The Unicorns Fell into a Ditch

https://www.bloomberg.com/opinion/articles/2020-05-18/the-unicorns-fell-into-a-ditch

by spudlyo • 6 years ago

296 221 6 years ago

bloomberg.com

umeshunni• 6 years ago

The title is a reference to this series of slides in the Softbank earnings presentation:

https://imgur.com/a/90bxNjo

https://group.softbank/system/files/pdf/ir/presentations/201...

MattGaiser5• 6 years ago

SoftBank could have saved money on all the high resolution graphics...

jacquesm3• 6 years ago

They could have saved a lot more by not doing so many stupid investments.

zacksinclair• 6 years ago

Holy shit. They actually put that into a slide deck? Wow

gnicholas• 6 years ago

I once saw a presentation with a slide that said “failure = success”. Yes, I am aware that this happened on HBO’s Silicon Valley, and no that’s not where I saw it.

seph-reed• 6 years ago

Check out the Pepsi logo design doc if you want a real laugh: https://www.goldennumber.net/wp-content/uploads/pepsi-arnell...

eli_gottlieb• 6 years ago

So they're saying one out of every three unicorns infected with the novel coronavirus will emerge as a winged unicorn?

pkilgore2• 6 years ago

"While reading a post on hacker news, a Softbank earnings call presentation caused me to google the difference between a unicorn and a Pegasus" is just one of those sentences that sounds Insane in prior to 2020.

rubidium• 6 years ago

And that wasn't even the craziest slide of the presentation.

"Information Revolution - Happiness for Everyone"

I had to wipe the coffee off my screen.

aabhay• 6 years ago

That’s not the first time that slide has appeared on a Softbank deck. In fact, that deck is nowhere close to being the most insane SoftBank deck.

hiharryhere• 6 years ago

Slides 50-54 in that second link are wild.

irrational• 6 years ago

That story about the pizzas was crazy. Especially the end where you have the doordash driver in on it, just pretending to deliver the pizzas. At what point would Doordash notice? A thousand pizzas? A hundred thousand pizzas? A million pizzas?

rhacker• 6 years ago

I read that story elsewhere today, but I was left with a few holes - when the door dash driver pays for the pizza, was it their own personal credit card, or was that a door-dash issued card? That was the missing part for me.

I think that they would notice at some point, and potentially trigger a fraud lawsuit - at some point the terms of service that all these people are agreeing to - would probably cover fraud. But even if not covered in the terms of service, one would probably still lose a lawsuit based on the fraud alone.

Apocryphon• 6 years ago

These hyper-growth chasing startups are too busy to notice, not to mention they have their own lawsuits to worry about.

https://www.thedailymeal.com/eat/n-out-sues-doordash-deliver...

MattGaiser5• 6 years ago

a door-dash issued card?

DoorDash issues something called a Delight card.It is basically a prepaid debit card.

skrtskrt• 6 years ago

I mean they are knowingly reselling something for less than it costs them, without ever touching the product, and they have no agreement at all with the restaurant owner that could stipulate "hey when you sell the pizza it has to meet these criteria". They specifically avoided letting the restaurant owner know that they were being sold through DoorDash, which is sketchy and definitely would lose DoorDash some sympathy about being "defrauded".

I just can't see fraud here, only a giant company that is built on losing money intentionally creating a system that loses money with zero guardrails. Then people just... used that system exactly as it was.

wmf• 6 years ago

Drivers are presumably tracked via GPS although who knows if the app verifies that data.

jpm_sd2• 6 years ago

Gotta love the illustration in the original post:

https://themargins.substack.com/p/doordash-and-pizza-arbitra...

Not to mention some horrifying numbers:

Doordash reportedly lost an insane $450 million off $900 million in revenue in 2019 (which does make me wonder if my dream of a decentralized network of pizza arbitrageurs does exist).
Uber Eats is Uber's "most profitable division” . Uber Eats lost $461 million in Q4 2019 off of revenue of $734 million. Sometimes I need to write this out to remind myself. Uber Eats spent $1.2 billion to make $734 million. In one quarter.

jacquesm3• 6 years ago

Interesting definition of profitable. Should be 'least losing' instead of 'most profitable'.

christophilus3• 6 years ago

It really does remind me of the .com bubble in many ways. The quote from Scott McNeely[0] has sprung to mind a lot lately.

- MSFT 10x sales

- V 17x sales

- MA 16x sales

- NFLX 9x sales

- BYND 23x sales

- ZM 68x sales

Some of those are obviously great companies with fat margins and well worth above average multiples. But ZM at 68x sales?

The market feels a bit out of touch.

[0] "At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"

yread• 6 years ago

I know anecdote isn't data but I only order with uber eats when they send me 10$ coupons. That way I pay less than if I walked to the restaurant myself. We call it dining with VCs.

selimthegrim2• 6 years ago

That isn't much different from the aluminum merry-go-round

https://www.bloomberg.com/opinion/articles/2014-11-20/the-go...

yborg• 6 years ago

Doordash is already 'in on it' on a whole different scale than the pizzeria, this is generating order flow and the real payoff is the next couple of hundred million dollars from Masayoshi. That's what they'll notice.

jpm_sd2• 6 years ago

Modern VC investing, in a nutshell:

In the new economy of user growth, you don’t have to worry about making a product that people want because you can just pay them to use it, so you might end up with companies losing money to give people things that they don’t want and driving out the things they do want.

caseysoftware3• 6 years ago

^ This is a really interesting perspective.

If we take this line of reasoning, then the various unicorns didn't detect and ride user behavior but used their massive piles of cash to distort it in non-sustainable ways. Now that the cash is drying up, people are bouncing back to the old patterns and approaches.

I wonder how many of those alternatives disappeared/closed in the meantime?

ivanbakel• 6 years ago

Which is exactly the goal of those unicorns in the first place. Once you've smothered the competition in investor money, you're free to raise prices to profitability and beyond.

Like ripping out Detroit's streetcars just to sell more cars.

gopalv• 6 years ago

Now that the cash is drying up, people are bouncing back to the old patterns and approaches.

We haven't got to a place where we can measure a bounce-back to "the old".

For instance, as far as I can see into the future, I'm still going to use Lyft when I travel in the US. I'm price sensitive, but the alternatives are still full of externalities if I can't hail a cab off the street easily.

Of course right now, nobody is traveling outside their home cities, nobody is going to restaurants (& restaurants don't have any leverage on delivery companies), the coworking spaces are all closed, there's no parties to cleanup with taskrabbit & that beach weekend in Carmel-by-the-sea won't happen.

The problem I think is that it's going to take 500+ days to get back to even finding what percentage of the economy would go back to doing things as they used to in 2019. And what percentage will just scale down everything and force the companies to skip non-recurring engineering expenses (I'd say iPhone SE is a good example here of "good enough").

economicslol2• 6 years ago

the various unicorns didn't detect and ride user behavior but used their massive piles of cash to distort it in non-sustainable ways

Seems likely given the ubiquity of "Pivots" where startups have already raised cash for some half baked idea and can pivot to selling something completely different to consumers by force feeding marketing down their throats.

lotsofpulp2• 6 years ago

so you might end up with companies losing money to give people things that they don’t want and driving out the things they do want.

I don’t see it this way. Obviously people want it, the problem is they can’t afford it. Everyone wants their own driver, dog walker, chef, house cleaner, save the earth mattress, whatever else, but they can’t afford it.

Although you can get a lot of that stuff in countries with poorer populations and fewer government safety nets.

Spivak• 6 years ago

I think there is a bigger point in between the lines which is that most Americans can't actually afford nice things. I am remarkably well off making good money in a cheap city but I still feel financially insecure because of how many times I hit the wall of not being able to realistically afford the "high quality leather boots" so to speak.

The fact that staples are so incredibly cheap has made everything else so ridiculously expensive in comparison. All of that would be surplus income that's supposed to make me feel "wealthy" has been gobbled up by ever increasing rent and healthcare.

duxup3• 6 years ago

I do wonder what if anything is wasted with talent and people's efforts plunged into things that ... amount to nothing.

Reminds me of some of the articles about top business schools and what folks observed as a large number of folks heading off to finance ... instead of running the actual businesses that produce a thing / long term value.

taurath4• 6 years ago

This sort of implies that what people "want" is fixed in time. More accurate might be to say its a bunch of money spent manufacturing some wants and disincentivising other wants.

jcdavis• 6 years ago

The actual nerdy economics joke there is in the second paragraph, which takes the form: Two economists are walking down the street. One of them sees a $20 bill on the ground. As she bends to pick it up, her colleague says “don’t bother, if that was a real $20 bill someone would have picked it up by now.” She replies, “no see this was left here by a consumer tech startup trying to maximize user growth; their Monthly Active Picker-Upper numbers are doubling every two months.” She picks up the $20 bill and the startup raises money at a $2 billion valuation.

Matt Levine truly is a poet

three_seagrass5• 6 years ago

I keep wishing he would do a podcast, even if it only released every two weeks.

blahbhthrow3748• 6 years ago

The Odd Lots podcast is very similar and Tracy and Joe are also very funny. Matt actually appears in a couple episodes (he has a really deep voice I didn't expect)

duxup3• 6 years ago

Intended or not I like the line about "if that was a real $20" as sort of a subtext of how sometimes in economics you see predictions or explanations assuming people or businesses are somehow assumed to be logical.

The $20 just couldn't be real because who would do that?

But of course they do that and the expectation that being logical pays off or how we expect the market to work is all out the window.

magicsmoke• 6 years ago

Economics is a post hoc explanation for how the market works. It's not like somebody came up with the theory of how a market should work and then built one, like you would a computer. Rather, markets existed back in the middle ages before economists did, increased the wealth of its participants, and economists later appeared to explain why that was the case. Nowhere is the prerequisite that this system is the result of logical design.

jstanley• 6 years ago

The bit about not picking up a $20 note because "somebody would have picked it up already" is a relatively common (half-joke) refutation of the efficient market hypothesis.

the-dude• 6 years ago

Are you aware it is a variant on a very old joke on Economics?

K2L8M11N2• 6 years ago

Yeah, that's what makes it funny!

Pmop• 6 years ago

On a funny note, I fed myself for 6 months with VC money iFood took.

ackbar032• 6 years ago

I was asking this question a few days ago, are any of these large food companies still going to exist as they do today? Everybodies basically annoyed with them except maybe the customer but then again he's being subsidized by underpaid gig workers, restaurants, and vc money, and all the while the company itself still can't turn a profit

reverend_gonzo• 6 years ago

For what its worth, even the customer is getting annoyed. I've had multiple cases where a a driver stole my food or mixed up orders. Sure, the company will fix it and refund you, but you're hungry now.

I now only order from places that have in-house delivery drivers, or I go pick it up myself.

MattGaiser5• 6 years ago

mixed up orders. Sure, the company will fix it and refund you, but you're hungry now.

I'm not terribly picky, so I am ok with the free meal with the promise of another.

acdha• 6 years ago

That's what got us to stop, too: a few years back we stopped using e.g. GrubHub and Eat24 because they were not only really late (over an hour and, memorably, once never showing) but lied about it blaming the restaurant, not knowing that I'd called them first and confirmed that our order had been ready as scheduled. They tried to offer credit on a future order until I told them my next call was going to be the credit card company.

code4tee4• 6 years ago

The first .com implosion was broadly marked by companies that lacked revenue getting crazy valuations.

The current “.com” implosion is broadly being marked by companies that do have “revenue” but only by using VC cash to create “fake markets.”

The whole story of buying pizzas from a normal pizza shop for $20 and selling them for $18 through your “app” is the stereotypical example of the current .com implosion. Anyone can sell $2 bills for $1, but that’s not a business and no you can’t “make it up on volume” because the only reason people are using your app is because you’re selling something for a crazy low unsustainable price.

The take home lesson from the current unfolding implosion is that a great product does not magically just equal a great business.

JumpCrisscross• 6 years ago

I like this. The takeaway from .com was revenue oriented. The takeaway from this bust is unit economic oriented.

sailfast• 6 years ago

Maybe? It seems that it is more about whatever metric VCs are excited about is what will lead to the next bubble. What are you measuring? Revenue? Is it viral coefficient? Is it revenue per customer? Is it lifetime revenue above acquisition cost?

Whatever it is that lands you the round will be the place that money gets burned to goose the metrics until the dollars run out or folks realize it was a phantom.

ngngngng• 6 years ago

Even when the numbers aren't arbitrage it's appalling. Friends of mine will regularly order $8 of food for $20 delivered. And these companies still post massive losses after all that markup.

Meanwhile Walmart abandoned their RFID automatic checkout system because RFID tags cost more than the markup of bananas, their most commonly sold item.

OkGoDoIt• 6 years ago

Indeed, the price of food delivery apps is insane. I really don’t know where all the money is going. How can they overcharge so much for food and yet still have a loss? In addition to the service fee, delivery fee, and what you pay in tips, the actual price of the food items is sometimes (often?) more expensive in these apps than on the restaurant’s own menus.

burmer• 6 years ago

This has been posted here before, but formulating this idea as "Counterfeit capitalism" really gelled for me: https://mattstoller.substack.com/p/wework-and-counterfeit-ca...

hanklazard• 6 years ago

Yes. The strategy seems to assume that network effect is everything and neglects to recognize that, at the end of the day, PRICE is the critical factor for determining demand of these services (food delivery, taxi service, etc). Once the subsidies end, behaviors will change so you must have an actual plan for making your business profitable.

code4tee4• 6 years ago

Yes, it’s as if the business models of these companies have forgotten all about price elasticity... especially when the “price” is crazy low (because you’re losing money hand over fist)

nabla9• 6 years ago

Dot-com bubble had similar business ideas as there are today. For example Webvan, online grocery store and delivery company.

pkaye• 6 years ago

Anyone remember Kozmo.com. Would perfectly fit with the unicorns of today.

https://en.wikipedia.org/wiki/Kozmo.com

nostrademons• 6 years ago

There was plenty of that with the first .com implosion. Many e-commerce sites actually did have customers (eg. my sister swore by Kozmo.com), it's just that they got them by selling goods for less than they paid for them, and then the customer base dried up once they had to actually make a profit.

The big scam now is in customer acquisition: companies spend more in marketing than the LTV of a customer and make up the difference with VC cash. This is a little bit easier to hide: you have positive gross margins, explosive revenue growth, and the appearance of a sustainable business, but once you take your foot off the gas and stop spending VC money your existing customers churn away and you can't acquire new ones. Google and Facebook are also making out like bandits from this, and may get hurt significantly when the bubble bursts.

code4tee4• 6 years ago

Yes, the cost of customer acquisition is certainly part of the current mess. While probably not strictly a gross margin issue, in practice it in effect is since that is very much a direct cost associated with the transaction.

There are certainly a lot of these upside down companies spending $100 to obtain a customer so they can sell a product for $70 that costs them $60 to make.

franze2• 6 years ago

I wrote about it here https://medium.com/@franz.enzenhofer/about-targeted-list-lan... and played around with the model since then a lot.

As long as a company does not have organic growth. Meaning Referral (existing customers bring in new customers) > Churn (losing customers) there just is no scenario where it will end well for the company.

Adding investor money for paid growth is at best a halfway decent accelerator, at worst noise that hides the real performance of a company.

3pt14159• 6 years ago

That's not true. There are plenty of companies where referrals are non-essential or non-existent, but the company is able to turn $1 of advertising into an LTV of $20 even if the customer churns. Imagine an app that helps a woman through pregnancy, for example. The churn rate on its own doesn't mean that the product is necessarily trash and the lack of referral doesn't mean that the product isn't appreciated. Some buyers have needs on short timescales or do not naturally refer other buyers.

CPLX2• 6 years ago

To be honest that dynamic was basically the issue the last time around as well. Pets.com selling pet food for less than the shipping cost, delivery startups like UrbanFetch and Kozmo with no minimums, etc.

tytso• 6 years ago

This is not a new startup strategy. VA Linux Systems, which had the dubious honor of having the largest "pop" on its IPO day, and signalling the end of the dot.com boom, was selling x86 Linux servers to its customers (including companies like Akamai) for $50 dollars under the BOM (Bill of Materials) cost. So it was losing money for every server before taking into account assembly, shipping, or R&D costs, but it made it up in volume. The revenue numbers were "up and to the right!". VA Linux systems was "successful" in that it IPO'ed and the Vulture Capitalists had a very successful exit. Unfortunately, it didn't do so well a year or two later...

VA Linux Systems had its IPO on December 9th, 1999. So 20 years later, people still haven't learned, and Venture Capitalists are still happily funding this model. Sometimes they appear to have been able to successfully exit, but sometimes not. For all that humans are smart enough to go to the Moon, humans are also really, REALLY dumb!

kingkawn• 6 years ago

I thought that the model was to underprice the market and force everything to go through your platform and then exploit the monopoly position once it is secure

kkotak• 6 years ago

Also - It's not the companies competing in the unicorn market, it's the VCs. The reason why there are no competitors to Uber and Lyft, is because the unit economy is completely broken. If you're not backed by billions of VC & banking money to let you lose on every transaction, the market doesn't really exist. It's artificially created on borrowed time, cashed out in IPO, and numbers shenanigans. VC's virtual limitless access to capital is dangerously giving them powers to choose winners and losers and control the markets, economies, and the fate of large workforces in the world.

taurath4• 6 years ago

I'll followup on this - its not the VCs, its the lack of investments that give a real return, which makes capital flow towards the higher risk things so it can seek a return.

treis2• 6 years ago

The current “.com” implosion is broadly being marked by companies that do have “revenue” but only by using VC cash to create “fake markets.”

The taxi market isn't fake. The food delivery market isn't fake. People paid for these things before Uber, Lyft, Doordash et Al

The problem is that investors see the possibility of a monopoly or duopoly forming. That means they're willing to throw stupid amounts of money at these companies in the hopes ending up on top.

taurath4• 6 years ago

The whole story of buying pizzas from a normal pizza shop for $20 and selling them for $18 through your “app” is the stereotypical example of the current .com implosion

Lets not have this be the lesson that people learn, please. This is not an actual strategy - think of it more as a coupon. There is plenty of reason to think that with economies of scale a single company COULD win out, not have to raise prices and keep on trucking, a la google/fb in the advertising space.

The problem is when multiple people realize this it become a cold war-esque capital arms race. That there is absolutely nowhere else within the economy to make a decent return on investment at a lower level of risk is what is driving all of this. We have 0% interest rates everywhere, and tons and tons of money sloshing around.

Its completely conceivable to me that the best thing to do to grow the economy at this point is to do UBI. That there has been no inflation while the government pumps TRILLIONS of dollars into the economy means none of that money is getting spent within the economy, just thrown away to prop up massive company debtloads.

perl4ever5• 6 years ago

"thrown away to prop up massive company debtloads."

This strikes me as unnecessarily reifying it.

I can print a $1 trillion dollar bill and give it to you. If we agree that you now owe me $1 trillion, it really doesn't have any effect on anything. It balances, we could repeat the exercise a trillion times, and assuming we both continue to believe in the meaning of that money, it has no effect on anything. The only rational thing for either of us to do is act as though it doesn't exist, even if we totally believe it does exist, because it balances.

I can't of course say that nothing bad will happen when people play weird games like this. But the essence of the game that we are aware of, it doesn't make sense to me to be afraid of. It's just writing large numbers on paper (or in databases). If the paper, or database records are destroyed, it's not wasting anything or consuming anything, unless something somehow became unbalanced.

code4tee4• 6 years ago

The first time I got in an Uber and saw a Lyft sticker in the window and a driver with two phones on the dash is when I knew for sure this whole “new economy” was doomed.

Both the user and the supplier we’re just gaming multiple apps to find the best deal with no loyalty whatsoever. It basically just boiled down to which VCs wanted to subsidize the transaction the most.

dom96• 6 years ago

Serious question, I am a total noob when it comes to investments. But let's say I want to bet on another ".com" implosion, what can I invest into to make that bet?

I feel like these unicorns are so ridiculous that they will surely fail sooner rather than later, is there a way to bet on this eventuality?

three_seagrass5• 6 years ago

Unlike the .com implosion, the current unicorn market is propped up by VC funds and angel investors. By the time they IPO and you can short them, they're not really unicorns anymore simply by getting to that point.

Analemma_• 6 years ago

One of the reasons why these startup bubbles happen is that you can't short companies pre-IPO, nor can you short VC funds.

It's a good demonstration of why shorting is an important part of a healthy market, no matter what people like Elon Musk claim. It's the way that sanity fights back against bubbles and irrational exuberance.

dreamcompiler• 6 years ago

Old VC model: 1. Invest billion$ in startup. 2. Profit.

New VC model: 1. Light billion$ on fire. 2. Matt Levine critiques the height and coloration of your flames. 3. There is no step 3.

projektfu• 6 years ago

Old VC model was invest $80M in startup, profit, IPO. Now it’s a billion here, a billion there....

altoidaltoid• 6 years ago

Pretty soon you're talking about real money

scep122• 6 years ago

You have insanely large pools of capital creating an incredibly inefficient money-losing business model. It's used to subsidize an untenable customer expectation. You leverage a broken workforce to minimize your genuine labor expenses. The companies unload their capital cannons on customer acquisition, while this week’s Uber-Grubhub news reminds us, the only viable endgame is a promise of monopoly concentration and increased prices. But is that even viable?

Are there historical examples of this strategy working? I can't think of any off the top of my head.

Uber's bet is that the desirable customer experience (quick, cheap delivery) is tenable with both 1) scale and 2) new technology that drives prices down. In the long run, I think they're right:

For #1: When you consolidate two (or more) local delivery operations that do the same thing, you can increase the efficiency of your operation as a whole.

For #2: The big question is: can they stay solvent long enough to see autonomy or other delivery technology come to fruition? I have serious doubts about this. I expect we'll see Uber slowly raise prices to keep the business sustainable.

agacera• 6 years ago

In Germany, Takeaway [1] bought most of the competion and the small players quit (like Deliveroo) since they couldnt compete... well looks like this is actually working:

https://corporate.takeaway.com/investors/results-and-reports

Prices were raised and I doubt restaurants and delivery guys are making more money in this scenario than they used to.

[1] https://corporate.takeaway.com/

samtp• 6 years ago

For #1: When you consolidate two (or more) local delivery operations that do the same thing, you can increase the efficiency of your operation as a whole.

The problem with that is delivery services have a fixed cost per order that does not significantly decrease just because you are fulfilling more orders, especially across multiple regions. You can group multiple orders per delivery, but the amount you pay the driver can only go so low before it is not viable for them to work for you.

scep122• 6 years ago

You can group multiple orders per delivery

Isn't this the reason that cost per order isn't fixed? The more orders a single delivery can fulfill, the lower the cost-per-order becomes.

TrackerFF• 6 years ago

lmao, they actually put those pics in their presentation.

dsalzman• 6 years ago

Podcast version here! https://anchor.fm/talking-money-stuff/episodes/The-Unicorns-...

Mengkudulangsat2• 6 years ago

I was working on fundraising materials for a client that was just-about-to-get-a-term-sheet when lockdown happened. They were reliant on airports and the likelihood of any deal closing soon is slim.

Once I detached myself from the project, I took a good look at my financial models. For every $50 the client took in bookings, they had to pass $30 to operators, spend $9 on marketing, 5$ on refunds, and $7 on overheads.

The assumption was while operator payouts grew linearly, marketing, refunds and overheads grew sub-linearly. There is going to be this nice breakeven point when everything is going to make sense, if only they procure enough capital to get there.

These Uber for X / Casper for X business models are all largely dependent on this belief being true. Whether that's the case or not depends on the unit economics of the market in question. The only way to know for sure is to run experiments.

That, I believe is what easy money has allowed in the US - mass experimentation. In my home country, we don't have the resources to even attempt to find answers to such questions.

tompccs• 6 years ago

This is a subtle and often-missed point. In the markets where they are trying to acquire customers and become dominant, the "Uber-for-X" businesses have negative gross margins. But they will have surely demonstrated (or the investors really are fools) that, once they have saturated a particular market (ie, a region or city) they are unit profitable. The bottom line looks bad because these companies are growing so fast that their balance sheet is dominated by the markets they're aggressively trying to corner, which wipes out the profits from the markets they have already won and proven viable.

gowld5• 6 years ago

It depends if you are Amazon or if you are Uber, doesn't it?

TheOtherHobbes• 6 years ago

2000 and 2008 proved conclusively that investors are never fools.

ponker• 6 years ago

These companies often assume that they can spend money to acquire customers but that those customers will stay loyal when the money hose turns off. If you have a fucking amazing product and spent the money to get people over the activation energy of trying it, that’s true. But a lot of these customers came to you for the bargain and flee as soon as the bargain dries up.

lordnacho• 6 years ago

This sounds right but it's not trivial to show that one piece of the business is profitable. Accounting isn't that simple, and to a degree the investors simply have to believe the story. I'm not saying you can't have an amazon type situation where indeed profits are sunk into new investment, but surely not every firm claiming this is actually doing this.

shoo• 6 years ago

Why would refunds scale sub-linearly with revenue?

542458• 6 years ago

Guessing, but maybe better anti-scam and customer service mechanisms? But yeah, seems iffy to me too, but hard to say without knowing the particulars of the business.

mindslight• 6 years ago

In general you'd expect repeat customers to be happy with their purchases.

cft• 6 years ago

Also the mode data you have, the more you can fine tune your ML fraud systems

Mengkudulangsat2• 6 years ago

Better UX mainly.

They were looking to deploy those IOT beacons that can give granular and real-time data on asset availability. A lot of the refunds stem from currently inefficient processes.

runamok• 6 years ago

This is usually expressed as the long term value (LTV) of the customer. It costs X to get a customer but once they know you they may use you again, refer you to others, etc. and take Y days/weeks/months to repay you for customer acquisition costs. For instance with magazines people used to subscribe for 3 years on average which is why so many companies love subscriptions. They have enough inertia and friction that people just keep paying in many cases.

evanb• 6 years ago

It seems they have fallen into the age-old trap of confusing unicorns with Pegasus.

ykl• 6 years ago

Metacommentary: Every time I see a Bloomberg link on HN, I cross my fingers that it is Matt Levine, and every time it is in fact Matt Levine, it’s pure gold and 100% worth the click. I get the newsletter in my inbox, but since I check HN before my inbox usually, sometimes this is the faster route to some good Money Stuff hilarity.

shaan1• 6 years ago

I think this is normal. Every business goes through ups and downs.

stephc_int132• 6 years ago

A lot of what I am reading lately reminds me of the touches of sarcasm I loved reading back in 1998-1999, just when the bubble popped. Winter is coming, and it might be uglier this time, I also believe this kind of evolutionary pressure is a very good thing.

pjc50• 6 years ago

Bring back fuckedcompany.com!

PhantomGremlin• 6 years ago

Pud doesn't seem interested in doing it. (He sometimes shows up on HN).

I should have registered fuckedunicorn.com, it was available when I first looked. Someone eventually grabbed it but hasn't done anything with it.

Of course, I wouldn't have done anything with it either, so there's that.

anticsapp2• 6 years ago

Hi, don't take this as a challenge or a "cite your source". Didn't the bubble pop 2000-2001? I'm asking because I'm wondering if I am remembering it wrong, I lost my job kind of late but I worked with IBM. The "I got $50K of options!" 22 year olds all got jacked much earlier.

jwilliamson• 6 years ago

The bubble popped early in 2000.

https://upload.wikimedia.org/wikipedia/commons/8/84/Nasdaq_C...

stephc_int132• 6 years ago

Yeah, I should have written just before the bubble popped.

I think we had clearly visible warnings back then, just as we had quite a lot of good warnings recently. In my opinion, the C19 event is only an accelerator.

empath75• 6 years ago

https://www.google.com/amp/s/www.wired.com/1999/09/zeros/amp

jariel• 6 years ago

Anyone benefiting from the lock-down, like Zoom, is doing well, those that are not, like Airlines and Uber ... not so much. This is mostly a coronavirus story, not a crash story or much else.

KoftaBob• 6 years ago

I would love to sit down with a few of these ivy league educated VCs and get them to explain how they justified investing massive amounts of LP money into blatantly bogus revenue models.

If they can come up with anything other than "build a monopoly and then figure it out", I'd be shocked.

Look at all of the most prosperous public tech companies, especially the famous FAANG companies. Every single one of those sells a product/service with an actual profit margin (ads, ecommerce infrastructure, cloud services, media, smartphones, operating systems, etc).

Not a single one of them got to where they are with the "sell a product/service at a loss and then figure it out later". Why? Because that's an incredibly foolish and reckless use of capital.

This is also why I don't like when companies like AirBnB are lumped in with ones like Uber during these "unicorns struggling in the pandemic" discussions. AirBnB has a sustainable revenue model, they were simply affected by an artificial restriction on travel. Uber and DoorDash have no excuse.

VCs, if you're listening... for pete's sake stop blowing investor money on this nonsense and invest in actual good businesses.

pkilgore2• 6 years ago

Unfortunately, Monopolies are profitable and we do not yet have the policy/law/political will/experience/all-of-the-above to prevent them for technology-at-scale.

Been reading "Goliath" lately by Matt Stoller -- there are some crazy similarities between monopolization in the early 1900s and now.

tim3333• 6 years ago

Maybe natural monopolies like Google or Facebook. I'm not sure if any of the VC trying to buy a monopoly efforts have worked that well? I mean Facebook took investor money but probably would have done fine without it.

netcan6• 6 years ago

The thing is, it works sometimes.

Facebook IPOed without a business model. Their ad platform was crap, attracting generic banner ad prices. They launched all the targeting tools pretty quick, so Zuck obviously had a a plan... but public investors took the risk.

Amazon was a long term example. They were losing money on every sale to be made up in volume (sticking with economist cliches) for decades. Now, they're literally 1000X bigger than the 2 billion dollar picker-uper startup.

I agree though. There has been a ton of spend spend-2-to-make-1 MOs running businesses lately... and it is ridiculous. Also agree about Matt. The cat can write.

I just think it's worth remembering the rational starting point for all the irrationality. Uber's initial value proposition was:

"We are a software platform company. Software platform economics apply, just like Google & Microsoft. We'll scale like software and have a monopoly like platforms."

That actually wasn't all that unreasonable. They did scale at a speed that a non-software (or law abiding) company couldn't have. But.. it turned out not to work. Market share didn't translate into monopoly pricing power.

Now (or maybe last year), the alternative value proposition is/was: "When self driving gets invented..." This one is unreasonable.

Softbank really did go big on some very bad bets huh?

Hokusai2• 6 years ago

The thing is, it works sometimes.

Yes. It does, like to buy a lottery ticket. It is not a good investment thou.

SoftBank really did go big on some very bad bets huh?

This is usually a misconception on how betting works. Many people looks at the result and classifies a bet as good if won and bad if lost. The reality is that the best way of looking at bets is from their expected return. A good bet is one with a positive expected return. Sometimes you will lose the bet and lose the money, but that does not mean that it was a bad bet if the expected result was positive.

If I bet you 100$ against 5$ that you get heads on a coin toss. That is a good bet for you. If you toss the coin and lose the 5$ that was still a good bet and you should take it again if you have the opportunity.

Were Facebook, Uber, Amazon,... good bets? It’s hard to say. What seems easy to see is if they turned into a profit or a lose.

lotsofpulp2• 6 years ago

Facebook, Uber, and Amazon are not comparable at all to WeWork, Oyo, or some others. If you thought some 22 year old with no hotel management experience was within a few years going to rival Hilton and Marriott and come up with the in house policies, procedures, and build up the staff required to go around the world and perform constant quality control, then I have a bridge to sell you. Same thing with WeWork, there's no moat there.

autokad3• 6 years ago

when you invest in a series of companies knowing some will fail but the ones that dont will hit it big, and thus make money on average, that is not gambling or anything like buying lottery tickets.

Think of it like a machine learning ensemble model. when you take a group of things, hopefully not correlated, you end up with a better result. when you average lottery tickets, you still lose.

snowwrestler• 6 years ago

Just want to make a correction here: Amazon was definitely not losing money on every sale.

I think what you're thinking of is that the company rarely reported a profit. But that was because they carefully managed their finances so that all the money they made was redirected back into growth, either through capital improvements, hiring, lowering prices, etc. before it was reported as profit. Amazon maintained a boot-strapping mindset long after going public.

In contrast, some gig economy companies are losing money on every sale; they generate no new capital of their own and their growth is financed entirely by external sources of capital.

bsder• 6 years ago

Just want to make a correction here: Amazon was definitely not losing money on every sale.

Correct. Amazon is in the other category of unicorn--ignore those pesky laws that limit our competitors.

Amazon gained 5-8% on every sale because they didn't collect sales tax for a VERY long time.

This drove my local booksellers crazy, and probably put them out of business. Yes, I'm still mad about that.

Amazon should have been fined billions for those infractions.

But it is just another example of "Do that illegal thing that's profitable. We likely won't get fined enough for it to be a problem."

netcan6• 6 years ago

I did say it was a cliche.

On the greater point... I agree that some gig economy companies are more on-the-nose, but they overall proposition wasn't that different. The business model lost money, but generated growth.

In hindsight, once you know who the winners are, it's easy to point out the differences. Realtime, it's harder.

jkqwzsoo• 6 years ago

Softbank really did go big on some very bad bets huh?

There's another clichéd saying: There are no bad assets, only bad prices.

Translated to betting: There are no bad bets, only bad odds.

netcan6• 6 years ago

Funny you replied with those two. I've worked in both finance and casinos.

gowld5• 6 years ago

There are no bad horses, only bad odds. A bet is a horse and its odds and your stake.

But even that is false. If you never win, you picked bad horses.

whoisjuan• 6 years ago

"Facebook IPOed without a business model."

That's a fallacy. If you read Facebook's S-1, the business model is there. Their ad platform could have not been great technologically speaking but it was a hardcore money machine that set FB in a clear trajectory to full operational profitability. Their user numbers where fantastic, so they had a perfect virtuous circle.

They had an accelerated revenue growth and their ad-depending revenue ratio was improving (as well as their cost of revenue)

Imagine going public with a 150% year over year growth. Like it or not, Facebook had a business model. A global business that could scale massively with a relatively small operational footprint. We know now at what cost and the moral implications, but the business was there.

No DoorDash or shit has the numbers to pull a "Facebook".

https://www.sec.gov/Archives/edgar/data/1326801/000119312512...

adventured2• 6 years ago

To add to the absurdity of claiming Facebook IPO'd without a business model, here are the financials surrounding their IPO (which was May 2012):

2009 | $777m sales | $229m net income

2010 | $1.97b sales | $606m net income

2011 | $3.71b sales | $1b net income

2012 | $5.09b sales | $32m net income

2013 | $7.87b sales | $1.49b net income

A billion in profit the year before IPO, supposedly without a business model. Uber should have considered not having a business model. Here is what FB's business model was in 2012: ring the advertising cash register all day and night.

davefp• 6 years ago

A unicorn with wings is an Alicorn, thank you very much.

netcan6• 6 years ago

When it comes to these kinds of basket case occurrences, it's a bad idea to try and tweak them to be less bad. There is a reason they occur, and it's not "compliance" or whatnot.

The ratings agencies are an obvious example. It's not a matter of integrity, ethics or policies. Ratings just aren't what they seem to be anymore. They're obviously not there for investors to estimate risk. Their main job now is to regulate the financial industry.

pwdisswordfish2• 6 years ago

"In the old economy of price signals, you tried to build a product that people would want, and the way you knew it worked is that people would pay you more than it cost. You were adding value to the world, and you could tell because you made money. In the new economy of user growth, you don't have to worry about making a product that people want because you can just pay them to use it, so you might end up with companies losing money to give people things that they don't want and driving out the things they do want."

This "new economy" does not sound like a legitimate one. We often see complaints online about "gatekeeping" in today's US society. This appears to be an attempt for all "economic" activity to be controlled through "investment" by a small number of people desperately searching for returns (because the real economy is in shambles). Destroy competition ("disrupt") and then rent-seek.

Proponents once claimed software as a business had infinite upside because the overhead costs are so low. They argued anyone could start a software company. Not today. VC required. That seems to be the general consensus.

Why does today's software require so much investment? Low quality work product that "cost" some ridiculous dollar amount in developer salaries which is then "sold" at the price of something like $0.00-3.99. The "value" to be recouped through surveillance of the user. Brilliant.

Unicorn is the perfect symbol because all of this is pure fantasy.

Money with no place to go. There is no "new economy". There is only the old (real) one that is in dire straits. That is why investors are so desperate. They will try anything.

gowld5• 6 years ago

I know someone losing money handover fist in a VC-backed startup. I know someone else who goes to a day job for socialization and health insurance but makes his real money selling Microsoft Excel and Word macros.

nikanj• 6 years ago

I feel like Excel with macros is closest to the "bicycle for the mind" vision that we've gotten so far.

wyclif• 6 years ago

Do you mind saying what his macro business is called? I'm curious about what that kind of business looks like.

ackbar032• 6 years ago

Where exactly does he sell them? I've wondered before whether there is a market for these

austincheney• 6 years ago

This was predictable and the prediction applied more broadly than just tech start ups. Tech investment in general was over saturated.

I was predicting last April (2019) that we would be heading into recession within 18-24 months even though we were in the strongest and longest running bear market in history. I wasn’t the only one predicting this as I was seeing several vaguely similar comments here on HN. I had no idea there would be a pandemic, a depression, or that any of it would happen within a year. Investments crashed earlier and harder that I anticipated because the cause of the crash was something I never thought of, but the reaction and result are similar.

The reason why people were predicting a recession is that there was/is too much money tied to investment speculation that isn’t reflected in the revenue of a given organization. In more plain terms people were betting on growth even though growth alone couldn’t repay the investments at present, which looks like a Ponzi scheme. The idea of a Ponzi scheme is to bet on growth and then encourage additional layers of investment to drive up the value of the prior layers and then dump it before it implodes, like a game musical chairs. Here are some basic examples:

* Uber was a $60 billion unicorn. It was loosing billions every quarter though without any profit in sight and yet people were still investing in it. Now it’s shedding like employees and closing offices.

* Amazon is a less extreme and much less obvious example. For one Amazon is profitable, and two Amazon makes money on infrastructure which provides scalable growth. Amazon’s market cap is insane at $1.2 trillion. Amazon generates neither the profit, revenue, sales, or growth to account for anything close to that, which speaks to speculation. As an interesting side note has historically lost money on its retail business and on Prime. It took selling access to its infrastructure to deliver a profit.

* For an example of the opposite Bank of America’s stock tanked as a result of the pandemic but it still reported a very strong first quarter a month later. It looks like the bank will continue to perform well in its earning statements even with consumer mortgage and loan forgiveness due to strengths in other banking segments. It will be curious to watch as last week Berkshire Hathaway started dumping its investments in the banking sector. The most notable are its dumping of Wells Fargo and Goldman Sachs that are failing to perform to expectations but it is also the largest single investor in BAC and it is dumping that too. This loss of investments won’t impact current business performance relative to the marketplace in general or to its competitors specifically.

auggierose• 6 years ago

It's that time again :-)

https://www.youtube.com/watch?v=I6IQ_FOCE6I

tim3333• 6 years ago

You can get the presentation with voice commentary here https://group.softbank/en/news/webcast/20200518_01

Unicorns in the ditch at 30:30

The Unicorns Fell into a Ditch

Related Stories