Today’s correction isn’t much like the dot-com bubble
theatlantic.comThere’s another often unwritten element here around companies basing their valuation on false markets. For example, if I sell $2 for $1 that’s a false market. Of course I can grow like crazy and gobble up lots of customers. I could even “disrupt” existing players like those stodgy old companies (banks) that sell $2 for $2.15 (a loan).
The VC subsidies for some of these companies are so high that they are basically selling $2 for $1 in some cases (WeWork was basically losing nearly $1 for every $1 of revenue!)
Ride share companies grew fast when they sold VC subsidized rides but have struggled to maintain that market share dominance without subsidies (lots of other players quickly move in). MoviePass sold lots of subsidized movie tickets until the money ran out.
Thus the fallacy of the whole “it’s ok that we’re unprofitable because look at how fast we’re growing” is that in many cases these companies were only growing BECAUSE they were grossly unprofitable in the form of their investors massively subsidizing purchases.
The whole point of fast growing startups with ever-increasing valuations is to enable early investors to cash out at huge multiples.
Everything else is a side show.
Sounds like a Ponzi scheme
Yeah, Amazon and Google are totally Ponzi schemes.
How do they generally cash out? Sell to other investors? IPO?
If you just thought about the "false market" like advertising, it wouldn't seem so perverse.
Coca-Cola "wastes" millions on advertising, something that doesn't directly generate profits. From a cash flow perspective, it's giving money away to advertising agencies. The theory is that you have an indirect return through building mindshare. Same goes for "good will" deeds like charitable actions by corporations or taking a hit on a product to use a more environmentally friendly component. From a completely superficial perspective, this is a deliberately inefficient action that makes the market "more false".
You could imagine a scenario where you take in a lot of VC money to jump-start the initial production of a more environmentally friendly product while still selling it at a competitive price that really isn't justified by its production costs. Is this a false market? Perhaps, but it may serve to build out the necessary pipeline enough such that the unit economics eventually work to be self-sustaining and also build a lot of brand loyalty along the way.
These are bets. Advertising is a bet on brand recognition, one that can similarly take years to materialize (see the mattress industry). Facebook was a bet that paid off. Everyone laughed at how much they took in originally too.
Of course, like all bets, there can be bad bets, and even good bets that just don't pay off. In some sense, the WeWork story should be considered a great success: the public market did exactly what it was supposed to do, shine a light at the appropriate time on a bet that had been going on too long. The real danger is when these initial stages are funded incorrectly: if a VC Fund makes a stupid bet, well, that's the game, but if a pension fund had invested in this, then it would be dangerous.
> Coca-Cola "wastes" millions on advertising
but they don't overspend on advertising, unlike those VC funded companies. Each can makes a profit for coke, and therein lies the difference.
The poster isn't saying that companies should never buy growth by selling $2 for $1. He's saying that VC seems to be bad at avoiding companies that only grow because of this. Consider PayPal. Early on, they would pay a $20 referral fee to anyone if they could get a friend to join and use PayPal. That's insane at first glance, but it worked because those new users kept on using the product; because the product itself was viable without the subsidy. Coca-Cola is the same way. They advertise, but they turn a profit after baking that into the price of the product. MoviePass was never going to work. The subsidy was the product. That's the concern.
Are they bad at avoiding that though? Or are we greatly extrapolating from one VC in one high profile case: because that is the actual hilarious part of WeWork, it was basically entirely funded by just one VC that kept doing more rounds.
Additionally, the nature of VC is that it is high risk: you're supposed to have 9 failures for every success. So just from an "amount" of companies perspective, they're always going to seem "bad" at this I guess. That's why I used Facebook as an example. It's unfortunate that it takes very little time for everyone to forget, but the valuation of Facebook seemed ridiculous at the time. That's the nature of the beast: it's really hard to tell the winners from the losers, and thus VC is a necessarily risky enterprise. PG talks about this here: http://www.paulgraham.com/swan.html
That's why my point is that the true problem is if the capital comes from the wrong place, namely non-traditional sources of capital funding these funds due to loss of any other viable more conservative investments.
And even WeWork isn't that bad. Each new location they open has large startup costs: they have to lease a large space, build it out, hire staff, do a lot of marketing -- only then can they start collecting rent from members, and it takes time to fill the space to capacity.
There's no reason to believe that they wouldn't be profitable if they stopped growing so quickly (they opened 200 locations in 2018 alone).
WeWork was profitable - for Adam Neumann.
Using WeWork funding to buy property that he could then lease to WeWork was brilliant. So was selling the branding and IP back to the company. So was borrowing money against his share ahead of the IPO - although it's not obvious how that's going to work out long term.
Was WeWork ever a serious business? Was there ever a plausible path to consistent profitability? Or was it just a cover story?
That's not an uncommon nor unheard of tactic in business. Fuel growth, and capture the market for your brand, by selling at a loss.
The trick is always the transition to profitability. Generally, this comes through layoffs and maybe price increases.
I think the problem is that a lot of these companies are trying this strategy with Juicero-like products. The moment they pivot to profitability, anyone else can just start squeezing at a lower cost.
Is Uber or We really making something that can't quickly be copied, even at a local level, once prices are doubled or tripled?
If you look at the scooter companies they are now charging $.29/minute (vs I think $.15/min a year ago).
If you rent it for an hour, that now costs more than $20 with tax. Not exactly cheap anymore.
That sounds like it's probably cheaper in the loan long run to buy a bicycle plus you don't look like an adult using a child's toy.
Imo this should be illegal. Taking a loss undercutting smaller competitors in a way that's only possible because you have piles of money unrelated to your actual business is going to distort the market in a way that's really bad for consumers in the long run.
Anecdotally I noticed this with Pita Pit in New Zealand. There used to be lots of independent pita places that had decent pricing, then pita pit started buying them out and replacing them with pita pit chains, while still competing on price relatively well. But as soon as they'd bought out all the competitors in the area they immediately almost doubled their prices.
What you describe is illegal in certain manifestations. It's called predatory pricing.
So during the expansion phase they are subsidizing consumers and as soon as the expansion phase ends they open up a space for competition again? Sounds pretty great for everyone except the owners of the independent pita places that go out of business.
I know retail stores in France cannot legally sell anything at a loss, except during government-decided 'sales' periods (twice a year, usually in January then June) which are mostly aimed at emptying stocks for the new 'season' (as if that mattered in the 21st century when most stores are a on a bi-monthly product cycle, but hey, that's the inertia of law/gov).
Not sure about businesses in general but I seem to recall it's a general law for commerce.
The problem is that retail is thus basically unable to compete on price beyond a certain (very mild) degree, notably forbidden to say "I'll sell item X at a loss to attract customers, and then make up for it on other items they buy". It's just illegal to do it in France.
A little bit too reminescent of a planned (communist) economy if you ask me, because it applies to each and every item taken individually, not the store overall or over a certain period of time. Needless to say this doesn't help thwart the collapse of retail versus online shops, especially in the way of services — and consider that foreign online businesses don't even have to follow such regulation, obviously, so...
It's a very, very grey area to regulate, and government being just awful at understanding how business works makes it ill-suited (often misguided) to regulate such things. I think branch negociations (within a given sector) is a much better approach: let actors (businesses) decide how they will compete, and only regulate if there's anti-consumer (cartel) behavior, not prior to any wrongdoing! — it reeks of a view that 'capitalism is bad' yadi-yada (typical French view) and hurts consumers' purchasing power in the end.
Wow.
So if a merchant buys in too much stock and can't offload it - they're literally banned from selling it below cost?
I assume they can still sell it on a secondary market (just not direct to customers)? Or do they actually have to eat it entirely and just like, burn the stock or something?
Edit after the fact: called my ex-boss, she kindly reminded me that as a company we would store goods for months and sell them during "les Soldes", so yeah you get twice a year a 6-weeks period to offload your stock.
Sorry for the confusion. Note that this only applies to non-perishable goods, food for instance is treated differently. Each sector in France falls under different regulation, it's a mess, very hard to navigate.
I'm not an expert in accounting but I assume there's a legit way to write it off as some exceptional loss and offload it, maybe even to customers; what's however certain is that if you get audited by fiscal authorities, you better be able to prove it's not fraud. (and yes, it'll be subjective, ultimately a judge's ruling I guess)
But don't quote me on that part, it's been a long time since I've worked in retail (10 years). I just know that as a brand store (Esprit de Corp) we would simply send unsold items back to the mother ship and they'd deal with it. I think the maximum allowed sale discount is around 20% outside of the bi-yearly governement-decided national sales (called "les Soldes" in French, and a high time for shopping amateurs, mostly women historically).
This all feels so 19th century / communist, I'm appalled just sharing it. But it was true as of 2008.
But hey, we get e.g. Black Friday online like everyone else, and Amazon does their Prime Days too, so... dunno what's up with that. I just know street retail is dying big time here, more than in most comparable European cities in my anecdotal experience.
That's the thing about these non tech companies though. They have fixed costs per transaction, something pure tech companies don't. So tech companies can grow at a loss because their marginal cost for each customer is zero or close to zero. As long as you are selling more, you are getting closer to profitability.
This does not apply to all these "unicorns" that have a non negligible marginal cost on their services.
The South Park gnome episode comes to mind. For values of:
1 - Demonstrate growth
2 - ?
3 - Profit
https://en.m.wikipedia.org/wiki/Gnomes_(South_Park)#/media/F...
Who knew it was a billion dollar business model?
>The VC subsidies for some of these companies are so high that they are basically selling $2 for $1 in some cases (WeWork was basically losing nearly $1 for every $1 of revenue!)
Effectively none of these companies lose money on a marginal basis. In other words, an additional customer making an additional transaction helps their bottom line. There's always two major questions. (1) Can the company grow to where their overhead is covered in that marginal revenue and (2) can they acquire the customers cheap enough.
Your statement that WeWork loses $1 for every $1 illustrates a common misinterpretation. Those two numbers have basically no relationship with each other and don't tell us anything. Imagine that WeWork wasn't a total fraud. They set up their first 10 locations for $500,000, have annual revenues of 1 million and profit of 500,000. A VC comes along and says "Shit dawg, here's 50 million set up 100 more locations". So WeWork takes that money, spends 50 million and a year setting up new locations. \
What's their financial statement going to say? That they lost 49.5 million dollars on revenue of 1 million. Obviously that's an eye popping loss, but assuming they can replicate their success it's a smashing investment. The latter part of that last sentence is the important thing. Whether or not the money these companies is investing is going to see returns or if they're wildly optimistic in their long term projections.
Reportedly Uber did use money on a marginal basis and maybe still does. That's a big and important one.
I never understood the "grow fast at any cost" mentality.
If you can't make your shit break-even or near-profitable at small scale, there is a big chance you will not be able to make it work at large scale.
An interesting brick and mortar example in the Bay Area was Fry's electronics. When they started, they grossly undercut all of the electronics brick and mortar stores and priced more like the distributors did rather than the stores.
As a result their business grew quickly and the other stores were unable to compete and went out of business. Then with the market to themselves they raised their prices to increase their margins. They also used access to adjacent markets (TVs, PCs, Radios, Appliances, Office Supplies) to supplement their margin which specialty retailers like Quement or Jade did not.
Their strategy was essentially to lose money on something that brought in customers, and to make extra money on other things once the customer had been acquired and was in the store.
The "grow fast at any cost" mentality is predicated on the understanding that the most difficult step of any new business is to change consumer behavior such that they go to the new business first. Once they have established that pattern they can then manipulate the pricing of their offerings in order to achieve the highest sustainable level of margin before they lose customers.
Agreed, but phrasing it in the “here’s what changed that most people don’t understand” language that VCs love:
“in the age of cheap money, scale is not a defensive moat”
When Fry’s was founded, it was so prohibitively difficult to get the funding to scale to their size, that competition was thwarted by lack of investment. Now? The trick is public knowledge; the funds are cheaply available to anyone able to scale a competitor. So the critical step two —- raise prices —- is impossible. Your margin is my opportunity, as they say.
What worked in 1985 when interest rates were ~8% doesn’t work when the great global pool of money is sloshing around, desperately seeking returns.
I think the actual investment dynamics are more nuanced (i.e. investors aren’t completely naive), but it’s still true that this get-a-monopoly-and-raise-prices approach is a business strategy from a very different era.
The trick still works (and is quite common), because investors apply that reasoning to the upstart, not the established business. If you go to a bunch of VCs and pitch them "Comcast is making a ton of money because they own a monopoly and steadily raise prices. Their margin is our opportunity. Give us $20B so we can build out a national 1G fiber network and take all their customers", their response will be "What's to stop Comcast from dropping their prices and increasing their bandwidth once you've spent all this money building your competing market?"
Knowing that you're the attacker and they're the defender and that most consumer markets favor the incumbent, the investor won't hand over their capital unless you can show that you've already started to take their market. And then once you have shown that you're taking a fat incumbent's market, they're happy to fork over tons because they know that every other investor's reasoning will be the same, and nobody will want to attack an incumbent that can just drop prices to fend off a challenger.
BTW, Google decided to buck the outside investors in exactly this example, funding GFiber internally. It played out basically exactly as the scenario above - the incumbents rolled out gigabit cable/fiber at competitive prices in precisely those markets GFiber was threatening, preventing them from making serious inroads. There were a bunch of other factors (like regulatory issues and the difficulty of scaling last-mile telecom), but after recent examples like that investors would rather find virgin territory rather than fight price wars in large existing markets.
(IMHO, this is one thing wrong with American capitalism today, as our system relies on cutthroat competition and aggressive risk-taking behavior by investors to get good deals to consumers.)
Like Youtube, which lost money every year until it was bought by Google. Or Instagram? Or a variety of others.
You don't understand why people want to copy those models of growths and get those big payouts? Which part confuses you?
Everyone agrees with that statement. The hard question is what "can't" means. Companies with a grow fast mentality always insist they could break even, and often present financial metrics indicating they do break even with the proper adjustments for purely growth-related costs. There's no obvious rule for how much you should trust a company's adjustments.
“We lose money on every sale, but make it up on volume”
A bit of history of that joke: https://www.barrypopik.com/index.php/new_york_city/entry/we_...
> 6 February 1833, New York (NY) Evening Post, pg. 2, col. 2:
> Among the business anomalies which meet the eye of a stranger visiting New-York, are the placards exhibited in the windows of the retail shops, informing passers by that the stock in trade within is selling off at prime cost, or according to the more alluring announcement which some have adopted, at fifty per cent. less than cost. A person attracted by this lure to become a purchaser, must soon come to the conclusion that either the veracity of the dealer is not of the most scrupulous description, or else that he laid in his goods at enormous prices. One in the habit of passing these shops, must at least smile to perceive that notwithstanding their owners have been selling off their goods “at less than cost” for so long a time, their shelves continue to be as well filled as ever. We have heard of one individual, who “wishing to retire in consequence of declining health,” was five years disposing of his merchandise, “at prime cost,” and at the end of this time he found his capital so much augmented that he removed into a more busy part of the city, and entered into trade on a much larger scale than before. How is it that trades-people can sell their goods at less than they paid for them, and yet realize a handsome profit, is one of those mysteries of commerce which we never could penetrate. Perhaps they are like the Irish mercer, who, having assured a lady customer that the silk he desired to dispose of to her actually cost him more per yard than he charged for it, was asked how he then could afford to sell it so low. “Ah, madam, he replied, we depend for our profit on selling a large quantity.”
present financial metrics indicating they do break even with the proper adjustments for purely growth-related costs
Such as “community-adjusted EBITDA”
It works out often enough that it’s worth investing in. The WeWork thing is a great example — if they could dominate commercial real estate, that would be nearly unlimited upside.
For a lot of these companies, they are profitable on a per customer basis, they're paying to acquire more customers.
For example, if it costs you $10 in marketing, promotions, etc. to acquire a customer, but on average those customers will pay you $20 over their lifetime, what should you do? Raise money and spend as much as you can to acquire more customers, if you think it scales!
I think that we call this sort of thing a "loss leader" in retail. Unfortunately, it seems like some of these companies' entire market is a loss leader.
> old companies (banks) that sell $2 for $2.15 (a loan).
banks sell $0.15 for $2.15, nobody can beat this business model. Bank only need $0.15 to give you a $2 loan and ask for $2.15 in return.
> if I sell $2 for $1 that’s a false market
You're assuming that there is some objective value of a dollar, and that all dollars are worth that same. These assumptions are not necessarily true. Rather, they are myths that are propping up the current system.
Can't believe I got downvoted for this. Would be worth a whole blog post. Start with the fact that only approved banks have access to the "cheap money" that the Fed loans or are targets of the Fed's open market operations.
Or, start with the phrase "bad money chases out good."
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One perspective that I gained much later than I should have:
Suppose you have a small software company, Reinvest Software with big margins and lots of opportunities to expand. You can take home that profit and pay taxes. Or you can invest in growth. That investment in growth is an investment in intangible assets with insanely good tax treatment. But it looks bad on the financial statements.
Suppose an investor, Smart Capital, sees your business potential and invests even though your GAAP income is low or negative. Smart Capital does very well for itself.
Suppose another investor, Sucker Capital, sees Smart Capital doing well, decides that profits don't matter and invests in Negative Margin Software, which never has hope of making money.
I think a lot of people can't distinguish between Negative Margin Software and Reinvestment Software. For many years, I didn't realize that they were separate things and I thought tech was mostly a Ponzi scheme.
At first glance, I see more Reinvestment Software vs Negative Margin Software compared to the dot-com era.
What are good examples of Reinvest Software? My guess would be Amazon, but what others?
Facebook was a good example. They avoided excessive advertising in their growth phase, effectively spending potential profit for a huge user base. Critically, the profit was intangible as was the investment as the IRS does not care about money you never collected or the number of users you have only cash.
YouTube is another, as far as we can tell it’s currently extremely profitable yet people looking at their financials where laughing at the sale price when Google Snatched it up. Part of this is from ever more advertising coupled with ever lower bandwidth costs.
> YouTube is another, as far as we can tell it’s currently extremely profitable
Anecdotally, the fact that YouTube is flooding their channels with more and more advertisements would seem to indicate that they are NOT profitable at all.
I now loathe YouTube links and highly encourage people to try to put their video content anywhere else (even their own webpage--hosting is a lot cheaper now).
google derives much more value from youtube's viewership data than the profit in ads it makes imho.
Youtube's profit model is only profitable at google scale - imagine the capital expenditure to build out such a large video platform (not very many other tech giants have been able to build video, and have it be free).
I always understood that the viewership data was valuable because it enabled Google to earn more money selling ads.
What is the value of viewership data apart from advertising?
I read the parent post as asserting that the value of ads placed on youtube is not as large as the incremental value to non-youtube ads (which is a much, much bigger market) from better targeting enabled by youtube data.
I don't know if that's true - youtube ad revenue seems to be ~10% of total google ad revenue; so for that to be true youtube data would have to provide 10% revenue boost to existing ads over all the other (many!) data sources that google has, and I'm not certain if it's realistic.
if it wasn't google who bought youtube, the viewership data would only have been useful for the ads on youtube. But because it's google, they can leverage this data on the entire google platform, and thus derive more value from it. This means they can afford to make less money on youtube and still have it be valuable. That is why google bought it and not microsoft (or another non-advertising company).
Estimates for YouTube are on the order if $15-25 billion in annual revenue and a ~50% profit margin. With very solid revenue growth. The data is clearly worth real money, but I doubt the data alone is worth 5+ Billion on it’s own.
PS: People are watching on the order of 1 Billion hours per day of video so IMO those revenue numbers may be low as that’s 1$ of revenue per ~15 hours of video watched.
youtube's revenue remains undisclosed in google's financial statements (see https://www.nytimes.com/2019/07/24/technology/youtube-financ...). The $15-25 billion is merely a guess.
The fact that google chose not to reveal youtube's financials is stark evidence that it's financials aren't great (otherwise, disclosing it should lead to better stock prices for google!).
Google does include YouTube’s financials, they just bundle them with other things. Having a separate line for YouTube has zero impact on the company’s overall financial situation and thus likely has ~zero impact on it’s stock price.
I suspect if anything they don’t want to break out the financials because it would invite more competition. That or YouTube is tied so closely to the rest of the company it’s hard to separate the numbers.
@sifilpov: Most high-growth startups are like this, and a fair share of "growth companies". Differentiating the two is exactly the difficult part ;).
This is exactly what this article (that appeared here last month) was talking about -
https://mattstoller.substack.com/p/wework-and-counterfeit-ca...
What balance sheet item shows this reinvestment that Negative Margin Software Company doesn’t have?
The article touches on this, but I don't think it really addresses the root cause of the difference between 2000 and now. IMO the main difference is really just timing. Companies are staying private much longer than they did in the .com bubble. Back then, the IPOs still occurred during the "only thing that matters is eyeballs" phase, and when markets eventually expected profitability, the emperor was shown to be pantsless.
Now, though, companies that are going public are already large and have gobbled up a lot of their market due to VC funding. What's happening is that they are at the point where that profitability signal has to be in view - you can no longer say "it will be just around the corner". This flamed out most spectacularly with WeWork, but it's a bit of just desserts that private investors wanted to gobble up all the big early gains, only to find that the additional time just gives public investors more reason to be skeptical.
Punting a risky investment is a fine line between the dream still being alive and the bad news starting to roll in. For some investors - and sadly, even for some founders - this is during the earlier stages, which is why it is a huge red flag if founders or early investors insist on cashing out during later rounds.
There's a fantastic book that just came out in ... 1954 ... that I'd highly recommend. John Kenneth Galbraith's The Great Crash, 1929.
https://www.worldcat.org/title/great-crash-1929/oclc/3136579...
The tech and land booms of the time involved Florida real estate, railroads (a/k/a airlines), airlines (actual aircraft involved), "Radio" (RCA), new alternative energy source and distribution plays, and of course, Goldman Sachs.
I'd first read it following the 2007-8 global financial crisis. It's still relevant now. Short, highly readable, entertaining, and informative.
See also Anthony Trollope's The Way We Live Now.
Which was written in 1875. About the financial scandals of the 1870s.
“ The problem with tech today isn’t so much that software failed to eat the world, but that the most celebrated unicorns weren’t actually software companies. They have struggled to achieve liftoff because their feet are stuck in the mud of the physical world”
This sums it up nicely.
Investors got deluded enough to think that if they threw enough money at a non-software company it would magically start making software company levels of profits.
Hopefully the real economy won’t be affected too much when this bubble finally bursts.
The thing is I don’t think investors got deluded, I think investors new exactly what they’re doing. They were hoping some greater fool would take the investment off their hands
The greater fools in the case of We being the public market. The rejection of the We IPO was a win against this ridiculousness.
in which case, how many other companies have "fooled" the public, but just skirted the line enough to not trigger this level of checking?
I remember VCs investing in Cash4Gold when that was being hyped, presumably because it was growing stupid fast. [1] I think that qualifies as a we-are-a-tech-cuz-website company. What VCs mostly look for is growth. Some silo themselves into niches (e.g. enterprise software), but I reckon that any company with high growth potential would be fair game.
[1] http://www.nagellen.com/2009/12/high-tech-venture-capital-fi...
That's not investing, that's speculation.
"Venture"
Welcome to Venture Capital.
Yeah. Software's marginal cost can theoretically be zero, and in practice is is pretty close to that. Thinking of marginal cost for real estate I don't think there are economies of scale to be had beyond traditional merging of horizontals. Is tenant experience really the real estate largest cost? I don't think so -- land and construction is where you want to focus your efforts. That being said I have no idea what I'm talking out, this is just layman intuition.
Sorry but if someone thinks that throwing money at a software company with equally poor business fundamentals would work then they are completely deluded too.
Even software companies fail and don't make much profit to speak of. Just look at all that cryptocurrency/blockchain nonsense.
If your business is losing money and, worse, has no meaningful way to stop losing money, it makes no difference whether you are selling software, services or renting office space or running a taxi business. It will fail.
Correct me if I'm wrong but... Instagram & Twitter were both unprofitable for a REALLY long time.
Instagram got bought by Facebook and eventually became an ad network.
Twitter eventually, after nearly a decade of not making a profit, made a profit.
The obvious counter-example to this is Slack, a "pure-tech" company whose value has halved since IPO, and there's a similar story with Snapchat (though its value has recovered somewhat in the past year).
Well, nobody said that being a "pure" tech company automatically guarantees sky-high valuations, a hockeystick growth curve and the successful capture of a winner-takes-all market. Of course there must still be failures in that space, some which fail early and some which fail late.
It's just that the described path to success is close to impossible in any other space except for pure tech companies, preferably with a software-only product, which means that any company not fitting that description, but boasting absurd high valuations justified by assuming the company will go the path described above does most likely mislead investors.
I don’t think there’s fundamentally anything wrong with slack though. Investors just don’t understand it, I don’t think. I’ve read so many articles about how Microsoft is going to crush it with teams and it’s so obvious to anyone who has had to work with both of them that they simply are not competitors — really the only thing close to it is Discord and it’s not going after the enterprise market.
Microsoft Teams is definitely a direct competitor, and while it may not be nearly as good as slack, there are few companies out there with as many tentacles in Enterprise as Microsoft.
It would not be uncommon for an inferior product to win a significant market share. Especially when it comes to Enterprise software.
The barrier to entry to compete with slack is fairly low. And Discord can just decide to start focusing on enterprises. Microsoft is just one company with the leading office suite that happens to be really kludgy. Slack has its pluses and minuses. So just because slack works great and is fun to use, and has lots of companies giving them money, doesn't mean they are worth their huge valuation. They aren't getting enough money, and another hipchat like competitor can come along and do even better. The best thing slack has is they are the default safe choice.
I say this as a slack stock holder who lost money, so I clearly know what I'm talking about ;-)
The only way slack's valuation makes sense to me is that it could be used as a covert business-intelligence tool. I tend to think of github the same way.
I don't think Slack counts, Slack's IPO was just a cash out because they saw the writing on the wall.
Slack's stock price chart has a "down and to the right" appearance.
It was valued at $7 billion or so early last year. so at today’s price, it still went up over 50% since then. so one could argue it is still overvalued.
just because some greater fool declared it was worth $40 at some point doesn’t mean it’s now a bargain if it goes down to $20.
Indeed, I wasn't suggesting it was a good investment, just that the appearance of the chart is fairly consistent in moving toward a value of zero.
All that’s happening is that the market is calling BS on companies that lack sound business fundamentals. The days of valuing companies sky high that are deeply unprofitable but “it’s OK because we’re a tech company so it doesn’t matter” are over.
This is ultimately a good thing for companies with real businesses that were for much of recent history valued far less than those that had no clear prospects of making a profit. See all the writings about IWG vs WeWork on some of the previous insanity there.
It still works for taking over highly fragmented industries. And always will.
That article seems to harp on the fact that it is "not-com bubble", basically that the companies are getting punished because they are not "pure tech/software companies". Quite a way to miss the point, IMO.
As if delivering pure software was a sign that the company is worth investing in. Just look at all the cryptocurrency/blockchain startups from about two years ago. Most of them literally didn't have anything else but a whitepaper and some hacked up "coin" - a derivative of the open source Ethereum code. And 99.9% of them has gone bust already, disappearing with all the investor's money.
This is about investors finally wising up that a start-up with no path to profitability is not a viable business, regardless of the explosive growth fueled by cheap VC dollars and undercutting the competition ("disrupting the market") by ignoring existing laws (Uber, ...).
At least not for public investors - it is still immensely profitable for the founders and early investors of those "unicorns".
However, their goal is not to make a profitable company but to grow fast, attract a lot of VC money and then recoup the investment in an inflated IPO when the entire Potemkin village gets sold off to a lot of naive suckers who end up footing the bill once the house of cards finally collapses.
This is what needs to called out, not some BS talk about "not-com" bubbles.
> This is about investors finally wising up
Well, this generation of investors, at least. ;) We had much the same thing happening 20 years ago, and I have no doubt that we will again.
Something I've been wrestling with is the perceived 'unsexiness' of certain technologies, like C#. When I joined this industry, I thought that anything that wasn't powered by Rust or Python or Haskell was irredeemable, that C# was a dinosaur not long for this world, and that tech unicorns would be set the tone of our industry going forward. Now that I'm a bit older I've begun to see that something like C# isn't going away anytime soon - that people still use .NET and other technologies because the enterprise endures, and companies like Microsoft are continually investing in their tooling. This article reminded me that sometimes unsexy technology powers the world, and if you can bring value and or mastery of that technology you can greatly benefit.
I'm reading this comment thinking about how wrong you could possibly be, or maybe how out of touch you are with C#, .Net, and how its perceived.
C# and .Net Core are miles away from unsexy, enterprise technologies. Microsoft has been doing an amazing job on the C# language in recent years, open-sourcing everything, making .Net Core run on every platform, being totally open about future updates, and pushing the .Net core framework to be more performant than about every other language other than C++, C, and Rust.
I work for a 2B valuation "startup" and we are fully .net core, all running in orchestrated Docker clusters and I perceive that choice as one of the reasons behind our success. The tooling and libraries, documentation, performance, etc, are in my opinion ahead of any other languages we could use: e.g. Java, Python, Haskell etc.
The difference between a company that benefits from 'tech' and one that doesn't is how their tech is used. If they use off the shelf tech to directly build their business, it isn't so much a tech company as it is app development, IT, or whatever you name it.
If however, you use whatever good or average off the shelf tech and build tools that leverage the tech then apply it to your business then you're a tech company. You can't just make the app you have to build tech to build the company. This is your advantage. The tech you build can be software or it can be patents or it can be proprietary processes but it has to be leveraged. My way to estimate this is to count the number of employees that build product or tools. The size of sales/marketing can vary but excessive numbers of devs isn't a good sign for a tech company and might just be a consultancy.
Dont forget that even if C# feels old and stodgy, F# gives a very fresh and "cool" experience on top of .NET
Agreed. Also the recent C# language developments are themselves pretty good, as are the runtime / SDK improvements in dotnet core.
With mostly a Linux, python / slightly FP background I "should" be the skeptic. But a recent project had me on a dotnet core app developed mostly on OSX and deployed on Linux. It was honestly pretty neat and while I no longer work on it, I am bullish on this space.
I was getting insecure that my side-projects/hoped-for-businesses are things like a social news app and a podcast discovery app while Uber, SpaceX etc are changing the world but now that the software-is-eating-the-world companies are getting massacred in the stock market I feel at least some slight relief about my choices. Near-zero-marginal-cost is a magic that only pure-software (and other IP-based?) businesses have...
(Of course I'm overlooking that most new software biz that is doing well is B2B unlike my projects... but still.)
SpaceX is real. Uber, AirBnB, WeWork and all the other 'lawbreaking as a service' and 'subsidizing transactions with massive VC' companies are not.
I think the word 'subsidy' is kinda questionable here. (This writer's previous article used the same word to discover many companies[1])
If a company is not losing money on gross margins--if they are losing money in total 'unit economics' because the customer acquisition cost is high--does it really mean they are subsidizing usage?
An example is Casper, the mattress company. They are still selling mattresses to consumers for more than the mattresses cost to them. They are losing money on ads. If I see/hear a Casper ad, is that ad really a subsidy to me?
PS. Saw an interesting Twitter thread from Tren Griffin: "Whenever you read or hear the phrase 'losing money' you should ask yourself: what does this person mean?"[2]
1) https://www.theatlantic.com/ideas/archive/2019/10/say-goodby...
2) https://threadreaderapp.com/thread/1184981449172144128.html
In my opinion, customer acquisition cost should be baked into your effective margin calculations. If you're selling things "for a profit", but it costs you more than the entire profit on the sale to make the sale, your business model still sucks and is being subsidized by something, debt or otherwise. This is a common trap online sellers fall into - gross margins are kind of useless if your selling costs are through the roof.
See also Blue Apron et al. If you're selling something to a customer base that is almost certainly going to have a lot of churn, that acquisition cost has to be built into your business model. Maybe if churn is low and the main cost is initial acquisition you can sustain losses for a time but not if it's ongoing.
ADDED: And a mattress is an example of a product that people buy very rarely so the marketing/advertising to acquire a customer is mostly a cost of a unit sale. Yes, maybe they get some residual word of mouth but it's mostly effectively part of the product cost.
If the money is going on tangental customer acquisition costs (ie marketing), it's probably not a subsidy.
If the money is going directly either to the supplier or the customer (subsidizing the customer's costs directly or indirectly), then it's probably a subsidy.
They're losing money so that you can get a cheaper mattress. You can call that a subsidy or not, but the important thing is that the transaction involves them ending up with less money and you with more money than if you had bought elsewhere.
Casper is an interesting example to me because I've learned not to buy durable goods from companies that aren't solvent. If Casper went belly up next year, there's nobody providing any warranty for your mattress. And if it's discovered that the mattress is dangerous to sleep on because of contamination during the cheap manufacturing process, good luck getting anyone to recall it and replace it with something safe.
I'd worry less about a product like Casper's than a lot of other products that you expect will need repair/supplies/etc. at some point. Sure it's possible that some gross defect will be discovered in Casper mattresses in a couple years. But it's not like there isn't lots of other furniture that turns out to not be well made. And good luck getting refunds on that after 2 or 3 years in many/most cases.
In all cases its a subsidy. Because without it the price would be different.
A brand subsidy is when your brand is enhanced by a third party either by direct or indirect but it doesn't have to include money.
Think taking a photo with a star at your dinner and putting it on the wall.
Taxi and hotel businesses deserved a little punch in the gut.
Why hotel businesses? There are many different hotel brands to choose from, pricing is transparent, photos/reviews are available on many websites, customer service at the chains take care of complaints pretty well, and there has been a ton of new hotel room supply added.
I started staying in AirBNB's around 2013 because I could get a kitchen, e.g. for a week-long stay. I like drinking water and not eating out 2-3 times a day, every day, for a week!
I was staying by myself, but I've heard from traveling families that hotels are a big hassle for them because they lack a kitchen. Imagine feeding a couple kids while staying for a week. That cost will really add up if you're eating out 3 times a day.
The standard hotel practice of giving you ice but nothing else, so you spend on expensive drinks and water, is pretty obnoxious in my book.
The little fridges stocked with $5 bags of chips are also obnoxious.
Another reason is that I'm not limited to "airport-hotel" land, which feels the same in every city. (Admittedly, this is something hotels can't easily fix.)
Also, the prices for AirBNB's were significantly more varied. At the low end, you could get one room in an apartment occupied by others, etc.
> Also, the prices for AirBNB's were significantly more varied.
As expected, since complying with fire and other safety codes, taxes, zoning rules, brand standards, and other business costs exist.
Kitchens are offered in various brands by Hilton/Marriott/IHG. I haven’t had Airport hotel land issues in big cities, but most other places restrict hotels from being in areas by restricting zoning... since residents in these places don’t want to be near hotels.
My point though, was that the hotel market seems to be operating pretty efficiently, with plenty of good choices available for consumers. Price might be higher, but most societies have decided it’s worth it to enforce certain standards upon them. This is different from how the taxi market was, where online booking, payment, and rating vastly raised the standards for everyone.
"Extended stay" places have at least limited kitchens. I often stay at them for the typically more comfortable sitting area but having a fridge can be useful too. I mostly don't use the kitchen though.
AirBnB did make renting vacation homes and the like more convenient. Even if hotels aren't really broken, the vacation rental services were very fragmented and mostly not great.
A lot depends on what you're looking for. On vacation, I do sometimes like something with a bit more "character." TBH though, most of the time I just want reliable with a 24 hour desk, the ability to leave luggage before I can check in or after I check out, etc.
The last AirBnb I stayed in was sparkling clean and totally infested with cockroaches. And they had the nerve to tell me they couldn't get me a full refund, and that I should be used to staying in lower-end places. In the end my fiance and I had to book a hotel anyway, at great inconvenience to ourselves and with no guarantee from AirBnb that they would refund anything. That was way more inconvenient than not having a kitchen for a few days.
So the flip side of it is that you're rolling the dice and AirBnb doesn't actually have a way to guarantee anything for you the way a hotel would.
Not as many pervert, I mean, "security" cams in the hotel rooms either.
Be gentle please, I understand and agree that these industries got complacent but these are people. I think our societies should integrate this 'kick' phases to make them smoother and more respectable rather than have toxic competitors attack them.
Uber has a market cap of like 50 billion. It's real. It's no Apple or Google though.
That makes it a large bubble. Market cap in and of itself is useless. How long do you see customers staying loyal after VC money stops subsidising every ride?
It will be interesting to see what happens when subsidies end. There are likely to be both first order and second order effects.
The first order effect is just price sensitivity. People will decide to take public transportation, drive, take a conventional cab (which now has an app)--or just skip going out for the evening--if prices, say, double.
The second order effect is that there will be fewer passengers which will lead to fewer drivers. This probably doesn't matter much in a big urban core. But in marginal areas, such as where I live, it may be the difference between a viable service and an unviable one.
I think that's very hard to predict. Just 5 minutes ago I had a conversation with my ex about how I always use Uber for ad hoc travel despite the fact it's often significantly more expensive than the local minicab companies, because they can get someone here much faster. Often it's a 3 minute wait, while I otherwise might wait 10+ minutes. Their app also gives me more reliable feedback.
If I schedule in advance, or need more flexibility in car type, then the minicab companies win, but it's very rare for me to pick them because of price, even though they're often much cheaper.
But of course not everyone can afford the luxury of paying extra, and will just factor in longer waits instead.
In a conversation where “real” can be partially defined as “are they worth their market cap”, saying a company has a high market cap does little to convince me. In fact it’s the opposite: it implies a long way to fall.
The whole thing is asinine.
They've never made money and they never will. If they haven't gotten after 10 years they wont get it.
Market cap is just a representation of what the market thinks a company is worth as applied to a relatively small fraction of the stock.
Compare to a casino: people think that the ball will land on black and are willing to put their money down based on that. That doesn't mean they are right. In this case there is much more of a casino mentality at work that determines Ubers stockprice than that the underlying fundamentals are solid and sound enough to compute a price that is reasonable.
In that sense you can't lump everything on the stockmarket on one pile. 37signals had a funny bit about marketcap: https://signalvnoise.com/posts/1941-press-release-37signals-...
"You might not have heard about these “real tech” companies—like Zscaler, Anaplan, and Smartsheet—because they mostly sell business-to-business software or cloud services. But all of them are trading more than 100 percent above their listed IPO price."
All of those are also down significantly from their all time high though.
Sure, but that isn't relevant to the IPO dynamics. Investors threw hundreds of millions at Zscaler, heavily subsidizing their growth, because they drew some charts saying they'd be profitable in the future. I'm sure that in 2014 you could have written an explainer about how suchandsuch Zscaler product is only competitive with Symantec because of VC money - or you could have written the reverse explainer, about how the Zscaler product isn't really competitive at all and they're duping people into using it using VC money and modern buzzwords. Both those genres are pretty popular about consumer-facing unicorns.
But it turned out the charts were right, and Zscaler is now profitable, although they still aren't making as much as investors at the all-time high expected.
One could argue the cloud services companies aren't really pure software as alluded to in the article, but a software veneer over a gig economy for the underlying hardware. This perspective would allow for a bit deeper of a comparison between what's working and what's not.
I don’t understand this argument at all; it seems to be only buzzwords.
What is the relation of the gig economy to a cloud hosting service, other than most gig economy apps are built on cloud servers? Also, how does looking at the problem this way enlighten us?
I think the idea is that a cloud company is primarily renting hardware. Therefore, it doesn't scale like a software company; as its number of customers goes up, its number of employees and amount of capital equipment has to go up as well. This would mean it should not have a multiple like a pure-play software company, where the costs go up little if any as the number of customers goes up, because almost all of the software's development costs are up front.
I assume you mean that these companies are in the business of renting hardware, not that they themselves rent the hardware they are using.
I believe the virtualization they are offering allows the service to scale a bit more like software, but I do agree that these cloud providers don’t have 0 marginal cost.
Either way, thank you for de-buzzwording the original argument. It makes much more sense in English
Sorry for all the buzzwords....It was 6 AM PST and coffee hadn't kicked in yet.
Interestingly the de-buzzwording of the argument makes sense for the actual thing called "gig economy" too. It could just as well be called the "human rental business".
Hey it happens, no value judgements really; I do it myself all the time. The problem lies in my misunderstanding more than anything else.
“Human rental business” absolutely makes whatever economy that is sound much more like the reality these workers live in. We should use it more instead of the euphemisms we all use now.
In fact it highlights the difference too. Cloud services companies own the hardware they rent. Human rental services are pass-thru accounts. Cloud services are more financially successful.
A similar thing happened with eBay and Amazon: Amazon owned the products they sold (initially anyway) and eBay was pass-thru. Amazon was more successful.
So Bezos is currently thinking, how can we own some Amazon humans and provide them for rent?
Renting hardware is how VPS companies (remember those?) made money. While that's a part of cloud company business, their real margins are in services, particularly proprietary software: for example, the same AWS t3.small that costs $0.0209/hr suddenly doubles in price to $0.041/hr when it's a db.t3.small running Aurora.
Ctrl-F "Interest rates" not found. That's what's different. Where is money going to go if not in the most hopeful investments, in bank accounts? If there is a bubble it's the fault of central banks
The part about stock prices for non-tech and tech isn't entirely true, what about stocks like PD? Here's a company that's trying to posture itself as an enterprise grade ops system, stock is in the gutter
Nothing sexy about monitoring. You or I could build our own overnight. Twilio is the true leverage and why they command a much higher P/E multiple
I agree with you but I’d phrase it differently. Perhaps that neither monitoring nor sms is “sexy,” but that you could reasonably hack together a monitoring MVP over a weekend but not a telephony MVP. There’s a natural barrier from the underlying problem domain.
Of course you can put together an SMS sending service over the weekend. It just won't scale to the whole world and will have limited throughput.
It's an incredible mix of hubris (on the startup's part) and delusion (on the investors part) to call some of these "tech companies". Like WeWork. It's a real estate company that should be valued like a real estate company.
But somehow everyone concurred that it is, indeed, a tech company. How or why, no one bothered to ask.
To be more specific it's a real estate company, that started out with a low asset ownership position.
Then it got into the asset game leveraging their revenue, but mostly leveraging some meaningless sociological/technological gibberish to skewer an investor.
I think this speaks to the state of the kind of people making decisions about things they don't even try to understand.
This is what amazes me; that there are so many supposedly intelligent individuals throwing money at shitty ideas.
Google investing in Juicero comes to mind.
It's like any semblance of due diligence is just an afterthought.
I think calling Juicero a shitty idea is too strong. It didn't end up working, and probably it was knowable in advance that it wouldn't, but the difference between early-stage Juicero and early-stage Keurig is smaller than most people gave it credit for. There's a strong and robust market (at least in the SF Bay Area) for weird expensive juices.
I agree, fresh juice on demand is a good idea (besides the fact that the amount of sugar is usually terrible for you).
But they had to have found out very early on with Juicero that squeezing the packets by hand basically produced as much juice as their expensive machine.
They did. As the Bloomberg article mentioned^, Juicero plus at least some of their investors knew, and multiple investors felt that the product Juicero delivered didn't live up to what they were pitched. (Note that Juicero didn't get any new funding between their initial launch and going out of business.)
^ https://www.bloomberg.com/news/features/2017-04-19/silicon-v...
Well, even if you can do something by hand, there's a market for a gadget that will do it more conveniently. There is a market for food processors and rice cookers. I don't think Juicero is a good example of "stupid money" craze. Theranos is.
Were that the case. But squeezing the juice out of the packet was far easier and quicker than putting it in the machine letting it get scanned, phone home, and then slowly squeeze the bag.
Kind of have to conclude intelligence for one area does not mean someone is not a mark when it comes to a different area.
Everyone? Virtually nobody thinks or thought WeWork was a high margin software company. Your comment is a narrative that has been regurgitated over and over again, yet who are these magical people who think WeWork is akin to Facebook?
Look at any article written about WeWork in the last 4 years. Every single article will regurgitate the Real Estate company pretending to be a tech company thing.
The people that matter - the investors - valued WeWork like a high margin software company. Then WeWork itself tried to value itself like a high margin software company in its S-1.
Because WeWork's margins and revenue are similar to another very similar company - Regus - yet their valuation is more than 10x
WeWork and its investors did not try to value it like a high margin software company. WeWork was valued like a standard, overly optimistic growth company. This is another narrative invented by tech journalists who don’t understand how valuation works.
Regus is a mature company with no plans for massive growth. Of course their Value (p/e of under 20 I believe) is going to reflect that.
Meanwhile, look at any non-tech company in growth stage. Take Shake Shack for example. Their P/E ratio is 170. Chipotle had a p/e of 400 a few years ago.
Nobody thinks Shake Shack and Chipotle are tech companies. These valuations reflect the prospects of growth—-not misplaced beliefs about restaurants being tech companies.
The latest Wework TV ads sell it as an “operating system” for workspaces, among much other showy language filled with business-transforming technology buzzwords. It definitely sounds like they’re marketing as some unique proprietary tech, and I wouldn’t be surprised at all if the aim was to justify their absurd valuation figures.
Except, every company in 2019 is marketing themselves as if they have some unique proprietary tech. I just saw an ad for Holiday inn that did this.
None of these things mean smart investors (or even customers) are being hoodwinked by this marketing nonsense however.
Adam Nuemann was certainly trying to push the "tech company" narrative. I heard a few old interviews with him and he was always sure to mention their "technology platform" and how they spent a very long time developing it.
So he must have thought someone was swallowing that.
It’s easy to get rose tinted glasses and call a firm a “tech company” when it has the growth profile that wework did. What everyone forgot is that the other thing “tech multiples” require is high margins.
How's it not a tech company? They have an app! /s
Did the company call itself such? Or was she invited to the party for her renowned riches?
uber needs to shift to self driving taxis quickly
How they will be better at making self-driving cars than established electronics and auto-manufacturers?