“The Problem With Profitless Startups,” Kevin Roose’s latest for New York Mag, talks about a thing I can’t stop thinking about lately, decades too late: FAKE MONEY. Or to be specific, VC money inflating new businesses which [arguably] wouldn’t otherwise succeed, and then go on to price out local/actual business who operate using more traditional business methods, such as selling goods and services for slightly more than they cost to provide. And then what?
The second issue with the venture-backed service economy is the Amazon problem – specifically, the practice of selling goods at or near a loss creates a deeply unfair competitive terrain for regular businesses. A start-up can sell a $10 lunch for $8 because it has money in the bank and investors who will rush in with more when the supply runs low. But if my local sandwich shop tries to do the same thing, it won’t make next month’s rent. The same goes with non-retail service businesses. Taxi companies had a decent chance of competing with UberX in its early days. But now that UberX and Lyft are both slashing prices to the bone with the assistance of millions of dollars in venture capital, the fight simply isn’t fair.
…The third problem is that, as companies like Kozmo and Webvan learned in the first dot-com crash, the music stops eventually. At some point, investor patience wears thin, and the businesses that are still losing money on a per-unit basis tend to shrivel and die. When that happens, what’s left? A hole in the local economy where the local sandwich shop used to be, and nothing to fill the void.
The first issue, by the way, is that this “fake VC money,” as I falsely think about it, is actually very real money that has to come from somewhere, and sometimes that somewhere is investment firms that are funded in part by the retirement funds of people like, oh public school teachers and firemen in middle America. Which is great news when it works out (moneyyyyy), terrible when it doesn’t (no money, no more sandwiches).
In other news, I heard a story over the weekend of a woman I kind of know almost giving birth in an Uber SUV on the way to the hospital. A few weeks later, Uber sent her a nice note with an UBER ONESIE. Presumably paid for with the retirement fund of a fireman in Omaha. Ha, no, nice gesture I guess, if that baby isn’t too cool to wear clothing with logos on it. ◔_◔
Photo: Steve Snodgrass