And don't forget Amazon. They aren't venture backed but they have access to capital at cheaper rates than most countries due to their position as a stock market darling. They use ultra-cheap money and a willingness to run negative margins which they refer to "reinvesting in the business" to bleed competitors dry. Few other companies on the planet have the ability to run negative or break-even margins the way Amazon does.
Diapers.com example: "When Bezos’s lieutenants learned of Wal-Mart’s counterbid, they ratcheted up the pressure, telling the Quidsi founders that [Bezos] was such a furious competitor that he would drive diaper prices to zero if they sold to Bentonville. The Quidsi board convened to discuss the possibility of letting the Amazon deal expire and then resuming negotiations with Wal-Mart. But by then, Bezos’s Khrushchev-like willingness to use the thermonuclear option had had its intended effect. The Quidsi executives stuck with Amazon, largely out of fear. The deal was announced Nov. 8, 2010."
Quidsi founder Marc Lore sold his next company, Jet.com, to Walmart for $3.3 billion [1]. Both Quidsi and Jet.com were never profitable, meaning Lore was also playing the game of venture predation, so hardly any pity from me.
To add, Lore's current startup is a premium food delivery service called Wondery that raised $350 million at at $3.5bn valuation last year [2], and it's not profitable too. None of Lore's companies have ever turned profits but he's made enough money to buy the Minnesota Timberwolves...he's the perfect example of venture predation, lol
Being a business owner with actual profits from technology by selling a useful product, I can never understand the bizarre emergent properties of our current financial system that lets folks like Marc Lore to exist.
> Both Quidsi and Jet.com were never profitable, meaning Lore was also playing the game of venture predation
I don't know about the books in this specific case, but losing money doesn't mean you're into venture predation. You could very well be losing money but also have sound unit-cost to price.
> You could very well be losing money but also have sound unit-cost to price.
If you have that and still loose money then you are doing other things that get you ahead of your competition that need to sustain their operation with those prices. Either way you use somebody's money to cheat your competition.
> Either way you use somebody's money to cheat your competition.
That's the principle of investment.
The difference between using money to improve productivity, or make the product more appealing to the consumer, or whatnot, and price-dumping, is that investing is supposed to generate long-term returns, which can benefit the company or consumers. Price dumping, on the other hand, doesn't generate future returns. It generates costs that the consumer will have to repay later.
In the first situation, consumers may benefit from that competition. In the second situation, they inevitably end up losing.
Amazon isn't unique in this case. Your example is a bit of cherry picking. These tactics are common in retail (demonstrated by the fact that WMT, AMZ, and COST are the top 3 retailers in the world).
> access to capital at cheaper rates than most countries due to their position as a stock market darling
Last I recall, AMZ uses an internal WACC of 8-9%. That's really only marginally "cheaper" cost of capital than most other mega-cap firms, it's not really a big advantage.
Its cost of capital advantage mostly comes from its access to cheap short-term credit in its retail cash cycle, not the equity market (like you suggest).
> "reinvesting in the business" to bleed competitors dry. Few other companies on the planet have the ability to run negative or break-even margins the way Amazon does.
Costco regularly runs negative or break-even margins in its merchandising. Its language for this is "reinvesting in value" or "reinvesting in price". It can do this, similar to Amazon, because of their membership business.
Walmart also regularly runs break-evens/negative margins in select merchandising lines depending on geography and competition.
> Diapers.com example: "When Bezos’s lieutenants learned of Wal-Mart’s counterbid, they ratcheted up the pressure, telling the Quidsi founders that [Bezos] was such a furious competitor that he would drive diaper prices to zero if they sold to Bentonville.
How is this not a serious anti-competitive monopolistic practice? Did the Dept of Justice get involved?
It wouldn’t result in a monopoly or near monopoly in any real sense, and it’s also hard to say it would meaningfully result in a restraint of trade. It’s also hard to say the consumer would be hurt by free diapers, at least in any concrete way, and if he didn’t add in ‘and raise the prices later when you’re dead’, it also wouldn’t be an easy thing to provide it wouldn’t just be wasting money out of spite. Which is purely legal.
Is it a strong arm/shitty tactic? Sure. Welcome to the real world.
It's anti-competitive but extremely American/capitalist. The whole premise of our economy is to leverage wealth and advantage to build more wealth and advantage until you're the wealthiest and most advantaged. That Bezos continued to do this is part for the course.
If we want true competition, we need a merit-based society instead of a wealth-based one.
I dunno. Bezos is pretty good at managing a company. A lot of people chose to bet on Jeff Bezos. He delivered phenomenal results for decades. I’m not seeing the societal failure.
The societal failure is the 1.5 million Amazon employees who work horrid conditions for not enough pay to support a family, housing, or healthcare. For the engineers who work at corporate and are underpaid due to salary collusion between tech companies. And the million other net-negatives for society that Amazon and every other billion dollar company has inflicted upon the planet.
Ultimately billionaires (capitalists) are profiting unfairly off the labor of others. This is obviously an unpopular opinion on a website promoting VC.
There's a nugget of an interesting concept here. I would like to know more, but I would also like to know more from the folks downvoting you as to why they disagree.
Could you please expand on your thought? I know some recent conversation has been had about the potential that open source models have to "win" against Big Tech, so I'd love to know how your thought accounts for that as well.
It seems obvious, they are burning through Microsoft's money for now (it was said these chatbots cost way more to run than they make profit) to capture the market and be able to get thick margins later.
> it was said these chatbots cost way more to run than they make profit
Well if it's running on Azure and using massively overpriced Nvidia data center GPUs I can't imagine anything else would be possible. Then again it's not like there any incentive for OpenAI to increase efficiency as long they get 'free' Azure credits (and it's not like the real cost for MS is anything close to what they are supposedly investing into OpenAI. IRRC that 10 billion was mainly not in actual money)
They have money because of AWS, which is a fantastic product in an extremely competitive market, competing against players who lose money like GCP and Azure.
Amazon.com as a store makes next to nothing as profit.
Who cares what he did to some diaper companies. Are consumers paying more or less because of amazon? Much less.
They basically run amazon.com for no profit and consumers get fantastic deals and cheaper products and more reliable service than ever before.
How much would you have to charge for same day delivery for that many products? Could you get close to Amazon? You would have to rip off you customers so badly just to stay alive.
> Who cares what he did to some diaper companies. Are consumers paying more or less because of amazon? Much less.
They are probably generally paying less but Amazon isn't the surefire low-cost provider on the internet the way they used to be. I don't expect the trend of them raising prices to reverse as they gain market power.
> How much would you have to charge for same day delivery for that many products? Could you get close to Amazon? You would have to rip off you customers so badly just to stay alive.
It's not "ripping off" it's just charging customers the actual cost of the service they are getting.
No, my concern was the claim that something happened to the diaper companies is false.
Some middleman website might have lost out on being able to sell for more money to Walmart, but that was their choice to not to pursue a deal with Walmart.
I am guessing what they were probably concerned about was guaranteeing themselves cashing out at least at Amazon’s offer because if Walmart found out Amazon was backing out of the deal, then Walmart would have had the power to push the price down.
Either way, diapers.com was going to lose to Amazon/Walmart/Target/Costco in the long run, so if they were getting a high valuation simply for being a popular website as online shopping was ramping up, then their best move was to sell while the iron was hot.
> consumers get fantastic deals and cheaper products and more reliable service than ever before.
This hasn't been true for many years IME, and will almost certainly get worse over time. Companies like Amazon don't fight tooth and nail to monopolize industries because they want to be nice to people, they do it because it results in power they can use to increase profits over the long term. Less competition means that they can ratchet up prices for customers and squeeze sellers/suppliers more. There are only a handful of general stories online these days, largely due to Amazon's actions.
I have never ever seen an example where Amazon has ratcheted up prices on any product after getting x market share. In fact, I've seen the opposite. Looking at camelcamelcamel price history, many diaper products on Amazon are trending down since 2018-2019 (max price history). Surprising given inflation.
It's too easy to enter the diaper (or whatever) retail market that such a tactic makes no sense.
How on earth do GCP and Azure lose money when they (just like AWS) are ridiculously expensive? Like frequently >3x the competition for VMs and for bandwidth egress, I’ve sometimes seen 10x, or charging for things that competitors don’t.
Except Amazon has the the diaper production locked up, and we're back where Amazon temporarily sells them for 2 bucks while you try and get your diaper factory off the ground.
The latency between the observation of a market opportunity, and actually realizing lower prices at the consumer level, is significant. Millions of people would be charged monopolistic prices for the year it would take.
This also assumes Amazon doesn’t buy any competitor early on, such as happened with Warby Parker.
Eh, there is alot more nuance here. Dumping is typically when an established company attacks a competitor with temporarily low prices.
If you squint right, sure, VC backed low costs could be seen as dumping. But the problem is that also means virtually every startup is dumping, even bootstrapped garage efforts. And I guess any company that reports a quarterly loss is also dumping.
So I think it probably makes sense to treat VC-subsidized startups as a different economic phenomenon that needs different rules than if e.g. Goodyear sells tires at far below cost in California until competitors leave and then they raise the price.
No, there isn't much nuance here. Accounting has notions of fixed costs and marginal costs. The startups you are referring almost all lose money on fixed costs, but sell things at per-unit economics which make sense at scale because they are below marginal cost/COGS.
Things like Uber are a typical dumping cases. For years, they charged below their COGS and eventual profitability depended on driving out competition and raising prices.
There certainly is nuance. There is nothing magical about marginal costs - if someone is pricing something at break even or 1% gross margin and never have any hope of running a profitable business at that price because of their fixed costs, it's not different from a competitive perspective - the price is unsustainable.
On top of that, there is nuance as to what goes into fixed v variable, how fixed fixed really is, how good your management accounting system is, how good you are at predicting things like product recalls, or insurance losses, or loan recoveries, or whatever other variables are part of your particular business.
> Accounting has notions of fixed costs and marginal costs. The startups you are referring almost all lose money on fixed costs, but sell things at per-unit economics which make sense at scale because they are below marginal cost/COGS.
Well yes, because they are selling software or other products which require a very high investment into R&D and have minimal marginal cost...
Other markets don't work like that so I don't think this is particularly relevant especially considering the a huge proportion or the majority of those startups (which received the most VC money) are yet to turn a profit (until they do it's still 'dumping' in this sense).
The same phenomenon takes place in traditional Industries as well without VC investors. If an established company comes out with the new product, say a medical device, it might not be profitable until they get their sale volumes up.
I think the key difference is how the price for the sold good changes over time, not the net profit for sales. If Your business model is to hold price relatively constant, but only see a profit when you hit your target market share, that's not dumping. It becomes dumping if your business plan is to capture Market share at a low price, and then ratchet up your price once you have displaced competitors.
The only issue is that companies like Uber are lying to themselves and their investors that costs will go down significantly in the future. Both through scale and advances in technology. Which is true. But rarely true to the extent to which they believe it.
Uber aren't selling taxi rides, they're selling shares in Uber, which is actually what the investors care about. The bezzle will continue as long as they can convince people there's a path to profitability.
> The only issue is that companies like Uber are lying to themselves and their investors that costs will go down significantly in the future.
did you not read the article? the entire thing premise is that is not true and there are negative externalities and incentives even if the company doesn't ever make a profit.
Well to be fair Uber is almost profitable at this point (just -1.78% net margin) so if they actually wanted to they could be profitable in a quarter or two..
>The only issue is that companies like Uber are lying to themselves and their investors that costs will go down significantly in the future. Both through scale and advances in technology. Which is true. But rarely true to the extent to which they believe it.
Uber and other folks who sell whatever it is they sell at a loss -- with no real expectation (other than driving their competition out of business so they can then hike prices well beyond where those who can actually make a profit charge) always reminds me of this[0].
The ridiculous part is that the link below was a parody when created. Now it's a "business model." Sigh.
>> Things like Uber are a typical dumping cases. For years, they charged below their COGS and eventual profitability depended on driving out competition and raising prices.
Even these things get played. Sometimes driver/rider subsidies get classified as "Marketing expense" rather than cost of goods sold.
They don’t even hide this fact. That’s pretty much the unstated goal behind funds like SoftBank funding startups at well above what the startups even ask for.
> The startups you are referring almost all lose money on fixed costs, but sell things at per-unit economics which make sense at scale because they are below marginal cost/COGS.
Many startups and new projects operate with effectively zero revenue until critical mass, at which point they start charging. Youtube, Meetup, Reddit, G Suite, facebook, craigslist, twitter, linkedin. The list goes forever. These all started as free services without any meaningful revenue. I don't see any difference between these platforms and Uber, which while not free, is also selling below costs.
Circa 2015, Uber charged roughly $30 USD for a trip to the airport from my house. Now it is usually between $60 and $70. There has been significant inflation, but $30 in 2015 is only worth about $38 today.
The source of Uber's dumping wasn't chiefly VC funds, though. Uber's ability to price below market was mostly funded by the residual value of their drivers' vehicles.
No, these can both be true. Uber can charge users less than they pay the drivers (losing money on rides) while still paying drivers less than the drivers' total costs. Like if I take an Uber somewhere, Uber charges me $10, pays the driver $15, and the driver's actual costs are $20 (gas, wear/tear, whatever.)
Not saying whether or not this actually happened, only that it's mathematically totally possible.
Eh, the money is fungible though. It’s still VC funding the massive growth of the company in order to “disrupt” (which actually means “extract value as fast as possible from drivers’ vehicles, insurance impropriety, etc.”).
I don't think you have to squint very hard to see VC as dumping. It's why they all follow that common trend of low-price growth hacking and immediately follow up by raising prices.
> It's why they all follow that common trend of low-price growth hacking and immediately follow up by raising prices.
The key difference is that startups are rarely selling the same product, to the same people, for different prices at different phases of growth. They're more often selling different products, with different positioning, to different market segments at different times in their growth; where they just happen to call those products "editions" of the same thing.
A common startup lifecycle:
1. get seed capital to build an MVP targeting one distinct market (usually consumers or individual professionals);
2. market (or give away) your consumer-product MVP to price-sensitive early adopters (which is where the initial look of "giving it away" comes from — that's what this market segment demands);
3. wait for those early adopters to educate the rest of the market about what's cool about the product and the brand;
4. meanwhile, use the "social proof" (rather than earnings reports) from these early adopters, as leverage to get a Series A investment; and use it to build a separate, more polished product targeting the enterprise market;
5. use your enterprise product, in combination with a bunch of new sales staff, to reach the non-price-sensitive late adopters. (While continuing to sell/give away the MVP consumer version!)
6. At some point, after achieving traction in both product lines, you can also "trickle down" the benefits of the enterprise product — and integrate process, saving OpEx — by building a new version of the MVP [now "consumer/SMB" product line] using the enterprise product's technology. (It's still a separate product, though, not just a feature-limited version of the enterprise product — there are a lot of things enterprises want that actively get in the way for consumers.)
This is less like Goodyear charging less for tires until they monopolize the market; and more like Goodyear starting off selling car tires, achieving brand recognition there, and then making all their real money by selling semi-truck tires.
A clear example of all six phases (but with bootstrapping in place of VC investment): Microsoft built initial versions of Windows for consumers, at retail prices (or "given away" via OEM channel-partners with steep volume discounts); achieved reach; then reinvested the revenue from that to build a more polished and robust Windows NT for enterprises, and made big money from non-discounted enterprise volume licensing; then "trickled down" the technology from Windows NT to create Windows XP, with the consumer/SMB product now just an "edition" of Windows XP.
I am not the person who replied to you and I don't know to what extent that tale is fiction, but MS was enormously profitable selling Windows to OEMs and consumers before NT became a major force. NT was more of a response to OS/2 than it was some grand plan at grabbing the enterprise market that was hatched years earlier.
This history is a pretty convenient interpretation. MS mad big money on their OEM deals and this is after they were all ready being paid for each IBM machine. They were also 10-15 years old at this point
Ehhh I dunno if it's really that nuanced. Companies that are unprofitable, but who sell goods/services above direct costs, are relatively (though of course never totally) safe from the accusation of dumping.
i.e., if you sell a widget for more than it costs to manufacture, but unprofitable after you account for indirect costs like R&D and other corporate costs, it may or may not be dumping.
The VC-backed companies like Uber weren't doing this. They were unprofitable even under the standard of price > direct cost. That's pretty cut and dry dumping.
"Scale until you become profitable" in the traditional (and IMO defensible and sound business) sense is about scaling until your margins cover your fixed and indirect costs like R&D (see: Google, Facebook), but that's not the Uber model.
"even bootstrapped garage efforts" this doesn't seem to follow. Bootstrapped efforts don't have the funding to absorb a lot of loss to get market share. They have to make a product people will pay for, typically.
Your parent is confused. There's a difference between absorbing losses to stay alive while you try to get a product to market and deliberately losing money per sale because you want to drive the competitor out of business. No squinting required.
Hahahaha, ‘everyone does it therefore it isn’t what it obviously is’ is….. pretty funny.
I get why you’re saying it, we’re profiting from it (kinda?), but a spade is still a spade when it’s shaped exactly like a spade, used for digging, etc. regardless of what label marketing slapped on it.
There is a bit of a difference here in that it is private vs gov’t backed (kinda, unless you count fed printing money as gov’t backing, which it wouldn’t require much squinting to do).
The difference between dumping vs not-dumping is the permanence and sustainability of the price.
If widgets costs you $12 to make and you sell them for $10, you are currently running at a loss.
If you plan to continue selling them at that price and reduce your costs to $8, that's okay.
Whereas if you plan to later raise your price to $15, you're dumping.
Though if you plan to develop super-widgets and sell those for $15, that's okay.
---
Hopefully that makes sense.
That said, a frequent issue is overestimating margins (intentionally or unintentionally). Uber underestimates their fundamental costs, so (intentionally or unintentionally) are dumping.
> different economic phenomenon that needs different rules than if e.g. Goodyear sells tires at far below cost in California until competitors leave and then they raise the price.
What's the end game to VC subsidies?
There are many VC-backed businesses where 'Scale until you become profitable' is the end goal.
But there are also many where 'Outlast until competitors leave and then raise the price' is the only plausible profitable future.
I don't think VC's give a damn about long-term profitability. All they want to do is to trick later investors into buying them out. I can't think of a single one of these types of companies that has had a profitable year* let alone make enough profit to recoup their losses.
*I'm excluding AirBNB because their prices are cheap by operating in a legal gray-zone.
Not showing you the price actually makes it more profitable for the end user, not directly for Abnb. By showing price in this way Abnb attracts you, then the end user scams you for a higher price.
But this is different from the 'legal grey zone' OP was talking about. The Abnb hosts should likely be paying local taxes/fees for operating as a short term rental, in which if they were doing so the final costs to rent an Abnb would be higher in most jurisdictions.
Also, the hosts should be meeting a number of zoning rules (if we’re being honest), meeting building codes for safety, etc, etc.
If they put a sign on the side of the road or in front of their place, they’d get shut down post haste, but because it’s online it’s easier to turn a blind eye and ask forgiveness, not permission.
I have heard "dumping" used typically when a foreign company is trying to gain market share by driving domestic competitors under. So, while they are typically established companies, they're not established in that market.
Anyway, the essence of it is that running at a loss for a while in order to drive your competitors out of business, then raise the prices, is widely recognized as the kind of market practice that the government is justified in taking action against.
There's a clear difference in trade economics between eating initial losses as a risk to acquire customers (which every company does, including the one man food truck by your street), and doing it with a fat war chest backing it with the only goal being to wipe out the competition. Garage startups aren't looking to wipe out the competition (yet), unlike the likes of Google and Uber.
Not sure how you reach the conclusion that bootstrapped garage efforts would equate to dumping under these conditions. Bootstrapped garage efforts, unlike VC backed, have very little if any runway. They can't afford to.
I agree, I think dumping makes more sense when a government is helping and industry produce temporarily low priced goods to kill competitors, as would sometimes happen with China. Even a big company like Amazon has a much more finite amount of resources than a government
Fascinating story of how Dow fought a dumping competitor:
"In 1905, German bromide producers began dumping bromides at low cost in the U.S. in an effort to prevent Dow from expanding its sales of bromides in Europe. Instead of competing directly for market share with the German producers, Dow bought the cheap German-made bromides and shipped them back to Europe."
I'm so jaded by modern startups and venture industry. There are people who've built entire careers building unprofitable companies that only sell products to other unprofitable startups and eventually get acquired by other unprofitable startups.
It's a gigantic game of hot potato that swallows up a gigantic pool of human talent, all for producing stuff that really adds little to no positive to the world.
If they're not disrupting (read: destroying) local economies, they're breaking all local rules and regulations. And despite playing fast and loose with any sense of ethics or legal compliance, they still can't be profitable.
This is our world right now. My wifes father was a plumber. She said as actual plumber, you know someone who provides water and ensures your shity is sanitarily drained away he didn't make really good money. He got a job working for the auto industry running pipes for hydraulics to the machines on the factory floor and made way more money. How is that worth more to our society?
These startups aren't even making pipes in a factory. They're building absolutely dumb stuff that offer marginal life improvements ("15-minute delivery") or no improvements at all (crypto).
Literally tens of billions have flowed into startups in just the above two categories. If both were to disappear from the face of the Earth tomorrow, you'd miss them for about 5 seconds.
Am amazing example I saw recently was a startup whose app supposedly helped you break your monthly rent payment into two smaller biweekly payments, except all it did was hold on to part of your midmonth paycheck until the end of the month so you couldn't spend it.
The best part is that was positioned as a way to help low-income people who suck at budgeting, but you had to pay $20/mo for the privilege of using it.
Because poor sanitation is a disease vector that can kill people and ruin communities. A working toilet is an unmitigated good. Cars on the other hand have a much more questionable value proposition. They turn cities into parking lots shrouded in smog and significantly contribute to climate change. Even if cars only contributed in positive ways, they're still not necessary to a functioning society the way that sanitation is.
Well considering all UN countries explicitly authorize auto purchasing, ownership, resale, etc., and that the governments of all the major countries actively help their own auto industries, I would say your a bit outvoted on this opinion.
Most of what I said was not opinion, and your point here refutes none of mine. Appeal to authority fallacy, with maybe a bit of appeal to tradition mixed in.
> Most of what I said was not opinion, and your point here refutes none of mine. Appeal to authority fallacy, with maybe a bit of appeal to tradition mixed in.
Huh?
> A working toilet is an unmitigated good.
Seems like an opinion, since 'unmitigated good' seems like an impossible thing to prove. Only one counterexample of plausible harm is needed.
> Cars on the other hand have a much more questionable value proposition.
It's even phrased as an opinion.
> Even if cars only contributed in positive ways, they're still not necessary to a functioning society the way that sanitation is.
Sounds like an opinion too.
If none of these are opinions, then can you clarify what you intended them to be?
>Only one counterexample of plausible harm is needed.
Ok, where's your example of plausible harm for a working sanitation system?
>It's even phrased as an opinion.
That sentence is, sure. Weird how you left out the supporting examples.
>Sounds like an opinion too.
Why? Because of phrasing? Consider the repercussions of a city having transportation issues vs a city having sanitation issues. Nobody who knows anything on these subjects would say transportation is more important than sanitation.
It boggles the mind you think it's just an opinion that cars are as important as a working sanitation system.
How many cities have car free districts? How many cities have sanitation free districts?
One plausible example of toilets causing harm is if it's a very poor rural area.
The existing outhouse works fine, spending money on getting a toilet and connecting it to running water would not be the wise choice as that money would have been better spent on other things first, such as sending the kids to school, buying them a uniform so they don't get bullied by the other kids, buying a solar panel plus a battery so they have some semi-stable electricity, etc...
i.e. it's impossible for it to be an unmitigated good in the real world, where there's resource scarcity and many uses of said resources.
So unless you have some credible proof otherwise, the default assumption for me and passing readers will be that they are opinions.
Also, a Zen monk will have a different perspective about value. There are people who value the entertainment from TikTok while others prefer to read a book.
This feels related to the idea in "Billionaires, Surplus, and Replaceability" (1)
Basically, if, say, Jeff Bezos never existed, it seems likely that someone else would have created Amazon, perhaps a few years later, and maybe not quite as good. "Big online retailer" is sort of a natural niche, with a bit of a natural monopoly. So while the classic argument for letting people keep most of their wealth gained in the free market is that they provided a lot of value, maybe that doesn't make as much sense when you consider that if they hadn't done it, somebody else probably would have soon after.
It's obviously impossible to gauge exactly how much excess value someone provided compared to the world in which they never existed, but to round it up to 90% or doesn't seem very accurate.
So it seems like in our current world, there's a winner-take-all effect that a lot of venture-backed startups are trying to exploit. If we were a lot more aggressive in taxing companies like Amazon, my intuition is that it would go a long way toward reducing this effect.
I don't think you can play the alternative universe easily. Will there be another Apple? Will there be another Microsoft? There is some uniqueness in Amazon execution that didn't enable a competitor to survive, even when they were a startup.
Amazon is a series of several businesses created in succession, with synergy between them.
It is highly unlikely that the same path would have been taken by someone else, or that they could have the repeated same results with any combination of those businesses.
I believe a lot of this was driven by fed rate shenanigans creating far more investment wealth than there were organic opportunities for investing it. All of these market-distorting startup deals were just symptoms of that broader systemic monetary policy error.
While the mom and pop taxi companies and others impacted by it have my sympathy and support, all the regulatory alternatives other than waiting until they achieve a monopoly and then breaking them up seem to cause as many problems as they aim to solve.
> > I believe a lot of this was driven by fed rate shenanigans creating far more investment wealth than there were organic opportunities for investing it. All of these market-distorting startup deals were just symptoms of that broader systemic monetary policy error.
The Fed is not distorting anything. It's an anomaly that you can "invest with Uncle Sam" , for the longest time if you wanted to see your money grow you had to take it from your fellow American somehow.
The ability to passively invest with the government is alienating, unsatisfying and creates growth problems to the country that allows it because it subtracts participants from the creative destruction process.
Interesting perspective, thank you for that, but the issue is not merely driving bond rates to zero. The money created by central banks also flows into VC funds and the stock markets via various indirect paths and from there into the startup ecosystem.
That's a problem of trust, money flows to startups because the so called capital allocators don't trust themselves with such amount of money, otherwise they'd be investing all into companies where they are at the helm.
The whole family office concept is something new, back in the day if someone had money they'd just invest in themselves by expanding their own business.
All the stuff that gives the most satisfaction is zero sum.
Only one team wins the Super Bowl, only one NBA team wins the Finals and only one franchise gets to claim the World Series.
You can see it when you look at investors, even the notorious ones, they are rich but mentally they are not stoked or feeling as powerful as athletes who won such trophies.
> Based on the NFL's collective bargaining agreement, players on the winning team in Super Bowl LVII will receive $157,000 apiece. Players on the losing team receive $82,000 per player. [...]
To say nothing of pay and fame - presumably translating to better marketing deals and salaries from improved negotiation positions for simply getting as far as the Super Bowl. Absent other conditions (e.g. worries about exacerbating injuries), chances are you'd show up even if you know you'll lose, and not just out of spite and wanting to make the other guys work for it - but because you'll gain from it, which is a bit counter to the whole "zero sum" thing. Plenty of sport where new records are exciting even when it's simply beating the previous ones.
To be fair, we really don't know what would have happened if the entire financial system collapsed in 2008.
This was the Faustian bargain we made. For us, I think it would be hard to argue this was a raw deal as opposed to living the last 15 years dealing with a depression or who knows what.
Once on this path we will just keep kicking the can down the road and let the unborn pay of it eventually.
I don't know why this is catching now since it was already obvious long time ago. I usually hate conspiracy theories but could only think that a new meme or agenda is catching up. For Cory, Matt, et al this should be obvious since the dot com era and in every investment cycle. The greater fool theory explained part of this.
I talked to a fair share of late stage VCs and they like to think of themselves as “category king makers” - the term itself reflects the general sense of humbleness in the VC community. Besides the “venture predation” described in the paper “category king making” also entails cutting off potential competitors from funding. The theory is that once a Softbank or Sequoia have chosen their horse other VCs will be discouraged to invest in the same category as it “is taken”. And many times the VCs actually act behind the scenes and actively discourage their peers to seek an investment in a competitor of their “category king”. It truly is a disgusting game to watch once you have been close enough. VCs for better or worse are the essence of the tech ecosystem. Make the world a better place. my a* :)
Yeah, Uber was a classic case study for blitzscaling and the Uber v Lyft battles are a case study of blitzscaling by using VC subsidies to try to price out competition.
Other thing we need to talk about is when funded startups run customer service that is not sustainably financed. Everybody apparently loves this and celebrates that the great service and listening to its customers.
But it is just the same thing: predatory pricing applied to a product delivered with high-end customer service.
Edit: Example: $5/month Todo list SaaS that has a 24h customer support telephone helpline
I don't see the problem. They apparently believe in a low margin, high volume play with support being a volume driver. They might be right or wrong, but I wouldn't want it to be illegal as a business model. Investors and companies have to be free to lose money or else we've just got a centrally planned economy where every business has to offer the same product at the same price.
The problem is society is witnessing races between Tortoises and Hares, where the Hares are doped with venture backing.
A healthy society progresses slowly like a tortoise, encountering actual tradeoffs that aren't masked by mountains of cash only to ensure cancerous returns for already rich people at the expense of skilled business owners who are actually designing their businesses to handle endgame stressors.
In any healthy competition you have rules around the gear you can use, how many people are allowed in your pit crew, what dimensions your fencing saber can be etc. so that rich people cant buy their way to success to cover up lackluster execution and skill.
I also think this kind of VC puts some of the companies that take it to bad spots. Not all markets can support it. Look at Substack. They came in and bought out the newsletter/indie media whatever market. Unfortunately it’s not the kind of market that’s likely to make that investment back.
The problem is the stupidity of those who believe unprofitable businesses can work in the long term and be sold for lots of money, and the resulting self-fulfilling prophecy, because those businesses indeed can and DO get sold for lots of money.
And the aura of money extends to customers and blinds their judgment. Few people look at long-term sustainability when choosing a service/product. It's usually about how polished it is, how well it works today, how shiny it looks, how "big" the company behind is. Nobody thinks about whether the business will exist in two years. And few people consider that if they are a customer of a VC-funded business, there is literally no outcome that is good for them: either the company goes bankrupt, or it gets acqui-hired, or it gets strategically-acquired, or (best case but very rare) does an IPO. Even in the case of an IPO the customers generally lose, as the product gets bloated with new features they do not want or need (see Dropbox).
When you run a B2B SaaS, you realize all that with painful clarity.
Funny to see nobody's mentioned Cloudflare yet. They're not making any money: This is presumably their exact plan: Offer CDN services and other web infrastructure services at a loss for a prolonged period of time until the competition is destroyed, then jack up rates and eat the market.
This coupled with their device attestation stuff scares the hell out of me. Once enough of the internet is shielded by Cloudflare, and they only allow access to authorized (read: uniquely identifiable) devices (or else you have to answer a captcha on every request)… I just don’t see a very good future for the free internet.
+1, they really made my eyebrows raise recently. They're absurdly overaggressive on flagging requests as scraping...and will sell you a CORS proxy for scraping, with a big fat "I'm a scraper" tag on it. They get two customers and the web-as-commons and the scraper are both worse off.
Very often the unit economics at smaller scales doesn't work, but then works great at a large scale. I don't think it's immoral to gamble on achieving the high scale later and investing in the company to shoot for that scale. If no one can achieve profitable unit economics early on and you aren't allowed to have unprofitable unit economics then no one will make the product. I think this is bad for innovation. Is this the same as "venture predation"? It sure seems that way. How could you tell it apart?
Easy to criticize but to be consistent you'd also have to consider non-VC-backed products dumped at below price by regular companies too, and that would get uncomfortable real fast:
- Chrome
- VS Code
- LetsEncrypt
- Everything open source
etc. Sometimes I wonder how much this practice distorts the software industry, preventing new innovations from happening. The industry settled on this approach without being forced to, so I wouldn't want legal changes to prevent it either, but it's worth a bit of self-reflection on how much we all love free stuff.
I recall that it wasn't seen that way when Microsoft used Windows revenues to push IE and crush Netscape. It was called product tying back then. You don't hear much about it anymore.
Netscape was payware in the beginning? Not sure how that's non-existent? Even after they were forced to go free by Microsoft, they were selling servers which are the compliment of browsers.
Yep, just about everyone who wanted to connect to and browse The Net over dialup in the mid-90s. It was conveniently sold at Price Club (which was eventually merged into Costco of today).
Yes, the free downloads came later! Originally Netscape Navigator was a premium product. My dad paid $35-$50 dollars for it at Price Club. This amount is close to $80-$100 in today money.
Chrome and vscode are integral parts of Google's and Microsoft's strategy and absolutely make them tons of money via increased usage of their main product(search and enterprise productivity suite).
I'm part of the problem. I always suspected my Uber ride was financed with venture money. So i always went with Uber. But i didn't think ahead to the fact that it would kill off the competition.
What i don't get it is what the Uber moat is? Why does this need to be centrally planned and controlled? Would an open source and free platform work where drivers got near 100 percent of the sale instead of the 75% they get today.
Uber's moat is its network. Can't get any drivers if there are no riders and can't get riders if there are no drivers. This means you need to start by offering drivers more money than you make in order for them to use the app. An open source solution wouldn't be able to get off the gorund.
The direct fix for this (which I believe has happened in some countries) is to ban them from asking drivers to enter into exclusivity or minimum volume agreements with them. Then drivers can work for multiple networks.
Yes - I believe Uber used to have a number of terms which made that difficult in practice (eg restrictions on numbers of rides rejected/accepted per day, etc). In at least some countries though competition authorities have banned these.
Uber's moat is the inertia of its massive customer and not-employee base making it difficult to enforce the regulations it has historically flaunted. In that way, it's similar to why Mastodon can't kill Facebook.
"A venture predator is a startup that uses venture finance to price below its costs, chase its rivals out of the market, and grab market share. Venture capitalists (VCs) are motivated to fund predation—and startup founders are motivated to execute it—because it can fuel rapid, exponential growth. Critically, for VCs and founders, a predator does not need to recoup its losses for the strategy to succeed. The VCs and founders just need to create the impression that recoupment is possible, so they can sell their shares at an attractive price to later investors who anticipate years of monopoly pricing."
Everyone on HN knows this is exactly the playbook of many fast-growing VC-backed startups. No need to mention names.
It's the playbook of any well funded organization trying to break into a new market. This is the entire premise of loss leaders, and they're effectively risking their entire capital.
Yes, but: for a profitable organization a loss-leader is expected to enable profit-making elsewhere in the org, so a total sum ought to be positive.
For example, console hardware is loss leader for console makers because they make up for it for every game sold. Google Chrome and Android are loss leaders for Google, but are strategic assets protecting its revenue business.
In both cases, these companies can continue to do that indefinitely (as long as it makes business sense).
Venture-backed companies that are burning cash, on the other hand, are pursuing an unsustainable strategy of predatory pricing to kill off competitors and grab the most of the market.
(obviously, it's not either-or, you can easily name examples from long standing companies or startups doing either)
This paper is not about grabbing most of the market etc and eventually making a profit. As the abstract quoted above says, it's about creating an illusion that this can be done so as to sell stock to a greater fool. Uber was quite successful at this, as were many others.
Really, from the pov of Travis Kalanick and the original funders, Uber is a fabulously successful business.
The original founders and the venture predators made their money. The professional execs at the top running the business now are also making lots of money. It doesn't matter to any of them what happens to competitors, employees and current shareholders.
Theres no difference between what you just described just that one has an umbrella where its funded by revenue elsewhere and the other is on VC dollars on the promise of long term ability for market share and raise prices or someone else buys organization and continues it as a loss leader for its ability to get market share.
They are completely different financially. Look at this way: in a single quarter, the cash flow for a company with a loss leader strategy will still be positive because the loss product is offset by other revenue. The venture predation company will have a massive negative cash flow no matter what because there is no near-term revenue to offset the loss.
That’s a bit of an exaggeration right? Facebook sold their headsets at a loss and seem to be doing fine, Uber and doordash entered into markets without charging fees and look to doing fine, OpenAI is currently doing that with ChatGPT and we will see how it goes for them.
Surely, selling at a loss is a risky endeavor, but we see it time and time again that companies selling at a loss get more funding due to their inflated numbers from selling at a loss. Or, it’s only those companies that make headlines and we don’t hear about all the companies going bankrupt selling their services at a loss.
> Uber and doordash entered into markets without charging fees and look to doing fine
These companies are not profitable. They are still in the loss-making market share acquisition phase. They might be profitable at some point, but that would likely be by increasing pricing to something far less desirable to consumers, negatively impacting growth. AirBnb recently turned a profit but is now more expensive than hotels with often worse service, and they're being regulated out of some markets, so we'll see how it works out for them. Would DoorDash with a minimum $15 delivery fee survive? Uber if it's more expensive than a cab?
Don't get me wrong, I'm happy living large off of VC fund's money. But I'm not brand loyal to any of this stuff.
Are there any examples of successful companies doing this? Uber and Wework only cost the IPO bag holders. Have any Venture Predation companies actually reached supracompetive pricing levels and recouped the predatory losses enough to have overall harm to consumers?
IPO bag holders, too bad, and I don't see any regulatory need to protect them.
I thought "loss leaders" were specific products sold below cost so customers would buy accessories or subscriptions that have nice profit margins. Like selling cheap printers but expensive ink.
The technical term for "loss leader" usually refers to a place like a grocery store selling some necessity like milk at or below cost, because they know if you compare milk prices and decide to buy there, you'll get other things once you're in the store.
That's different from "sell a dollar for fifty cents until all competitors are dead".
There's also loss leader applied to things like consoles, where they lose money (at first) but make it back on the games.
I think the problem is that making a user or service provider create an account on an app isn't the moat that they think it is. A lot of these market domination moves only last as long as the VC money then the competitors are more than happy to swoop back in.
Consumers are super fickle, and I will happily check a different app to see if I can save a dollar on a $10 car ride
You aren't the norm. If you were then Lyft would be doing much better. How many rideshare apps do you check? 5? 10? My guess is maybe once in a while you check Lyft if uber seems high. That's what I do.
I almost always check both apps, but to be honest I don’t actually rideshare much so I’m always curious about pricing and options(I don’t live in a place where there are 5 rideshare options).
Or I just use google maps which gives me the full menu of available options and how much they cost including scooter and e-bikes as well as transit since I’m normally just interested in the fastest option which is frequently transit.
Pricing is highly dynamic for Uber and Lyft, changes minute to minute. I can't imagine Google can predict this well. Any idea how they do this? I can't imagine Uber and Lyft make this open. I just tried it and only Lyft is available in my google maps app and they said the range for one ride was $76-90 and the actual in Lyft was $66.
This is essentially how Carvana has decimated the private used car market in my area. Only instead of low product prices, they offer well-above market value for used cars to private sellers so that Carvana becomes the only source for a car that fits your criteria.
I do not see Carvana lasting long, at least not if their only strategy is to pay above market for used cars and getting in the crosshairs of multiple state regulators.
yyy "cornering the market" is exceptionally difficult to execute. In used cars for example, other companies could make a fortune trucking in used cars from elsewhere and selling them to Carvana...
if their theory holds true that means private sellers were massively under negotiating, or that there is a large arbitrage value between when a seller wants to sell and the days on market.
ie assume seller is willing to pay $50 a day to have car sold today (and not have to field calls etc). That means selling a car a month faster is worth $1500. Carvana can borrow the $25K car value at ~5% to pay $100 interest to hold the asset for a month playing the time arbitrage.
I'm finding one thing that seems to be happening generationally (or just in my experience) is that folks are far more willing to pay for convenience/now. That means they'd rather have the $25k and car sold today than have the $1500 in their pocket a month later (and field calls etc).
I agree completely and totally see why people do it. I am keenly aware of the big spread between trade-in value and what the dealer will turn around and sell it for -- and yet, having sold a vehicle a couple of times, I will probably never do it again. Especially when you consider the risk of getting scammed somehow in the money transferring process, a lot of people will eat the few thousand bucks. I don't know if Carvana will stick around, but definitely see myself going to them or Carmax instead of Craigslist next time I am done with a car.
Right, the CarMax process is pretty painless and the prices they pay aren't much lower than what you could get in a private party sale. I think some HN users might not appreciate how risky selling a car on Craigslist has become; there have been many high profile news stories about sellers being scammed or robbed. Plus with the increasing levels of violence in many cities more people (especially women) are simply afraid to meet random strangers or give out their contact info.
I sold my old car via CarMax and enjoyed the experience. I'll go back to them once my car gets old enough regardless of potential peanuts I might save theoretically.
A flipside effect to this is advertising and PPC which has trended up so high overtime, especially in education.
Strategies viable in 2019 are largely useless to bootstrapped businesses in 2023: the costs of ads even to acquire customers with low spending power is two to three times what it was (e.g. students)
As someone working on a NLP product for education, the pricing and subscriptions are also dropping rapidly, lead by the funded companies entering this niche (the founders almost entirely are non technical recently). The combination of the two is like a jaw - it's unclear what to do when your technology becomes a trend, other than grab and deploy your own funding and use marketing strategies and technical efficiencies to outlast your competition.
This rise of PPC should be matched with targeting efficiency through tools like Segment etc that are aimed in increasing the ROI on adspend. It's a resource allocation strategy that drives the limited supply (ad space above search) to the highest bidder (ie highest return usage).
Just like a competition for any other limited resource in a capitalist market driven society.
Losing money while you grow isn't neccesarily bad.
Venture Capital at its best allows a company to take losses until it can achieve economies of scale.
I'd say it turns predatory when even after achieving scale(Like Uber or Amazon) a company still runs an unprofitable business to choke out competitors.
How can you prove this in court? No clue. Maybe the company has to articulate the explicit economy of scale it hopes to achieve and how?
I think the difference between legit and illegit is whether or not your competitors have to go out of business for you to become profitable. If you burn through some cash to get off the ground, eventually driving your per-unit costs down so that your prices become profitable, that's legit.
If on the other hand your current prices are never going to be profitable (looking at you, Uber), and your business plan requires that your can raise them a lot without losing sales (because your competitors are gone), that is not legit.
The third factor in all of this is that many companies like Uber weren't really ever likely to become profitable in any scenario, and this was really about taking the cheap VC money while it was cheap. Blitzscaling was just a way of pretending that you would someday become profitable.
I think higher interest rates will get rid of a lot of this.
It's about unit economics: losing money while you grow isn't bad, but if you lose money on every customer, it means subsidized growth. That's usually done not to get economies of scale, but to get GROWTH GROWTH GROWTH and user numbers, so that the unprofitable business can be sold to the next buyer/investor.
Are there any that are actually successful with this strategy? Uber and Lyft, for one, but they still don't make profit and aren't really that sticky, honestly, given that people will use other services if they're cheaper, like Waymo and some new ride sharing upstarts I've seen around recently.
I can't escape the feeling that it boils down to the old classic 3 stage business model:
1. collect underpants
2. ?
3. Profit
Uber and Lyft are great examples. They haven't established long-term stickiness with drivers or passengers. So if either of those groups get offered a better deal they will switch. Therefore it's just a relentless race to the bottom with no sustainable business in sight.
> just a relentless race to the bottom with no sustainable business in sight.
Isnt it ironic that the main thing they teach to the general public is benefits of competition in free markets. But the first thing they teahc to MBA types is to avoid competition by any means possible.
There's an interesting article somewhere about a pizza place that iirc arbitraged VC subsidies by ordering pizza from itself through some delivery app that was buying the revenue by selling the pizza below the actual price.
I wonder what the relative scale of that wealth transfer is compared to the transfer of wealth involved with leveraging the motor vehicle equity of drivers into profits for wealthy investors.
It's not profits though. Investors are paying more than the value of the ride to the driver. Now whether that offsets the depreciation of the vehicle over time, I don't know the numbers on that.
As long as the founders get to borrow lots of other people's money to use this strategy, they have won. Even if the company goes bankrupt or is bought at a low valuation, they collected big wages and benefits for years and get to put their startup experience on their pitches for their next project.
Subsidizing a project to make it grow and drive competitors out of the market has been fundamental to the US 'tech sector' since 2008 (eg. YouTube).
Wait, it's predatory pricing traditionally understood to be aimed at consumers/customers. Applying the term to sketchy pricing practices aimed at competitors is a bit novel in my book. I feel like words are being misused here.
I am a founder of a bootstrapped B2B SaaS business. A VC-founded competitor that can burn through money offering subscriptions at unsustainable prices (e.g. $20/month) is the main fear keeping me up at night.
Probably more aptly named 'Venture Dumping' because 'dumping' would be a bit more like the classical term but that just doesn't have the right 'ring' to it.
The response from regulators should be: Let VCs waste their money.
This is an extremely weak analysis from an economics point of view. The regulator has several options to deal with monopolists if and when they emerge.
If consumers realize benefits in the meantime in the form of cheap products subsidized by VC money that’s a good thing.
Reminds me of the game Capitalism[0] where the player was incentivized to achieve monopoly in markets by selling below-cost, subsidized by the other parts of the business. Vertical integration was also highly encouraged.
Pricing below costs is the opposite of a problem for consumers (in the short term…). “Predation” in this case refers to competing businesses, who often have enjoyed a long period of monopoly rents.
Sometimes that is true, but if the barrier to entry is low (eg. ridehailing services), as soon as the predator raises prices, competitors will appear. If the barrier to entry is high (eg. telecommunications), there is usually some antitrust regulation.
For academics I think this is fine, the whole job is to look for new extensions of the law. But it shows how very far we are from any kind of basis for "stopping tech."
Gonna be hard to achieve consensus around "raising fares and lowering driver pay" which is the opposite of what Uber did.
"Uber showed that venture predation works. Uber raised around $24 billion from private investors and used it to subsidize cheaper fares for riders and higher pay for drivers. Uber quickly crushed the taxi companies and acquired a dominant share of the combined taxi-and-ridehailing market.27 But it never developed a superior product or cost efficiency. Lyft, other ridehailing startups, and even taxi companies developed similar apps. Uber had to keep up its below-cost pricing to maintain its market share. In each of the three years before its IPO, Uber racked up losses of $3 billion or more.29 Uber reassured investors by explaining that, once it became dominant, it would be able to raise prices and recoup its losses. In its IPO roadshow, Uber’s executives
told investors that they expected the company to earn an adjusted profit."
...
"We concede that the “millennial lifestyle subsidy” was fun."
...
Then a lot of handwaving. But no victims other than bad high margin businesses. (There's a theoretical driver that doesn't realize the high pay won't last forever and buys a car, but he can sell it no? And he could read the news about his livelihood and learn that his high pay is at risk).
Btw, you can still take taxis. It'll cost more and pre uber they were very surly or wouldn't show when you called them. The only "regulate Uber" consequence will be higher ride costs and lower paid drivers.
Amazon operates on very tight margins in it's retail business. The ideal case is lots of competition, which would lead to uh... very tight margins among competitive firms. Amazon is just smart enough to get ahead of that. And I think their long term goal has been to operate at such a low cost structure that they have a durable advantage in cost. And then to pour back all their capital back into lowering their cost structure.
So why stop them? In order to subsidize the higher cost company, their private jets and sexual harassment lawsuits?
Capital is very easy to get in 2023. We are not in the time when capital is so difficult to get that you'd need a 2 generation family firm just to build a single factory. At that point spending 5 years to crush your competitor might have made sense. But now it's limited to monopoly markets like cable, and cell phone service. And it might indeed be useful to create more competition there.
Unlike Amazon I think Uber isn't likely to be a great business. There is just no cost structure advantage being built. So they'll either operate on low margins forever or they'll raise prices and we'll get competition in the space of a few years. In either case I would not want to hold Uber stock right now.
You. don't. say. Really?!? OMG, what an insight! What are they going to say next? That startups also use the good will of the internet to create their IP to then take it private as a way to get free labor? I'm shocked! And because this is also the internet, that was sarcasm.
Diapers.com example: "When Bezos’s lieutenants learned of Wal-Mart’s counterbid, they ratcheted up the pressure, telling the Quidsi founders that [Bezos] was such a furious competitor that he would drive diaper prices to zero if they sold to Bentonville. The Quidsi board convened to discuss the possibility of letting the Amazon deal expire and then resuming negotiations with Wal-Mart. But by then, Bezos’s Khrushchev-like willingness to use the thermonuclear option had had its intended effect. The Quidsi executives stuck with Amazon, largely out of fear. The deal was announced Nov. 8, 2010."
https://slate.com/technology/2013/10/amazon-book-how-jeff-be...