I don't really understand your question... this is the favored approach of many Silicon Valley VC firms, and they are widely considered some the smartest tech start-up investors in the world.
If it really is a bad idea, and those firms have been so successful for so long not because of it but in spite of it, then it seems like a huge opportunity for others to come along and displace them with a better model. There's a lot of money in many of these tech markets. But we don't see that happening.
I guess the answer is that it's unintuitive... it seems like an obviously bad idea to many people, but the people that have the most experience think it's a great idea and continue to succeed with it.
There are other approaches: in China, for example, investors generally considered profitability much more important and expect it very rapidly, like in the first 6-18 months (though this has eased quite a bit towards a more SV-style model in recent years).
The gripe then is that companies can't have any long term vision or go big because they have to be making profit immediately and constantly.
Yeah, I when I thought about it I realized when I say "SV VC" I mean probably only the top 10-20 firms or so - the "top tier" or whatever, Sequoia, Accel, KPCB, Benchmark, etc. (highly subjective but you get the idea) - and I think those guys tend to do OK, and it has been mostly the same ones my whole time in tech (~10 years), and I know many go back considerably before that.
I meant that a lot of those people are down with the land-grab now / rent later model.
It's a bad idea most of the time but sometimes it works. The smart investors have a portfolio of many bets, and it's priced in that most won't succeed. For the entrpreneur I think this is a bad idea but for the investors it's workable if they can do it a few dozen times over.
It's just injection of both money and risk, amplifying the result. It'll fail more often than usual. But if it succeeds, wow.
It's a bad idea for the small business owner/startup to pursue, because investors buy into it for the 1 in how-ever-many that get big. 1 facebook is worth many failures. And to be fair, they're not just throwing money at the wall and hoping it sticks - though there is some element of that. There's also the many companies that don't make headlines but are generally - if modestly - successful as well. So, the investors don't want to lose money of course, but they're okay weathering several losses if the occasional win is big enough to more than compensate.
On the flip side, if you're a small business trying to grow your company, this hole "carve out the market operating a loss in hopes that you'll make it big" idea doesn't work in your favor most of the time, statistically speaking.
Modest investment for modest gains for modest success for long term growth is the smarter bet for the business owner (usually), but that's not as flashy, headline worthy, or profitable for the investors as the go-big or go-home approach.
So, it depends on what perspective you're taking as to whether this "conventional wisdom" really is good or bad.
If it really is a bad idea, and those firms have been so successful for so long not because of it but in spite of it, then it seems like a huge opportunity for others to come along and displace them with a better model. There's a lot of money in many of these tech markets. But we don't see that happening.
I guess the answer is that it's unintuitive... it seems like an obviously bad idea to many people, but the people that have the most experience think it's a great idea and continue to succeed with it.
There are other approaches: in China, for example, investors generally considered profitability much more important and expect it very rapidly, like in the first 6-18 months (though this has eased quite a bit towards a more SV-style model in recent years).
The gripe then is that companies can't have any long term vision or go big because they have to be making profit immediately and constantly.
Something about green grass...