[benzor]

There's some nuggets of truth in here, but I am disappointed that this article sidesteps what I feel is the most important reason for startup success in 2020: easy and abundant access to cheap capital.

- Interest rates are at all time lows, borrowing is cheap

- The Fed's balance sheet is at an all-time high. The economy is flush with cash, particularly the investor / VC class

- This excess cash creates an (arguably artificial) wealth effect and drives an appetite for risk

- Large unicorn startups that are perpetual money losers continue to operate only because they are effectively subsidized by regular capital raises. Look no further than all the Silicon Valley darlings such as Uber, Netflix, AirBnb, Tesla, and so on. All of them would cease to exist without continued capital injection from secondary share offerings or VC raises

- These companies achieve growth and put pressure on the competition by offering their services below the real cost that would be needed to achieve profit, hence driving huge share price growth

- This share price growth attracts new investment from the momentum-chasing crowd, increasing appetite for subsequent secondaries, and then the cycle repeats

I don't mean to be cynical, but it's hard to see this ending well for some of the nouveau riche. Tech has been a great avenue to riches by offering real innovation in some cases, but the article's error-by-omission really gives the wrong impression.

[heylook]

> - Large unicorn startups that are perpetual money losers continue to operate only because they are effectively subsidized by regular capital raises. Look no further than all the Silicon Valley darlings such as Uber, Netflix, AirBnb, Tesla, and so on. All of them would cease to exist without continued capital injection from secondary share offerings or VC raises

You should look up the financial statements of the companies in your list.

[benzor]

Apologies for some hastily chosen examples. I think the point still stands if you consider the following companies: WeWork, Lyft, Snapchat, Pinterest, Dropbox, Slack, Casper, Lime, Peloton, Beyond Meat, Wayfair, Zillow.

More generally speaking, take a look at Goldman Sachs' Non-Profitable Technology Index:

https://pbs.twimg.com/media/EsRVCiMXIAE7xlA.png

[danielmarkbruce]

Would you have put Google and Facebook in this group when they weren't profitable? You are missing something - many companies have great long term economics even if they are losing money right now. Slack (if still independent) could easily be profitable - they just have to spend less growth (ie, largely they could cut their sales and marketing dramatically, along with other items). Snapchat the same, Pinterest the same. Some of the others I believe you might by and large correct. The general statement that lots of companies are giving away dollar bills for $0.80 isn't right.

[mike_hearn]

This is a common argument but would seem wrong to a lot of people. It's just unintuitive. Most people of our parents generation would find this argument slightly absurd, and our grandparents would find it entirely absurd.

It sounds weird because it assumes that every tech business has either insurmountable lock-in or insurmountable first mover advantage, without explicitly stating that. To fill in that assumption requires a lot of cultural knowledge of tech - the vast majority of businesses don't have either.

The problem is these assumptions are very likely incorrect for most modern "tech" businesses. It looks like over-generalisation. For example:

1. Slack has relatively little lock-in. The last company I worked for was in the process of migrating to Teams when I left. The justification was cost savings. Slack is trying to build network effects and lock-in with shared inter-firm channels, but most employees don't need to interact with other firms at least in today's business world, so even if Slack becomes the Bloomberg Terminal for the rest of us, it won't be the foundation of a huge business: only the people who need to communicate with other Slack-using firms will have Slack accounts and they charge by account.

2. Snapchat is a social network, and the iron law of social networks seems to be that they're at the top for only a relatively short period. Facebook is by far the longest lasting but even so, they've had to shore up that position by buying Instagram and WhatsApp. Snapchat's value won't last forever, so burning cash to get to the top in the hope of monetising it over the long run seem a bit optimistic.

3. Uber is basically a taxi firm. There is no moat there. Me using Uber doesn't really make it more useful for you, except in the sense that it attracts drivers. But drivers are capable of using multiple apps at once and switching between them. If Uber's prices were to increase really significantly, their market share would probably go into free-fall yet the hallmark of a company with lock-in is that they can charge very high prices for decades without facing competition.

4. Amazon was never able to convert high market share in retail to high profits. Its profits come mostly from AWS: a pure tech supply chain business.

It's also worth noting that Google and Facebook became profitable quite quickly relative to the sorts of companies people are criticising these days. It took Google less than 6 years to reach mega-profits. There are now firms that are doing Series G (!) raises, which aren't profitable after 15 years.

[danielmarkbruce]

1. Good unit economics can come from various sources. The idea that Slack has little lock in and hence can't have good economics is misguided. Coke has little lock in, yet amazing economics. Google has little lock in, yet amazing economics. Sources of competitive advantage aren't restricted to lock in. Scale is a source of competitive advantage, for example.

2. Your point is hard to refute and may be correct - it isn't obvious they will do well or poorly over time.

3. This is almost certainly wrong. If Uber had no moat there would be more than Uber and Lyft in the US. It's going to be impossible to enter this market for a new player short of having self driving all worked out.

4. Yep, it wasn't/isn't clear on Amazon's retail biz, I'll agree with that.

You have some examples which are correct - there are specific situations where you are right. But the statement cannot be generalized.

[mike_hearn]

For (3) it isn't required to have a moat. Market dumping is sufficient. Nobody is going to compete with a firm that's selling below cost, as Uber/Lyft are doing. But, I've used non-Uber/Lyft taxi apps that were perfectly competent. It's not that hard to build such an app, especially if you 'just' want to sell taxi rides in local jurisdictions instead of any conceivable moving service in every possible geography. If/when they stop burning money, only then we'll find out what kind of moat they have.

[benzor]

This is an excellent answer and took the thoughts right out of my mind.

To elaborate a bit for GP: No I would not have classified early stage Google or Facebook or Amazon as "perpetually unprofitable tech" because, frankly, they clearly weren't. All 3 of these companies had strong, obvious moats that enabled them to preserve pricing power. All 3 of these companies had a small handful of initial cap raises and have grown entirely via Free Cash Flow ever since. The fact that all 3 of these companies continue to operate with staggering profitability decades later confirms this. (You can of course debate the ethics of having such a moat, antitrust etc., but you cannot deny it's there.)

[Breza]

It's incredible that Amazon was able to build such a moat in the early days. Logically, you'd think that somebody like Sears (which became a huge company in the first place by offering the convenience of shopping from home!) would have made a big early investment in online shopping and become gigantic.

[sillysaurusx]

Why Dropbox? Did something change?

I haven't paid attention for many years, but at one point is was an extremely profitable company.

[nowherebeen]

Cloud storage has become a commodity and cheaper elsewhere.

[Balgair]

Are the fake-meat companies tech companies? I thought they are more like contract manufacturers, brewers, or other industrial foodstuffs.

No doubts on the access to cheap debt, though.

[jdgoesmarching]

WeWork was also never a tech company but pushed really hard to brand themselves that way. If evaluated truthfully as a real estate company, the money they raised was hilariously idiotic.

So much of this world is driven by idiotic speculation based on slick websites and charismatic presenters.

[Breza]

I just finished reading Billion Dollar Loser and I think you might like it.

[technotony]

There's a ton of tech behind Beyond Meat. Their core science is based on research from an RNA professor at Stanford. That proteomics research is the reason their burger tastes so much better than previous generation veggie burgers.

[yissp]

If you're referring to Patrick O. Brown, you might be thinking of Impossible Foods, not Beyond Meat.

[1_player]

Tech company means they deal with software. Beyond Meat isn't a tech company.

Or is pharma part of tech in your definition? What about NASA?

[SeanAppleby]

I think it depends purely on your definition of "tech".

Impossible engineering soybeans to produce more heme to make fake meat behave more like meat is a technology, in that it is a novel innovation applied to solve a real world problem.

But in modern common parlance "tech" tends to mean either that a company's offering is either entirely or heavily augmented by new software, or that the company has ties to a specific network of talent/investors/etc, or that the company has very low incremental costs per user. In those cases, they might not be a tech company.

[Aicy]

How are they not?

It's technology innovations in food rather than electronics, but it's still technology innovations that are based around disrupting the existing industry.

[collyw]

Marketing companies would be my opinion. Fake meat has been around for years, but has become trendy again in the last couple of years. (Maybe it's better now, but that is subjective).

[tjs8rj]

About half the companies you mentioned are cash-flow positive, so their economics work, they just have accounting for depreciation and other lines on their balance sheet. They are default alive companies using accounting practices to avoid taxes, but they have more money coming in than going out

[hnick]

> These companies achieve growth and put pressure on the competition by offering their services below the real cost that would be needed to achieve profit, hence driving huge share price growth

Which I find weird, if I sell fruit at a loss to run a local competitor out of business as a major supermarket it's illegal predatory pricing (or at least was when I was growing up), yet do it to an entire industry and it's fine. Maybe this is just one of those US exception things.

Missing (or implied) by your list is that incumbents are not an all-or-nothing gamble based on other people's money, so are reluctant to engage in such tactics themselves and will suffer for it.

[handmodel]

I don't think this covers all of this - but I feel like the reason it could never be investigated is that most of these things are only unprofitable because of the administration. Not on a per item basis.

Netflix may lose money on their show but clearly by giving you a month free and then charging just $12 a month they are making money on that unit. AirBNB is making money on each additional rental they do even if historically that didnt cover all marketing and tech.

For a store selling berries if they buy it for $3 and sell it for $2 then it is more tangible (though Im sure today they could just call it marketing)

[hnick]

I guess that makes sense and is one consequence of moving so many things to an abstract 'service' model. Many services are essentially free to provide - until you count all the other overheads any business also has to pay for. It's not as simple as buying and selling berries like you say.

[fairity]

Your comment leaves me wondering if we're reading the same essay.

PG specifically states that the "main reason it's easier to start a startup now is that it's cheaper". And, "cheaper" comes in the form of lower infrastructure costs, lower advertising costs, and lower cost of capital.

>> But the main reason it's easier to start a startup now is that it's cheaper. Technology has driven down the cost of both building products and acquiring customers...now investors need founders more than founders need investors, and that, combined with the increasing amount of venture capital available, has driven up valuations.

[greggman3]

I'm not sure what your point is . The article says it "cheaper to do". The person you're responding to says "there's access to cheap capital".

[jhugo]

> now investors need founders more than founders need investors, and that, combined with the increasing amount of venture capital available, has driven up valuations.

[sithlord]

These companies could easily cut their marketing budgets in half and basically be profitable. They could also cut their R&D and focus only on their main money streams and be profitable. There is just no reason to be profitable, when you can raise more money.

[arthur_sav]

I think everyone just wants to get a piece of the future. The companies of today, if successful, will become huge conglomerates given the accelerated globalisation.

[tjs8rj]

Netflix and Airbnb are profitable, and as far as I can tell the others could be profitable but aren’t because they want to stay huge / have the capital access to do so. When you have unlimited money pouring in, whats the point of profit other than a checkbox for wall street? You can pay everyone their wages, compete fiercely, grow like crazy, and so on. Profit is just inefficiency - we don’t have a use for this money so we just put it in the bank.

I don’t disagree that Uber and Tesla and many of these are on life support currently, but from a game theory perspective, if you have unlimited access to money, why bother being profitable when you can just spend it getting bigger and smarter?

[kqr]

There is one fairly obvious reason: survival is the great filter. Anything that's not under survival pressure is almost by definition not good in the long run. If something is bad, you want it to die quickly before it becomes too big to fail.

[intricatedetail]

Isn't that in a way a ponzi scheme? Companies that don't bring value and need a supply of investors... that does ring a bell. Why regulator doesn't look into it?

[aliswe]

Nono, lots of differences. In a ponzi scheme, the early investors get paid by the new investors and the company doesnt have any real business other than gathering new investors