The Problem With Profitless Start-ups
From NewYork Magazine:
Yesterday, I ordered lunch from a gourmet meal-delivery start-up called SpoonRocket
– a takeout container of sirloin au poivre and roasted cauliflower that
was shuttled to my door in exactly 11 minutes, costing me $8. I then
took an UberX car to a meeting
across town, paying roughly $10 for a 15-minute ride. On my way, I
pulled out my phone to see about getting my broken dryer fixed through Handybook, which provides on-demand repairs in the Bay Area for less than a local handyman would charge.
There are dozens more services
like these operating in and around San Francisco – Homejoy for
cleaning, BloomThat for flowers, Postmates for courier service, and on
and on. Most of them provide cheap, convenient amenities at the tap of a
smartphone app. Few of them are profitable on a corporate level. And
together, they’ve formed the backbone of a strange urban economy: one in
which massive venture-capital injections allow money-losing start-ups
to flourish, while providing services that no traditional, unsubsidized
business can match. It’s an economy built on patience, and the hope that
someday, after the land grab is over and the dust has settled, a better
business model will emerge.
It’s hard to know which of today’s new start-ups are
unprofitable. But in some cases, losing money is kind of the point. I
have no inside information on SpoonRocket's financials, for example, but
I imagine that the company books a loss of a few cents every time I
click the order button. (There’s just no way, short of a supply-chain
miracle, that my $8 covers the cost of preparing a gourmet lunch,
driving it to my house, and paying all the drivers and cooks and
engineers and assorted other costs associated with running their
business.) But SpoonRocket doesn’t have to make money, because it’s just
raised $10 million in venture capital
expressly so it can keep its prices low. The metric its investors care
about right now is user growth, not profits. And if, indeed, the company
is selling meals for less than they cost to make, those investors are
willing to fill the gap.
This business model is great for consumers. As a result of
start-ups’ willingness to lose money for months or years at a time, I
get cheap, fast services that come with an effective subsidy that can
add up to thousands of dollars a year. But they're problematic for the
businesses themselves. Unlike Amazon or Google (which have profitable
core operations that subsidize the money-losing services elsewhere in
their business), or Uber (which uses the profits from its high-margin
Uber Black and Uber SUV lines to subsidize its low-margin UberX
service), many of today’s start-ups have no profitable parent company
pouring in money. They’re simply taking millions of dollars in venture
capital with the hope of keeping prices low, pushing rivals out of the
market, and eventually finding a way to turn a profit....MORE
HT:
Abnormal Returns