitability due to AWS. I don’t think their retail business is even profitable now if you slice it out.
Almost none of these private companies are worth $35bn. I saw this in raise after raise...same VC funds that invested in previous rounds and needed to mark their book higher so they could get juicy bonuses. It is amazing anyone buys this nonsense.
The reason you need public markets is because if you are actually worth $35bn, you can't get liquidity anywhere else...$35bn is an oddly specific number but it is far larger than most people in tech understand (just for scale, Koch Industries is probably the most valuable private company in the US...it is valued at what ~$75bn, Mars is another one...that is is around ~$50bn...if you have a tech company at $35bn, some VC somewhere has just lost a fuck ton of money).
The reason a private company that is "worth $35bn" doesn't come to market is obvious...it isn't worth $35bn.
Amazon, Google, Microsoft, Salesforce, Oracle...need I go on?
If I navigated a business correctly and maintained control of my company through bootstrapping and not otherwise taking VC money with the good faith intent of a liquidity event (though there have been a few that did VC funding and then told their investors to piss off and stayed private, YMMV), why would I ever want to take a company public? If I'm more interested in running a business in the direction I see fit and don't need the liquidity or the payout then that seems like a pretty big hurdle.
Understandably though maybe you need the liquidity public markets can provide for a giant undertaking, thinking of Tesla here, then look at all the hoops Elon has had to jump through to maintain some semblance of his control.
My point is, I'm sure there are private tech companies worth some multitude of billions but the powers that run them value their control and don't need the liquidity of the public market and so taking the company public would just complicate their interests.
A super quick search shows me there are at least 26 private tech companies valued at greater than 1bn not sure how many of those don't ever intend to go public but I'd guess a few.
That's a good question, it's why, for example, Bloomberg Media is still private.
The only two reasons I can think of are:
It gives your employees a cash out plan if you used RSUs/Options/Ownership in the company as an incentive for hiring.
Some businesses benefit from going public by it adding credibility (and open financial books). Some very large enterprises (Fortune 100, major governments) tend to look more preferably to publicly traded companies so it makes sense for the business to go public to go after these customers.
There are also ways to defend against "public involvement" in publicly traded companies that have been around forever. Look at Facebook and the NYT's stock class structure, for example.
It's also finally easier to get liquidity when you aren't desperate for it, and the public markets position you for it in a good way.
We are accountable to the people, we are a meritocracy that makes great decisions...but we won't let you vote.
When people start talking a lot about control (it is kind of a tech bro meme at this point), you can be sure that they are the kind of person who shouldn't be in control.
And btw, the cost of screwing minority shareholders has been basically zero in the US (you usually only see this kind of emerging markets) but it never stays zero. And typically, these companies will trade at a discount.
In reality, you have to give up control. When you take outside money, which you will have to do, then you give up control. I have no idea why people view this as particularly problematic (again, this is the CCP approach)...if you don't like oversight or accountability, don't start a company. Simple.
(Tech CEOs seem to write about this endlessly...you will notice that there isn't a particularly consistent position. They like juicing the stock market so they can bump their pay package but they don't like the oversight. These two things are connected. The reason public markets can produce bad outcomes is because they become linked to CEO pay...in tech, there is a CEO celebrity culture which always sees people side with executives...but most of these people are incompetent...Facebook's executives seem to have legendary status, despite them managing to literally destroy a monopoly...so when you see someone saying they want to retain "control", I would ask why. It usually indicates incompetence).
I think the ultimate answer to "not needing money" is a direct listing ala spotify, and most companies with significant enough employment bases receiving stock options will be forced public by the number of shareholders eventually.
Though we may see more companies choosing RSUs or equivalent to provide cash compensation in proportion to stock value increases, instead of increasing their shareholder base, which might be an interesting development.
"Here’s to a new generation of entrepreneurs who prioritize building sustainable businesses," says the guy whose job title is apparently "Flying cars salesman" at a company that has mostly produced CG renderings of their future product.
To me this just illustrates the excess some companies have. Frankly I wonder what some of these companies are doing to even require these staffing numbers do VCs like headcount or something?
Founders build better credentials (resume and reputation) if they run a bigger company.
Managers build better credentials if they manage more people.
Developers build better credentials (at least according to the job market) by using complex tools like Kubernetes even when the problem doesn’t justify it.
Yes. Headcount is a metric just like anything else and is often included in decks as an example of growth.
Most of the jobs are sales people. When trying to scale fast, most VCs expect most of the money to be spent on sales people in a b2b product that has found product market fit.
Sales isn't my thing/department, I'd probably be amazed at how big the sales teams are at some of these places. Is that part of tech a kinda of a turnstile as it is?
I woudln't complain too much. The strength of an economy is determined more by its amperage (flow) than voltage (total dollars). Also, it redistributes wealth to the less well off; obviously, with the potential to earn a higher payout.
>Also, it redistributes wealth to the less well off; obviously, with the potential to earn a higher payout.
If the net effect is to outcompete small businesses with unprofitable schemes it seems like what we're actually doing is shrinking the overall pie and just redistributing the share of what's left.
Remember interviewing a guy who worked for Uber( non technical side of things). If that's the level of candidates they hire,I'm afraid they need 5 people just to change a lightbulb.
The issue is that when you hire someone good and realize it took 30+ interviews you realize it will take about 6 months to fill a full office. At that point, the 'minimum requirements' will fall off a cliff.
Unfortunately not compatible with American excess and someone giving you a nice chunk of cash to "invest". If you don't buy a new fancy office and fill it with 30% people who do work and 70% of people who make it harder to get work done, you're "not doing startups right". Yeah, I'm bitter.
I think this is an underappreciated aspect of rapid growth. Hiring competent people retards growth. If you grow organically, you can afford to spend the time hiring and keeping competent people. If you need to field 200-people office next month, you'll have to drop the bar.
Assume that like most things, there's decreasing marginal return in terms of growth for each individual employee. If your goal is grow as much as possible to pump the VC valuation, it makes sense to hire more people to get stuff done. Probably not sustainable. Probably dips into the negative frequently.
Many of these businesses are also predictably linked to the broader economy - ticketing at Eventbrite, reservations/shopping for Yelp. It would be prudent to keep a cash stockpile for the inevitable cyclic downturns.
Full disclosure, I worked at Eventbrite two years ago.
Until recently, Yelp had a giant stockpile of cash, but an activist investor successfully launched a campaign to get Yelp management to return much of that cash via buybacks [1]. By the end of 2018, Yelp had a cash balance of ~$837 million and proceeded to return almost $500 million in cash to stockholders via buybacks in 2019 [2].
Hoarding cash may seem like a good idea in hindsight, but public market investors will often raise a huge stink if you try.
GOOG & APPL market capital is basically 1000x larger.
Activist investor shows up with $100M fund that they can throw behind Yelp giving them ~10% of the company, they'll have a major say and in some other public companies they might hold the largest share stake depending on the shareholder splits.
The same investor could show up with $100M on a $1T company, have 0.01% and nobody even knows who they are and they can't really push the company to do anything.
There are not that many funds that can take major voicing stakes in GOOG or APPL because of the capital it would require.
I am surprised at the poor economics behind Eventbrite. In 2019, they lost a cool $26 million with a -21% margin. What are their major unit cost items? At the risk of sounding ignorant, isn't it just a website?
>At the risk of sounding ignorant, isn't it just a website?
A website with a gigantic sales and account management apparatus behind it. The costs are centered around acquiring and retaining users/customers, including a big customer support footprint.
Yeah, but there is physical and people infrastructure behind many websites. Uber/DoorDash/Lyft have drivers and cars. My organization has large parking garages. GoPro makes hardware. Zoom has horrendous bandwidth costs and requires a ton of servers.
They all have some element of their business which doesn't meaningfully scale exponentially.
What does EventBrite have that would be like that?
- Sales staff to get event organizers to use their platform and help with setup.
- Customer support to deal with issues.
- Maybe loss and employees to deal with fraud of some kind (since payments are involved).
“Why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?”
First off, the SEC “allows” companies to go public in the US. Any company can do so, assuming you meet the regulatory requirements. Being profitable is not one of them. Being transparent enough on their business and their outlook _is_ one of them.
Now, when you go public, you take on a bunch of additional constraints - like having to report regularly to shareholders, that private companies don’t have to do. So now, the question should be “why did investors invest their own cash into unprofitable companies IPO’ing?”
The answer partially lies into how profitable companies typically do not IPO, as they do not need capital. Want to be a part of IKEA? Not a public company? The Mars Group, who sell most candies worldwide? They are also doing great. LEGO? Nope.
Okay, so you have investors - pensions funds, private individuals and many others - who want to invest, and gain returns on their money. So why do they invest in no -profitable companies? Because they think it’s an investment that they are comfortable with. And they usually believe that short- or long-term, their stock value will go up, thanks to the performance of the company.
And once again the tech workforce wakes up in the gutter wearing clown makeup and wondering what happened.
In a functioning economic regulatory environment the whole "Spend big money upfront to Capture & Control $MARKET" game would have been illegal from the get go. We would have had a much greater variety of companies and a much greater variety of size of companies. But, hey. Here we are. In the gutter. Covered in slapstick.
Who's to say that wouldn't have been a better world, technologically speaking? Who's to say Intel's market dominance was a good thing? I thought it was a truism in tech that monocultures are a bad thing?
For better or worse economies of scale with increasingly large upfront costs and low unit cost are what sustainably drive dominance and thus lead to a "monoculture" as a better strategy until they squander it sufficiently to be overtaken.
The truism is a bit off as well given the difference between "defacto standard" and "monoculture".
Of course not all monocultures are equal as well - commerical monopoly vertical intergrated, horizontal like ARM style designs made by others, open standards used by all, etc.
I think the more pertinent focus is to ask: was Intel created naturally or artificially? To that, we must look at its effects on human civilization, including the compounding network effects on the Valley. I see its merits as natural and therefore, per Aristotle, necessary. So I can't consider a parallel universe where Intel is not a wealth creation signal which causes the venture capital industry to grow to the point where now every cosmopolis has some sort of VC Fund.
It's easy to get sucked into counterfactuals, which are fun hypotheticals but sort of useless in debate. Yet one has to consider- if Intel was never created, wouldn't someone else simply have invented the microprocessor technologies they created? Were there not competitors? It seems inevitable.
I remember from a Nova special that TI was actually right there with the planar lithographic technique. And yes, I am also of the position that their R&D was really more like "intrinsic value exploration" - microprocessors being an inevitable necessity for advancing the state of the art of human civilization, so there is a first mover advantage. But this is where "risk-taking" is so underrated, even in a "swingin' dick" American culture, there aren't many of those types in EE departments and Bell Labs!
So, while I would argue it was practical necessity to mass fabricate central signal processing units, gunning for that opportunity would be reserved for a self-selected population pool, which Nature has determined to be those already opting to be mavericks when launching Shockley Semiconductor.
Companies such as Uber tend to be biased towards growth rather than profitability, even at the time of their IPOs. Uber's layoffs are in part due to the coronavirus situation, but perhaps also due to their transitioning towards a profit bias.
It may seem counter-intuitive to invest in companies that are not biased towards profitability, as they tend to be risky and volatile, but portfolio management theory predicts that including some volatile assets in a portfolio makes it perform better. See e.g. https://www.investopedia.com/terms/c/capm.asp.
> When did losing money become acceptable and the new normal for publicly traded companies?
It's when big investors decided they'd better keep a selected few companies on life support while they kill fair competition with their suicidal price dumping, and then milk the monopolies they inevitably become.
They don't lay off because they're on their deathbeds, they do so because of automation and optimization. No need for that many mechanical turks.
Op of the article assumes that you have to be cash flow positive to operate or even IPO. This is false on so many levels. Just look around so many companies exist today which were not cash flow positive at the IPO or even after IPO...Amazon, Tesla to name a few.
Since when making points with dirty data is actually relevant ?
We don't even know if the data is representative of anything, there have been millions of layoff, and this db contains 60k of them, and this guy even decided to consider 30 % of it
The unit economics of some of these companies may have worked during the good times, but these are unique times. Uber and Lyft are notable examples that barely made a profit even during the good times. Yelp was already in decline long before COVID-19 and having mass business closures didn't help. These layoffs exposed the fact that many companies are like most Americans who live check to check.
There's a ton of speculative cash-flow negative rental properties. Probably much more money is invested in this space than VC companies. I wonder how these landlords will fare in this and which will cause a bigger long-term problem.
Usually that means rents aren't enough to cover the mortgages.
Example: Buy a house for $2 million. Mortgage, taxes, upkeep, insurance, pushing toward 100K a year. But there is no chance at all you are going to be able to get $8K/month rent to cover that.
Long term rental property owners, on the other hand, are doing very very well even if they don't sell.
I think it's more of a story about marketing, consumer habits, driver churn (for Uber and Lyft), and competition. Breaking into an industry is expensive.
One thing that is obvious in this observation is those high growth companies who have an all time high burn rate, headcount, little revenue and once the pandemic hit the tech industry, those found in that category are hardest hit and are operating in an unsustainable fashion.
> ...why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?
Huh?
In a market nobody's "allowing" things or not, people simply choose to purchase/invest or not. Losing money has always been acceptable in every business ever because businesses require investment and investment takes time (months, years, decades) to pay off.
Why shouldn't you allow an unprofitable company to IPO? He's arguing that I should be prevented from buying shares in Uber or Yelp no matter how badly I want to? That's incredibly presumptuous of him to think he knows better how I ought to invest my money than I do.
> Here’s to a new generation of entrepreneurs who prioritize building sustainable businesses.
Nobody would be investing money in these companies if they didn't think there was a good chance of them becoming sustainable long term. Obviously, the board of Uber is doing their best to make it a sustainable business. (You may disagree that it's sustainable, but that's business -- you can disagree about everything.)
Essentially, the author appears to be anti-investment, which is basically anti-economic growth broadly.
It is a well established phenomenon of our time that the financial system has deviated very far from real measurements of value, like GDP.
> Nobody would be investing money in these companies if they didn't think there was a good chance of them becoming sustainable long term.
This is an idealistic view of the stock market.
People invest in companies because they hope to make a return on those investments. They believe that the stock will do well, not necessarily that the company will become sustainable long term.
It is believed that those two things should be linked, but this article and the commenter are making the assertion that that fundamental link (between real value and stock market value) has been broken.
That stock price is no longer indicative of a company's long term sustainability.
You've constructed a straw man regarding policy "why shouldn't you allow an unprofitable company" and are arguing against no one.
We aren't talking about policy or regulation at this point, we are simply laying out the context of reality. We are simply getting our facts straight.
The fact in discussion is simple: is the stock market still linked to economic sustainability? Or has it's fundamental vision and purpose been distorted over the past few decades?
> It is a well established phenomenon of our time that the financial system has deviated very far from real measurements of value, like GDP.
That sentence doesn't even make sense. How are you defining "financial system"? What makes GDP more "real" than other metrics? How are you defining a deviation between the two?
> This is an idealistic view of the stock market.
Of course it's not, it's literally the definition of how stocks are valued. Of course different people come to different conclusions about a stock's value, and supply and demand sets the final price. If you want to prove that day traders are massively distorting prices over the long term, the burden of proof is on you, friend.
> That stock price is no longer indicative of a company's long term sustainability.
You're the one constructing a straw man, a stock price isn't supposed to indicate sustainability, it indicates the summed probabilities of net present value of future profits.
What has the stock market got to do with sustainability? And why do you think the stock market had some "fundamental vision and purpose" of sustainability?
The whole premise of a vibrant economy is that investors take risks, that companies try for success, and many (most) fail along the way. But that the successes more than make up for it in the end. If every company had to prove (to who?) that it was perfectly "sustainable" economic improvement would slow to a crawl, since business it about risks.
> You've constructed a straw man regarding policy "why shouldn't you allow an unprofitable company" and are arguing against no one.
The article explicitly said "we did we allow". I'm not arguing against a strawman. I'm arguing against an actual sentence from the article.
There are all these people who claim (without any evidence whatsoever) that stocks are untethered to reality, that it's all a pyramid scheme, that valuations are obviously wrong. Well, go ahead, put your money where your mouth is and short it all. See if you know better than banks with entire teams of financial researchers and analysts.
Well, zero interest rates from federal reserve definitely allow such businesses to flourish. Where you try to corner a market with infinite money for a monopolistic position.
Startups don't get 0% loans from the federal reserve. Banks "do", but interest rates for unsecured, high-risk startups is well above 0%.
Startups get investments from investors, but investors have an opportunity cost. A lower bound on opportunity cost is market index growth, around 7% per year.
Interesting to see some of the comments from people who are so buried in the bubble that they can't see how bad these companies often are.
I feel like this insanity started in SV and has grown out to the other tech hubs over the past 10-12 years. Whatever the case it's made me glad I never managed to move out to SV.
I've tried to navigate my career around not ending up at this kind of company. The common things IMO:
- Not profitable
- Keep getting more rounds
- Likely B2C
- Likely involved web marketing, ads, etc..
- Likely involvement in "social".
They're all a gamble.. if you're young/single and have little to risk and you go to one of these and it hits you might win big.. but they've never been safe/responsible companies.
I did work for 1 year at one place that I quickly realized was super messed up. It was amazing to me when they IPOed with accelerating losses.
It wasn't always this way.. you used to have to make solid product with a business model that clearly showed growth AND profitability.
> It wasn't always this way.. you used to have to make solid product with a business model that clearly showed growth AND profitability.
Its because there isn't anywhere to put cash.
The market tolerance has expanded because the market was desperate for things to invest in.
So whether it is non-voting shares, profitless companies and bigger issuance sizes, it is all a symptom where there is no predilection for a cure.
The government's growth targets cannot be met without giving money to the credit worthy. Money is free for them and they have make more from that money. It doesn't "trickle down" very far, but it does still lack a place to go where a return beats inflation (the speed at which the government gives other organizations cheap money).
And yet, these investors still aren't putting a lot of money in companies working on the stereotypical moonshot "big problem" ideas that Silicon Valley is derided for not caring about- curing cancer, fixing climate change, fighting poverty, inventing fusion power, etc.
As an engineer who loves the moonshots it breaks my heart. The core problem however is that from a dispassionate investor viewpoint, the uber for Y companies are more understandable and are perceived to deliver larger results more quickly in aggregate. Even accounting for these public failures. And since the dispassionate investor really only cares about return (regardless of what most say) they don’t invest in long term, capital intensive, unproven business. There seems to be an opportunity for entrepreneurs who can market the moonshots better to investors and hire the people to execute on them. But those two skills are very rarely in the same person.
Actually there are a lot of investments in pharma, including oncology.
The Vally put a lot of money to work on green tech / climate change back in the 2009-2012 time frame. Not much to show for it; investment has definitely slowed.
social issues: I have to agree.
Lots of B2C market-destroying investments in SF, less so down here in the valley. Sadly I don't see the flow of them stopping -- they're mostly pretty low tech and so easy for a non-tech investor to understand (or rather think they understand).
Turns out the 50+ years we'd need for fusion is a bit too long a position for a system that demands quarterly growth for growing retirement accounts, whodathunk. They take 50 years to mature anyway, what's the point?
Granted, you probably want a bit less than <the time you expect to cash out the account> to figure out if your bets were correct or not and you actually have a retirement account, so it sorta makes sense, but we've gone off the deep end in the other direction, so it doesn't.
None of the things you list can be 'cured' by even a very well-funded start-up, not under any circumstances. Not even remotely close.
Venture capitalists attempt to earn a return for their investors. How do you plan to do that by ... fighting poverty? Are you going to raise $4 or $5 trillion to spend on poverty over the next 10 years? Because that's what it'll take - at a minimum, and that's just for the US. That's a task for government, not a start-up with $4 million in capital. It's an almost hilariously absurd premise you're floating. Poverty isn't a moonshot problem to be tackled or solved, we already know how to solve it. What's lacking are the necessary, gigantic resources that can only be funded by tax revenue (epic income tax increases).
Curing cancer? There is no cure for cancer. There never will be. What you actually mean is 4,972 cures for different types of cancer that require different approaches. Venture capitalists have been massively funding that effort for many decades. There will never be a cancer cure moonshot because it's impossible.
Fixing climate change? Yeah one of those venture capital firms with a trillion dollars should really solve that one. VC firms have in fact been making a dent in that for decades by funding the progress of renewable energy. You don't solve climate change with a moonshot, you make slow, incremental progress. There are no alternatives, no other scenario is possible or will occur. The notion of a moonshot for climate change is a pipe dream.
Inventing fusion power? You're lucky if you move the needle a fraction of an inch with hundreds of millions of dollars. The only entities that can make a meaningful difference in fusion are governments and people like Bill Gates that can throw a billion dollars at a problem and not sweat the losses.
I'm not the first to make that critique, I'm merely repeating it. Even Peter Thiel said a variant of it: "We wanted flying cars, instead we got 140 characters."
Everything you're saying makes sense. It's true that venture capital structurally cannot coexist with investing in these longshot/moonshot "big problems". So maybe the problem is that tech has become too reliant, even dominated, by VC funding? Perhaps more public investment in R&D and the sciences is in order? There should be alternative funding mechanisms that don't rely on the short-term focused, pour money on ten and hope that one survives, scattershot approach of VCs?
The main point is that it is truly a shame that even though we live in an age of dumb money thanks to the Fed and ZIRP, and a lack of places to put that money into, the natural response is to invest in yet another food delivery/ridesharing app, rather than the stereotypical big problems.
Perhaps the problem is that VCs have too much money to begin with?
I really can't understand how some people see that but don't think capitalism is broken. I really hope we can fix it, because the alternative is worse, but I'm becoming more pessimistic as time goes on...
Capitalism might be broken, but I don't see this as evidence. This might be evidence that some investors have more money than sense, which has always been true and will always be true.
If you think a company or asset is overvalued, don't buy it.
I don't understand why people seem to take personal offense to bad business models. If you think it's dumb that's fine. Every investor has a thesis and jumping on the "negative cash flow startups are dumb" bandwagon is within your rights (and might even pay out). But I don't see the point in getting worked up about it.
The funny thing is personal offense to "bas business models" applies in the opposite direction politically as well. There are some who are outright infurated by high productivity-high wage -low turnover arrangements in "lowly" jobs by their rivals when they should take an attitude of never interupt your rival while they are in the middle of making a mistake. The best I can guess is that strategic doctrine becomes dogma as an end in itself.
If anything shouldn't they be glad about idiots with more money than sense investing poorly like that? Unlike profitable endeavours it reduces societal income inequality by running at a loss to the lesser paid employees. Eventually the upper class twit will level a niche by their failure if they don't learn.
Obviously it would be better if it was spent on something unprofitable and a source of productive societal good but the marginal upside is no accidental "charity displacement" unintended consequences akin to famine relief collapsing farming.
Giving some companies too much money isn't just handing them a gun that they might shoot themselves in the foot with; it's giving them a rocket launcher armed with a cluster bomb.
The Doordash externality that you posted is not really a problem for anyone except Doordash. Both the restaurant and the consumer benefit from the arbitrage.
Airbnb is profitable so I'm not sure why you included it. If you don't like Airbnb that's fine but it has nothing to do with bad business models. Airbnb has proven to be a pretty good model. Even better it's challenged the stranglehold hotels have had on some local politics.
You posted about Uber which is also a pretty good business model so not really relevant here. Pollution is a problem that needs to be solved but very little of that blame lies with Uber. A carbon tax could fix that instantly. We cannot rely on investors to save the environment.
But the restaurant experiences other problems from DD, as per the article: "Doordash was causing him real problems. The most common was, Doordash delivery drivers didn't have the proper bags for pizza so it inevitably would arrive cold. It led to his employees wasting time responding to complaints and even some bad Yelp reviews."
Some of the comments in the Doordash comments goes into the externalities caused by predatory pricing,
Rents have increased in many housing markets due to Airbnb's presence. The fact that a dip in their business has led to more affordable rents is rather telling.
To say Uber has a "pretty good business model" belies their huge operating expenses leading to both mass layoffs post- and pre-pandemic, but that's not my point. They're still contributing to an externality by driving up traffic and car usage. We can't rely on investors to fix the environment, it is true, but we can doggone blame them for wrecking it.
These are just some random examples but are far from the only effects generated by reckless companies with a slash-and-burn-to-hyper-growth mentality.
Some bad Yelp reviews and wasting the time of a minimum wage employee? Not exactly the apocalypse or "a cluster bomb" or whatever you called it. Yes businesses have externalities. No, this cute story does not make me question silicon valley. Spending a lot on customer acquisition costs is the norm and on net works out very well for SV.
Again, Airbnb is not a bad business model, so we're now having two different discussions. This discussion is supposed to be about why people don't like cash flow-negative businesses. Airbnb is a great business model (cash flow positive with solid growth). I see it has some externalities that you don't like, but literally every business has externalities. It's fine that you don't like them but that's not an indictment of capitalism or SV. It's just a business you don't like. Are you equally upset with most of the Fortune 500 that probably have worse externalities than driving up prices in some trendy neighborhoods? If so, that's fine, but nothing to do with our discussion.
Uber is a fine business though. The issues with uber aren't it's cash flow problems. They could very quickly become cash flow positive if they wanted to (they would just have to change their growth trajectory).
If you're worried about carbon emissions, that's fine, we all should be. But you should be furious at basically all businesses. This is nothing special to do with Silicon Valley. You should focus 100x this rage on the Permian Basin. Are you?
Perhaps one could also say their attempts to cheat their staff out of tips is also an externality in the sense that it further devalues the labor power of gig workers, but I suspect I'm just overusing that word by now.
> Not exactly the apocalypse or "a cluster bomb" or whatever you called it.
It's less of an apocalypse, than collateral damage. Perhaps during the first dot com bubble the majority of the losers- Enron excepted- kept the damage within the tech sector. Nowadays with software having eaten the world, the capacity to cause problems for the rest of the world is much greater.
> I see it has some externalities that you don't like, but literally every business has externalities. It's fine that you don't like them but that's not an indictment of capitalism or SV. It's just a business you don't like. Are you equally upset with most of the Fortune 500 that probably have worse externalities than driving up prices in some trendy neighborhoods?
So this is the crux of if tall, which could provide fertile ground for a more extended discussion. There's something to be said that many of these grow-at-all-costs VC-cash infused unicorns have modus operandi that includes cutting corners and aggressive business tactics. Stories about early-stage Uber telling its drivers to drip off mustaches from competing Lyft vehicles come to mind, presaging the much more excessive and extensive abuses that later resulted.
The question is, would this sort of reckless behavior have manifested if the overall pace that these companies were operating under were not as aggressive and fast? Does the the medium of the money eventually dictate the behavior of the company? It would seem like in some of these examples, the promise of big dumb money, coupled with incentives to pursue cash flow-negative business models, coupled with the problems resulting from having to make good on the big dumb money investments while digging themselves in deeper with said half-baked business models, leads to them engaging in even more risky and externality-creating behavior. And generally promotes a toxic business culture that excuses bad behavior.
If they had less money to play around with and lower expectations and thus less incentive to desperately flail around trying to justify their crazy valuations, could this behavior be preempted, or at least lessened?
> Airbnb is a great business model (cash flow positive with solid growth).
> You should focus 100x this rage on the Permian Basin. Are you?
You don't need to be livid with rage to mention someone is contributing to a larger problem, however proportionally small. You don't even need to mention climate change as a reason to blame ridesharing for driving up traffic; the increase in traffic is inconvenience enough, let alone its influence on public policy wrt urban planning, decrease in investment for transit, etc.
> They could very quickly become cash flow positive if they wanted to (they would just have to change their growth trajectory).
>The bad Yelp reviews is the tip of the iceberg, as restaurants are being squeezed out by the extinguishing embrace of food delivery apps and their fees. (This was covered in some of the links you've elided) The point is that the power of some tech companies backed by big money can lead to destructive effects on other industries. Ridesharing has also been criticized for more than their environmental impact, including points that I've mentioned.
Ok, so your complaint is that you don't like technology. That's fine but again nothing to do with cash flow. A cash flow positive business can still be an abusive food deliverer.
I'm not trying to defend startups. I'm trying to point out that cash flow negativeness is not the problem.
>Point is that the road to an unending stream of ethical violations and scandal can sometimes be seen by the earliest of underhanded cheating. That behavior is indeed hilarious in that it's almost cartoonishly evil and low, like a schoolyard bully. Can't find an anecdote yet, but here's one early report of Uber's growth-at-all-costs strategy incorporating dirty tricks.
I'm supposed to be mad that Uber is trying to hire its competitor's employees? I don't get it. That's not evil, it's just a pretty good idea as long as they are paying their cab fare. Evil would be thinking that once you hire one of these drivers for $5 an hour or whatever that they can't take a better deal with a competitor.
>Fire departments are a non sequitur.
Not at all. It's an example of one of a failure of capitalism. But it existed long before Silicon Valley. Cutthroat competition is both old and good. It seems like you're trying to say it's new (simply factually wrong) and bad (not really supported by the evidence). Competition gets us new technology, good prices, good service, etc. There is a very close correlation between high prices and bad service and monopolistic behavior.
>This excuses poor behavior by suggesting it is fine when larger bad actors exist, which is a fine attitude for you to have, but others may disagree. That said, it's also possible to examine the current VC-boosted culture within tech- or tech startups- itself; are there more ethically questionable startups with flimsier, even scammy business models, than in the past? Other comments have argued that this is a progression on a trend, and not how things have always been. (Though one would think the dot-com bubble was also a time of similar widespread fraud.)
Not at all. I'm not excusing anyone for anything. I am saying that your complaint is with all businesses that harm the environment or do scammy things. You don't have a particular complaint against cashflow negative businesses. I may be having trouble explaining this. Here's an analogy:
All baseball players use steriods. This has destroyed baseball. Some newer players also chew bubble gum. This has nothing to do with steriods or baseball frankly. People are out here with signs saying "Bumblegum chewers ruined baseball".
They're missing the point. Bubble gum didn't ruin baseball. Steroids did. Even if some juicers also chew gum, while true, it's irrelevant.
Cash flow negative businesses aren't the problem. Companies that ruin the environment are the problem.
>Even if the tangible economic impact of modern Silicon Valley and dumb money is negligible in the grand scheme of things (which is a debatable point), it's still possible for those working in tech to critique the business culture, which does change and isn't a static thing. The '80s were remembered as a particularly greedy and excessive time on Wall Street; certainly industry practices can change over time and the shared cultures of those businesses can change for the worse, to the dissatisfaction of those who disagree with it.
You might misunderstand me if you think I'm saying you shouldn't critique your own industry and culture. You are morally required to critique your own industry and culture IMO. But the critiques have to be meaningful. "Uber rapes people and should be punished" is a meaningful critique, based on facts, morality, etc. "Investors and managers tried a certain business model that lost revenue in the beginning to acquire customers" seems like a really bizarre thing to be upset about. No one is really getting fooled. The investors are smart enough to know what they're getting into. Especially investing in tech, especially in SV, especially in 2020. Most new businesses of any kind anywhere have a high customer acquisition cost and almost no businesses of any size are profitable in the first few years. This is not new or particular to SV.
>That's fine as it is your opinion, but that is a subjective judgment and seemingly based on limited data.
I love data. By all means, do you have some data to show that DD is distorting the food delivery market in a way that hurts consumers?
>Then's plenty of coverage about other bad actors, tech is just a highly visible target.
I don't see much. There should be headlines every day about how much oil Exxon and Shell have pumped that day and how much damage that will do to the environment. Why aren't there? Honestly these stories should be every hour of every day. We're watching the world be literally destroyed before our eyes and we're arguing about pizza arbitrage.
>The question is, what is that long term endgame? Waiting for Google to both invent a viable self-driving car AND push through the relevant amount of lobbying and marketing to engender the legal and social acceptance of widespread adoption of autonomous vehicles? Til then, it just looks like they're burning through a lot of money trying to grow for the sake of growth. And making good on their valuation is still a technological and societal quantum leap away.
So don't buy their stock, as I haven't. I don't see why it's a morality play to not buy into someone's business model. I'm pretty sure 99% of people including me don't own Uber stock. It's not a big deal if you want to join our ranks. I'm just saying its silly (to me) to be mad at Uber for engaging in exactly the strategy they told their investors they would engage in.
> I'm trying to point out that cash flow negativeness is not the problem.
Cash flow negativeness in of itself may not be a sign of an bad company- see Amazon- but it does seem like it is present in many unsustainable business models, and those are companies that, at least in this tech cycle, tend to engage more vigorously in actions that result in side effects considered harmful.
> I am saying that your complaint is with all businesses that harm the environment or do scammy things.
That's not my complaint. My main point is that the influx of big dumb money coupled with unrealistic evaluations and this race-to-the-bottom, winner-take-all approach to startups is creating a toxic business environment. Moral hazards and externalities abound. Startups seek hyper-growth and burn themselves and their workforces out in the process. Consumers get exploited for their data, get lured into dark patterns, at times get offered shady legal gray area products from fintech startups. Good products worsen and die out as companies grow desperate trying to have it all, rather than focus on their core competencies. It all just seems unnecessary and gratuitous.
> I love data. By all means, do you have some data to show that DD is distorting the food delivery market in a way that hurts consumers?
> Cash flow negative businesses aren't the problem. Companies that ruin the environment are the problem.
How many cash flow negative tech businesses, Amazon aside, aren't the VC-propped up tech startups burning through capital that we're talking about? Actual case studies would be helpful here.
> No one is really getting fooled. The investors are smart enough to know what they're getting into. Especially investing in tech, especially in SV, especially in 2020.
Ask Softbank, or the Theranos investors. Ask everyone trading in CDOs in 2008. Everyone in a bubble looks smart, until it pops.
None of the things I'm saying are necessarily more critical of VCs than the words of say DHH or JWZ, or more radical than say the writings of Jaron Lanier. In fact, it would seem that on HN there is a growing backlash towards the excesses of these companies.
> Most new businesses of any kind anywhere have a high customer acquisition cost and almost no businesses of any size are profitable in the first few years. This is not new or particular to SV.
> There should be headlines every day about how much oil Exxon and Shell have pumped that day and how much damage that will do to the environment. Why aren't there?
The Exxon Valdez oil spill took place nearly 30 years ago. Deepwater Horizon took place ten years ago. There are regularly new reports about climate change, coupled with information about advances in renewable energy and hot consumer offerings from Tesla and hybrid car manufacturers. To claim that the public is ignorant of the deleterious effects of fossil fuels is just plain silly.
> We're watching the world be literally destroyed before our eyes and we're arguing about pizza arbitrage.
This is Hacker News.
> I'm just saying its silly (to me) to be mad at Uber for engaging in exactly the strategy they told their investors they would engage in.
Is anyone actually mad in any of this discussion thread? Some people like to see Uber get taken down a notch, and going "haha your business plan doesn't actually make any money", but I don't see any moral panics actually taking place.
> Ok, so your complaint is that you don't like technology.
There are, shall we say, more palatable alternatives to most of these companies being discussed. In the food delivery space, there is ChowNow, which is less a delivery marketplace and instead sells software to restaurants. Coloradoan restaurateurs have created NoCo Nosh, which is their own localized food delivery service app from the restaurants themselves. Uber and Lyft's departure from Austin drove the creation of local ride-hailing services there as well (Ride Austin, Fasten, etc.). All such technological products can exist without being created from VC-funded unicorns.
To say that I'm against technology is rather reductionist. For instance, without it, we wouldn't be able to have long meandering fruitless debates. This Internet of yours is a wonderful invention.
>the capacity to cause problems for the rest of the world is much greater.
And none of these problems should cause us to lose sleep. A few bad yelp reviews. Uh oh. Carbon emissions should cause us to lose sleep but nuking Lyft and Uber back to the stone age would probably have net zero effect on this.
>Stories about early-stage Uber telling its drivers to drip off mustaches from competing Lyft vehicles come to mind, presaging the much more excessive and extensive abuses that later resulted.
If you think this is bad you should read about how fire departments used to operate. Fierce competition is one thing that even critics of capitalism should support. Maybe not fire departments brawling, but consumers generally win when competition is fierce. The mustache things sounds hilarious but can't say I've heard of it. Can you link me? Did Uber HQ order its people to vandalize Lyfts?
>It would seem like in some of these examples, the promise of big dumb money, coupled with incentives to pursue cash flow-negative business models, coupled with the problems resulting from having to make good on the big dumb money investments while digging themselves in deeper with said half-baked business models, leads to them engaging in even more risky and externality-creating behavior. And generally promotes a toxic business culture that excuses bad behavior.
I don't see how this is any worse than the externalities and behavior of cash flow positive businesses. Are you arguing that Bechtel and Blackwater and Facebook and Amazon and Exxon have fewer positive externalities or better behavior?
Capitalism has problems. But Silicon Valley and dumb money aren't it. Destroying the planet is it, but you'll see that with 99.99% of companies. Absolutely nothing to do with SV or dumb money. "Smart money" often invests in planet destroying things because they happen to be really profitable a lot of the time.
>If they had less money to play around with and lower expectations and thus less incentive to desperately flail around trying to justify their crazy valuations, could this behavior be preempted, or at least lessened?
I mean, none of the behavior you're describing is really offensive to me. I find the pizza arbitrage story funny and cute and probably a sign of running a sloppy business. I don't really care other than that because I don't own shares of Doordash.
>And yet, their losses were mounting pre-pandemic:
So your distaste for Airbnb arose precisely when their losses mounted? Or is it fair to say that your dislike of Airbnb has nothing to do with their income statement? Trying to make sure we're not getting two conversations mixed up. I understand you don't like Airbnb but that's not a very interesting conversation. I'm more interested in people taking personal offense to cash-flow negative businesses.
>You don't need to be livid with rage to mention someone is contributing to a larger problem, however proportionally small. You don't even need to mention climate change as a reason to blame ridesharing for driving up traffic; the increase in traffic is inconvenience enough, let alone its influence on public policy wrt urban planning, decrease in investment for transit, etc.
You don't need to do anything sure. It's just kind of silly to scream and shout about some dumb investors when a bunch of people are silently killing the planet and I rarely see these sensational news stories or comments about them. I see 10x attention about Airbnb causing rent prices in trendy neighborhoods.
>Great idea!
It's a horrible idea actually! This kind of thinking is why people hate investors that are only interested in quarterly returns.
>Will they?
If I were an owner, I would absolutely hope not! I guess I'm one of these strange investors that cares about long term value rather than short term returns.
If they can take over taxis around the world for the next 30 years, I don't really care if they had a few unprofitable quarters.
>Can they?
Sure. If they just started charging the actual price for a ride, they would be making a lot of money. But that's not the business that investors wanted to buy.
> And none of these problems should cause us to lose sleep. A few bad yelp reviews. Uh oh. Carbon emissions should cause us to lose sleep but nuking Lyft and Uber back to the stone age would probably have net zero effect on this.
The bad Yelp reviews is the tip of the iceberg, as restaurants are being squeezed out by the extinguishing embrace of food delivery apps and their fees. (This was covered in some of the links you've elided) The point is that the power of some tech companies backed by big money can lead to destructive effects on other industries. Ridesharing has also been criticized for more than their environmental impact, including points that I've mentioned.
Also, even if these problems are not insomnia-inducing, they are at least larger and more significant than if these companies didn't have the level of resources to create bigger problems, nor the incentive to cut corners and create these problems.
> The mustache things sounds hilarious but can't say I've heard of it. Can you link me? Did Uber HQ order its people to vandalize Lyfts?
Point is that the road to an unending stream of ethical violations and scandal can sometimes be seen by the earliest of underhanded cheating. That behavior is indeed hilarious in that it's almost cartoonishly evil and low, like a schoolyard bully. Fire departments are a non sequitur. Can't find an anecdote yet, but here's one early report of Uber's growth-at-all-costs strategy incorporating dirty tricks.
> Capitalism has problems. But Silicon Valley and dumb money aren't it. Destroying the planet is it, but you'll see that with 99.99% of companies. Absolutely nothing to do with SV or dumb money. "Smart money" often invests in planet destroying things because they happen to be really profitable a lot of the time.
This excuses poor behavior by suggesting it is fine when larger bad actors exist, which is a fine attitude for you to have, but others may disagree. That said, it's also possible to examine the current VC-boosted culture within tech- or tech startups- itself; are there more ethically questionable startups with flimsier, even scammy business models, than in the past? Other comments have argued that this is a progression on a trend, and not how things have always been. (Though one would think the dot-com bubble was also a time of similar widespread fraud.)
Even if the tangible economic impact of modern Silicon Valley and dumb money is negligible in the grand scheme of things (which is a debatable point), it's still possible for those working in tech to critique the business culture, which does change and isn't a static thing. The '80s were remembered as a particularly greedy and excessive time on Wall Street; certainly industry practices can change over time and the shared cultures of those businesses can change for the worse, to the dissatisfaction of those who disagree with it.
None of this is even necessarily criticisms of capitalism as a whole; rather it's criticism of a development of how capitalism is practiced, or even a specific capitalist culture. For instance, can both be for free enterprise and a critic of financialization.
> I mean, none of the behavior you're describing is really offensive to me. I find the pizza arbitrage story funny and cute and probably a sign of running a sloppy business. I don't really care other than that because I don't own shares of Doordash.
That's fine as it is your opinion, but that is a subjective judgment and seemingly based on limited data.
> It's just kind of silly to scream and shout about some dumb investors when a bunch of people are silently killing the planet and I rarely see these sensational news stories or comments about them. I see 10x attention about Airbnb causing rent prices in trendy neighborhoods.
Then's plenty of coverage about other bad actors, tech is just a highly visible target.
> I guess I'm one of these strange investors that cares about long term value rather than short term returns.
The question is, what is that long term endgame? Waiting for Google to both invent a viable self-driving car AND push through the relevant amount of lobbying and marketing to engender the legal and social acceptance of widespread adoption of autonomous vehicles? Til then, it just looks like they're burning through a lot of money trying to grow for the sake of growth. And making good on their valuation is still a technological and societal quantum leap away.
It's more that this capital can be utilized to actually be feeding families through real job growth and not some hand-waving waving self-deception of building the future. In other words, this is not real productivity because it isn't sustainable without burning cash.
You and I have very different definitions of "sustainable". Absolutely nothing about the modern global economy is "sustainable" for the planet. Infinite growth is not a realistic goal. We need to start putting a sustainable planet above a sustainable income statement.
Setting that aside, failing startups are actually great for the average Joe. You've basically sucked off an enormous amount of capital from naive but rich investors and transferred it to the employees and local businesses where the company is based. Even consumers can benefit if prices are subsidized like Uber, etc. They can also brutalize corrupt local industries like taxis and hotels.
Failing businesses also teach lessons about dumb capital and dumb managers. Smart capital and smart managers usually take notes.
It's basically win-win all around except for whichever rube is holding the shares when the house of cards collapses, which, as I said some people have more money than sense.
I wrote the post you replied to and I don't make a statement on capitalism at all.
I don't actually care.
I play macroeconomic games in commun-ish countries too. (All the actual communist ones are sanctioned so I can't)
It doesn't matter to me if it is one organization coordinating all facets of life, or if it is infinite organizations trying to do it better by competition.
This is a fiat currency and central bank feature/bug and also opportunity. Its more useful if you understood that, than worry about the political ideology.
Correct, it wasn't always this way. Too much "dumb" money that is eager for returns, trying to chase the "if you build it they will come" mantra. But that worked 20 years ago for a nascent web.
I think these investors are all praying the "proprietary" data that is being acquired has some tangible value in some indefinite future that can be acquired - or if they can go public, in which case they can liquidate their positions through a hand-off to some mindless robo funds. See: SVMK
Isn't this also because of tax considerations ? If you make a profit you have to pay taxes, so its better to inflate expenses as much as possible. However this argument gives some credibility to the business models of these companies.
That's like saying "would you rather get $10 and pay $3 in taxes, or would you rather lose $1?" I think the option investors want is $200 in 5 years, and spending gross margin on growth might get you there faster.
One of the reasons Amazon spent so much over the years was to reduce the amount paid in taxes. So instead of "inflate expenses" it's really "reinvest".
For example, there are specific tax credits for R&D, which can include software if documented properly.
I'm out on a tangent, but that is too broad a statement.
There exist constant taxes over non-liquid assets. I am pretty sure we'll people that have been bankrupt over then if we look. They just aren't a problem for people with money (top of middle class or above).
Also... "why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?"
This shows a fundamental misunderstanding of how public markets work.