And Then They Came For Our Sandwiches

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

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5 Comments / Post A Comment

lalaland (#437)

Meaghan, I worked briefly for a start-up and this is something I think a lot about too, although I think your experiences were a bit more lucrative than mine. :) Your question “and then what” worries me a lot, in particular.

I imagine you’re still friends with at least some of the people you’ve worked with – the start-up world can be quite a little bubble once you get into it, and it’s easy to stay in it, hopping from one to another – do the people you talk to have any thoughts on this? Or is this something better to not think about?

cordovan sofa (#6,125)

I tend to think of this as the Netflix problem. The competitive pricing and deep catalog of Neflix shut down all the local video rental places. The national ones as well. (Hello, Blockbuster!) Now, Netflix wants to push away from DVD and toward streaming services, with a business model increasingly like a cable company’s. When they eventually shut down the physical media side, which they keep feinting toward, where am I going to rent movies, especially the weird little stuff that’s too long tail to profitably occupy server space, and the stuff that’s caught in copyright tangles thanks to contracts that predate the internet?

Allison (#4,509)

@cordovan sofa the library!

Dervisher (#6,416)

“…selling goods and services for slightly more than they cost to provide.”

Except they don’t always cost only slightly more. Sometimes they cost alot more. Not all businesses funded by VC’s are evil, Meaghan. And those pension funds have alot more serious problems than funding VC’s.

Meaghano (#529)

@Dervisher or sorry, businesses funded by VC’s. anyway, no, I spent four years working for two of them. i don’t think it’s an ideal way to function but it certainly works in many cases. doesn’t mean it’s not worth thinking through the ramifications.

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