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Comment by Animats | Hacker News Reader

DoorDash loses money on almost every meal it serves.

Uh oh.

We're headed for a big crash in "just in time services that lose money". Remember Webvan and Kosmo. The business model of all these guys, including Uber, is "achieve monopoly, crank up prices". Probably not going to happen.

The experience of Austin, where Uber and Lyft pulled out over the driver fingerprinting issue, is instructive. Within a month, six competitors were up and running. The barriers to entry in this area are low. Even if someone does get market dominance, they can't raise prices much.

Uber is particularly vulnerable because their latest capital infusion of $1.5Bn is high-interest debt, not equity. That's an axe hanging over the head of a money-losing company.

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Someone on HN explained this very well recently: that food delivery is the perfect business for duping gullible investors, because you can book the entire cost of a meal as top-line revenue, even though it passes straight through you to the restaurant. So if someone orders $80 worth of food, that's $80 that you can show off on your Series B pitch deck even though your profit after delivery might be -$5. It's not even like the Uber theory of "we're spending to grow", it's "we're spending to make more money that isn't ours look like ours", with the losses expanding in lockstep. I agree that a major bust is incoming.

Edit: "gullible" may not be the right word. It's more like this is a clever hack to exploit how tech investors are complacent about huge losses, as long as revenues are growing too. That's not inherently a bad thing, sometimes this approach is a good way to build out a healthy business. But the food delivery outfits are carefully exploiting this and hoping they get pattern-matched to other business models where it's OK, even though their situation is not the same at all.

I don't know if those gullible investors are so easy to find, Groupon introduced everyone to the concept of "gross revenue" and "net revenue" back in the days.

And they were a tremendous success for their pre-IPO investors.

> Uber is particularly vulnerable because their latest capital infusion of $1.5Bn is high-interest debt, not equity

Pardon my ignorance, can someone explain this? What is high-interest debt and what is equity and how do they determine risk?

Also I would expect that Uber is profitable since they take a cut per ride, and their overheads should be low (just a bunch of super smart software engineers and cloud hosting, right?). What am I missing? I am young, might be stupid. Bear with me.

You're not stupid! Uber is less vulnerable than DD (mainly because their margins are higher). But it's still a cost-intensive business. Subsidies, local offices, marketing, it adds up. For reference, see [0], although Uber sold their Chinese business to a competitor soon after that article was published.

Also, equity = shares in Uber. Debt = loans. You have less liability when you take somebody's money in exchange for a % of the company, than when you take somebody's money and guarantee you'll pay it back + interest ;)

[0] https://www.bloomberg.com/news/articles/2016-08-25/uber-lose...

Wow! Thanks for the article and the explanation. Makes sense now.

P.S. If you see this, how different is Amazon? Isn't Amazon also losing millions of $, yet their stock is soaring to all times high?

As I understand it, Amazon's MO has been ploughing all of their profits into capex to expand their infrastructure, so they don't show much profit, despite continually increasing their revenue.

The other key piece is that Amazon's infrastructure investments often double as product R&D since their business increasingly shifts to selling access to their infrastructure vs selling products directly to consumers.

Last time I checked Uber still loses money. It's because they spend a vast amount on marketing both in the form of ads and subsidizing rides to undercut their competition. ie. In certain markets they are paying drivers more than the fare charged to customers would indicate. (Also, uber spends a lot on frivolities like driverless car research and branding redesigns, food delivery, etc.)

This is because Uber believes and has convinced investors it can become a worldwide monopoly by killing off competitors, network effects, etc. But the evidence so far is not supporting that case. Lots of competitors still, lots of markets that are "lost" for Uber.

So the real problem is that in the long run they can easily be profitable, but probably not at a level that justifies their valuation, since what they provide is a commodity. But luckily for them, this won't matter, because they'll IPO and be dumped onto the 401ks of witless Americans long before anyone figures this out.

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