Tech Startups Face New Investor Mandate: Profits Over Discounts (wsj.com) 67
The discounts and freebies many tech startups have used to lure customers-- free lunch delivery, $3 beauty products and bargain taxi rides -- have fallen out of favor with investors who are losing patience with the failure of these companies to turn a profit. From a report: The proliferation of subsidized products and services from venture-capital-backed startups over the past decade reflected a rush by investors to fund the next behemoth consumer-tech company. The thesis: Create a market leader with loyal customers hooked by attractive deals delivered at the touch of a smartphone app. Once the company got big enough, profits would flow and the subsidies could end.
Startup investors are re-evaluating that approach. Following a year of dismal performances from companies that were heavily subsidized by venture capital, investors and board members are pressuring companies to figure out a more profitable business model, tech deal makers and startup founders say. Investors want startups to become less dependent on raised capital to cover the cost of customer discounts, such as e-commerce startup Brandless selling home and beauty products for a fraction of the cost of shipping, ride-hailing companies Uber UBER and Lyft discounting the cost of their rides, and meal-delivery service Postmates offering coupons for $100 off delivery fees.
Startup investors are re-evaluating that approach. Following a year of dismal performances from companies that were heavily subsidized by venture capital, investors and board members are pressuring companies to figure out a more profitable business model, tech deal makers and startup founders say. Investors want startups to become less dependent on raised capital to cover the cost of customer discounts, such as e-commerce startup Brandless selling home and beauty products for a fraction of the cost of shipping, ride-hailing companies Uber UBER and Lyft discounting the cost of their rides, and meal-delivery service Postmates offering coupons for $100 off delivery fees.
Re:sounds right (Score:4, Insightful)
I actually avoid working for companies that offer too many benefits like those explained.
Mainly because they come with a hidden cost to the employee. Free Food, don't leave the office to a local restaurant where you are not working. Free Taxi/Uber/Lift/Bus Services. The looks they give you if you have to leave early to go to the doctors office.
They are all designed to keep the employee working well beyond the 40 hour week, with peer pressure and easy monitoring.
Now here is an other side. These things make us seem more productive, especially with an office of 20 something year olds who don't know the difference. But the company is spending a lot of money for benefits that really don't boost productivity or moral, as people are getting burned out, but when they look at working for someplace else, they just don't seem to have the same benefits, because the benefits are meant to keep you working...
You can get a lot done when you are well rested, have you home affairs taken care of, know there is a place to escape work and reset your mind.
I am saying get rid of all benefits? No. The company needs to stay competitive in hiring and keeping employees. Health Insurance, Family Care, in general benefits that are meant to make your home life easier and smoother.
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There's implied work demands -- the benefit is to keep you at work -- but there's also actual dollar costs associated with these benefits.
I've literally had managers tell me that these work perks cost money and are "part of" my larger compensation. I tell them I'm not interested in the fridge full of Red Bull, the fitness center, or any of the other bullshit they spent money on. I want my compensation in dollars first, and time off second.
Everything else besides health care, heat and air conditioning is u
Re: sounds right (Score:3)
Re:sounds right (Score:4, Informative)
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Re:Those poor, poor venture capitalists. (Score:4, Insightful)
Won't you think of the venture capitalists?
Well, I like that venture capitalists are being so magnanimous as to subsidise hipsters' lifestyles. It's almost "parental" of them.
And you can bet that, just like kids, those hipsters will be ungrateful little bastards when their subsidies end.
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And you can bet that, just like kids, those hipsters will be ungrateful little bastards when their subsidies end.
Uphill, in the snow! Both ways! And a Hershey bar only cost a nickel! Now get off my lawn!
Seriously, how is this modded "Insightful"? My Millennial friends and I don't use Uber, Doordash, Favor, or any of those various services that are most associated with giving away freebies. They cost too much. We're too busy earning a living over here and paying off those wonderful student loans.
I'd go so far as to say that the "hipster lifestyles" you think only exist in ads, and a few edge cases like Facebook an
1099 Drivers can't pay for the free stuff out ther (Score:1)
1099 Drivers can't pay for the free stuff out there pocket and the rules say you can't be to pushy for an tip
Good luck with that... (Score:5, Interesting)
This can be argued to be the beginning of the end of a lot of things in the US. Mainly because there are so many services that are burning cash which people use constantly, everything from Uber/Lyft. Even Amazon didn't show a profit until recently.
If investors do start cutting off the capital, people are not going to like it. For example, if their ride share service now costs an extra $50 "administration fee", or if other fees go up, people will just do without. If that Bird scooter started costing $10 a trip, people will walk, or they will just go back to their bicycle. It isn't like anything made in the past ten years by these startups matters much.
Maybe this is a good thing, but I think it may get worse before it gets better, especially once these startups start shedding jobs, which will cause a domino effect.
Of course, the investors will get what they pay for -- Amazon took a long while before it went profitable, and just trying to extract cash from existing businesses will be at best met with diminishing returns.
Re:Good luck with that... (Score:4, Insightful)
Huh? Amazon has reported positive net income almost every year since 2004 (they had a tiny loss in 2012 and a larger one in 2014). They've been profitable for quite a while.
This trend -- of expecting startups to be economically sustainable earlier, rather than hand-waving at prospects of network effects or efficiencies of enormous scale -- is a very positive thing. A business that takes a decade to break even for a year is almost never a good use of resources.
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Huh? Amazon has reported positive net income almost every year since 2004 [...]
True. But Amazon started as a company in 1994 and went public in 1997. So you could say it took 7 to 10 years for Amazon to become profitable.
Comment removed (Score:5, Informative)
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Plan B is to pivot and become Amazon delivery drivers.
Re: Good luck with that... (Score:2)
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Amazon was profitable by 2003 [vox.com] and had net positive cash flow by 2002. So unless you consider the early 2000s as "recently" (which would be a stretch for a company that went public in 1997), you're wrong.
Additionally, Amazon had a plan on reaching profitability, and also a plan about what they would do with their profit. These new "unicorns" don't have plans for either. It's hand-waving about profitability, and what will they do with the profits? No real definite ideas. But Amazon stated their goals, t
the .COM Bust of the early 2000's (Score:2, Interesting)
during the 1990's during the .COM boom employees were getting way too many benefits and paid way to much for what their work deserved. (80k for an entry Front Page Web Developer in 1990's money), Where many IT Guys were given a seat a the C Table...
Then the bubble popped. Many of these jobs that were being paid 6 figures for had been replaced with low 5 figure jobs often outsourced. A lot of IT Workers had left their careers and moved to a different direction, as they went from top of the ladder to that w
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Whoosh.
This is about not giving the service to free for the customer, nothing to do with cutting employee benefits. Cutting benefits is a proven way to push your company under as the best employees leave for competitors that aren't cutting employee benefits. (and they can be picky and just poach your most knowledgeable employees)
My ideas (Score:5, Funny)
I heard about this place called Silicone Valley that has a lot of money to give out and you don't have to pay it back. I want to get some of it to create an online mattress company.
The idea is to ship large mattresses to customers and let them try it for a year. If they don't like it within that timeframe then they can simply let me know and I'll give them all their money back. But wait, here's the really smart part: the customer won't even have to ship the mattress back. They can just dump it in the landfill so I save money in shipping expenses.
I've got tons of other ideas too like people paying $20 for me to deliver a $5 sandwich, an app where people hand over info about their entire personal life for free, and an app where young females pay to ride in the cars of random men.
If anyone knows where I can get funding secured for these ideas, please let me know. TIA.
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Sincerely,
Softbank
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you joke, but I bet that's exactly the ``problem'' that many fund managers have: they got money to invest, but no place to put it... and unless they find a place to park it soon, they'll lose control over it.
(e.g. nobody wants to hear that the fund manager keeps their money in cash---and it's often more profitable to throw money at places and collect management fees. heads I win, tails you lose scenario).
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Hello, we have $20 billion we need to give to someone, preferably $60 billion. Please help us.
Sincerely,
Softbank
Ironically, it's Softbank that is starting to let the air out of the bubble. With the whole WeWork fiasco running for as long as it did even when it was obviously little more than a way to move VC money to the founder's pockets there was no clearer indication that we are in a bubble. With all of the money in tech that has propped up unrealistic stock prices, this next bubble pop is going to be a rough one.
Re: My ideas (Score:3)
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The interest rate was lowered, so money is cheap. They've got to find a place to put all of that money.
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I've got tons of other ideas too like people paying $20 for me to deliver a $5 sandwich,
Good morning! I'm a high-powered SV consultant, and I bet we can do a LOT better if you charge only $5 to deliver a $20 sandwich. Sure, we lose money on the transaction, but we'll be able to grow massive volume!
Re:My ideas (Score:5, Insightful)
High Risk = High Reward. There are plenty of stories where someone decided to risk a lot of money in what everyone else says is a bad idea, only for it to be the next disruptive technology.
There are also more occurrences where people lost a lot of money because it just was a bad business plan.
1970's Computers are for businesses. Personal Computers would be too under powered to be useful and too expensive for the home user.
1980's why bother selling the same OS to an other hardware manufacturer because of the patents in the BIOS they won't be compatible enough for modern software.
1990's this program which is a glorified dumb terminal, that displays text that you can select a reference and go to an other document, will only have academic purposes
2000's PDA/Smartphones are just toys which will never make it. Because you need a full keyboard and a big screen to get real work done.
2010's Storing your data and doing a shared computing remote calculations just won't be fast enough because bandwidth is too slow.
It is also possible for many of these technologies we benefit from today could had failed miserably and we would be operating in a different world, for better or for worse.
Re: My ideas (Score:1)
P.S. (Score:5, Funny)
Sincerely,
Investors
OVERPAID CEOs (Score:3)
Uber LOST $5.2B in Q2 of 2019 alone.https://techcrunch.com/2019/08/08/uber-stock-plummets-following-second-quarter-earnings-report/
Any idiot can lose money, why do these dolts deserve $10's of millions for throwing VC down the drain while the actual workers / drivers earn sub-minimum wages?
Time for these shams to fall.
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Re:OVERPAID CEOs (Score:4, Insightful)
A user base you bought based upon giving them your product/service for free, is a user base that will leave you as soon as you raise prices to the point you no longer give them your service/product for free.
It's the Groupon effect. Most businesses who used groupon would see increased customer traffic (using the discount of course) but very few of those converted to regular customers and in some cases drove away regular customers. It's very hard to convert someone who is sued to being a subsidized customer into a regular, full price paying customer.
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It is a known scam. (Score:2)
The investors also know this, but their idea is to package it and sell it to a greater fool down the line. All of them knowingly participated in the scam. The goal
Capital-Funded Discounts (Score:4, Insightful)
Well... there's a solid justification for using capital to fund discounts: A small startup is going to have higher costs Per Unit of product or service
being Sold than a large company would due to economies of scale.
However, if you charge a higher price, then you will suppress adoption of your good or service, so perhaps you never grow enough
in demand to reach those economies of scale where your costs go down and your profits go up.
If you want to attract customers and grow quickly, then it makes sense to be charging a price that is low in order
to obtain the highest rate of adoption. The purpose of your early sales is a humongous MARKETING effort, and your discounts represent a decrease in cost that cannot be sustained without your expected growth.
The only issue really is if that growth doesn't materialize within a reasonable amount of time, and your costs don't go down, OR your discounts were too much;
also, if more competition enters the scene with an even deeper discount.
Either way... the VCs are just being short-sighted if they want to say for startups Discounted products/services toward EARLY customers
are a bad idea.... Indeed.. if there is no price advantage, then why should they try a good or service that is more on the experimental side and might turn out not up to the hype?
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Sure, but the subsidies need to be confined to evening the playing field, in terms of costs, with big companies. They should not be used to subsidize people to buy/use the product/service any more than maybe the very first time. Beyond that it's either unsustainable or you are trying to condition people to want a product they don't want, which is EVIL.
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More importantly, if the business is already making money hand over fist, why would they need the VCs?
Most tech startups do not have the same scaling problems as traditional businesses. They do most of their work upfront to build the service, then they just throw it up on AWS and wait for customers to show up. There's no need to invest billions of dollars into factories.
They need investments upfront, because they need to hire people to build the service. By the time profits are rolling in, the service alrea
As we were just talking about (Score:3)
This article nicely complements the prior article on the guy who was scamming online mattress companies for free mattresses. Investors are right to force these companies to become profitable early on - the alternative is free mattresses that actually cost someone a lot of money.
How to survive Silicon Valley... (Score:1)
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Another sign to send out your resume and start interviewing is free lunch being canceled.
Winner take all (Score:1)
The trick to getting really "rich on the Internet" is usually to use the Network Effect to out-gun competition in multiple factors, becoming a monopoly, or as close to it as possible. It's also similar if your plan is to be bought out by the existing big players, because they will probably buy the largest, not necessarily the most profitable.
To pull that off, you have to grow faster than your competitors, which usually means growing customers at the expense of profits, using investor funds if possible. Howe
Boom bust cycle in action (Score:2)
Hahahahaha! (Score:2)
These morons do _still_ not understand that the problem is them making stupid investments. Well, I guess these startups will just go bankrupt faster now. Trying to force issues usually just makes the situation worse.
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These morons do _still_ not understand that the problem is them making stupid investments.
When you have access to stupid amounts of money, eventually stupid investments are all that are left. It's gotten to the point of gambling, throwing large enough sums of money at enough different targets so that, if one or 2 of them hit, it more than makes up for all the others that missed. The problem is, just like any form of gambling if you play long enough the house always wins and at this table, when the house wins they take chips from everybody. They've thrown out so much money that it's overvalued
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Can't argue with that. Still makes them stupid for playing the game.
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Can't argue with that. Still makes them stupid for playing the game.
True, but when that Jenga tower falls, we're all going to be hit with falling bricks, not just the ones playing the game. That's what I'm concerned about.
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Indeed.
Re: Hahahahaha! (Score:2)
Will tech investors even recognize this? (Score:2)
(-this would seem to be dishonest at the least and skirting fraud at the worst, but I'm not rich so maybe that mentality is my problem?...)
Their core idea isn't always bad, but it's often nothing special and they have to give it away below cost to gain users.
Many don't seem to really have any product other than their stock price.
Re: Will tech investors even recognize this? (Score:2)
Are We Actually Surprised? (Score:1)
The basic idea is that revenues should scale faster than costs. A lot of these so-called disruptive companies don't have that and never will. Netflix will scale. Amazon was built with that kind of scaling in mind too. Uber and Lyft? I don't think so.
With the recent quest for unicorns, VC's seem to have forgotten about having a viable business model. Unicorn status is all about perception anyway. Finances play a peripheral role, if any. Now they're mad that they're getting burned? What a surprise.
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Uber and Lyft can easily become profitable by reducing their role to that of match-makers and quality control, then skimming a few % off of each ride.
Oblilgatory joelonsoftware (Score:1)
So why bother taking VC money anyway? (Score:2)
The whole point of VC cash is exactly the scenario described above. Use the hot money to grow, quickly.
If they don't want to let start ups do exactly that, then why bother taking any VC cash at all?
Those guys typically want a ton of equity and a first born.
I have a great business idea (Score:2)
First really stupid idea will involve placing an order for one million 45Kg smart cabbage shredding machines from China that read barcoded cabbages and a subscription model. I call it 'Slaw.
Tech ? (Score:3)
No simple rule (Score:2)
As in many things, good decisions on investing rely on having solid, often technical information:
Is a company selling $1 bills for 90c? No matter how much you advertise, and what user base you develop, that can never be profitable.
If a company is selling a product that costs $1000 to make for $100. Whether that makes sense is a technical question - can costs reasonably be brought down with volume?
Is the what the company is selling really the *same* as what is already available, just cheaper due to burning
Working as expected! (Score:2)
Silicon Valley's most profitable invention!
Patent: How to extract absurdly massive stockpiles of idle wealth from venture capitalists and redistribute it to the masses in the form of affordable products and services.
#winning