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I'd counter that Pizza hut has a key logistical advantage of vertical integration. A delivery service is a very different business than a restaurant chain that does its own delivery.

I agree that GrubHub, Doordash, and to some extent Uber seem bloated when considering the sum total of the markets they play in. That doesn't mean these business models aren't sustainable, though. Some companies allocate resources to a few areas that turn into profit centers, some don't. The ones that don't will be sold off or parted out. And the cycle will continue. I'd wager that one of these companies will survive and turn out to be a profitable, healthy business in the next few years. The rest will probably be sold off or slowly downsized.

More broadly, to your criticism of SV's investment strategy, resource allocation is a hard problem. If you want to direct large sums of capital at certain business verticals, do you want to grow slowly and steadily over a 20+ year period only to find that the economics don't work, or do you want to fail fast with some extra waste in the middle? Failing fast has some upside to it, though I understand why I consistently hear this criticism on this site. It feels like the last decade has seen the pendulum swing towards fast money and back a little. I don't think were as far off from a healthy middle ground as some might argue.

Correction: Dominos not Pizza Hut.

> If you want to direct large sums of capital at certain business verticals, do you want to grow slowly and steadily over a 20+ year period only to find that the economics don't work, or do you want to fail fast with some extra waste in the middle?

Maybe we'll eventually learn that artificially forcing business models to run at accelerated rates creates self-fulfilling prophecies of "fail fast."

Except for dozens of counter examples that make up for literally multiple trillions of dollars in market capitalization.

And how much money has been squandered funding the startups that do fail? Survivor bias.

I'm not sure what you're getting at. Here are the facts: Companies following these accelerated growth trajectories now make up a total of 4 trillion in market capitalization depending on how you count it. That's really just the FAANGs, not the smaller companies that are profitable or on the road to profitability [1]. If you count everything you can safely say the number is closer to 8 trillion.

Every year, VC in the US _as a whole_ invests roughly 100B [2]. If you cut out non-growth and non-tech sectors I'd guess that number total goes to around 40B, and roughly 100B (very rough number) globally.

So yeah, some money gets "wasted" but it creates huge market capitalizations that are around two full orders of magnitude larger than a single years investment, and growing strong year over year.

[1] https://www.investopedia.com/terms/f/faang-stocks.asp [2] https://www.prnewswire.com/news-releases/us-venture-capital-...

Facebook - didn’t raise billions and was profitable when it IPOd

Amazon - operates on thin to non existent profits for years but use much of its own money to grow through operating cash.

Apple - definitely didn’t raise billions in the 70s and was profitable at IPO.

Netflix - I don’t know much about Netflix.

Google - grew fast but it also had a profitable business.

Microsoft - famously, MS didn’t even need the VC money it got early on. It took the money because it wanted the expertise of the investors.

Netflix started in the original dot-com bubble as a DVD rental service, and only began streaming in 2007, a decade after they were founded. Reed Hastings put up $2.5 million himself. Not exactly a case of rapid illusory hypergrowth like the poster children unicorns of the current gig/sharing economy dot-com bubble.

None of these companies had to deal with the current investment environment. It's an arms race. While it's a chicken and the egg issue since both Facebook and Google provide virality and discovery, respectively, and it is those two features, virality and discovery that lead to a positive return on investment from blitzscaling.

Besides discovery and virality, there is also the issue of falling transaction costs. When Google, Facebook and Amazon were founded, you had to maintain your own datacenters and infrastructure. That alone produced a massive barrier to entry that made competition less fierce. Since the advent of AWS and other cloud computing platforms, transactions costs for tech companies have dropped dramatically so you can't rely on infrastructure prowess as a competitive advantage for many tech verticals.

You simply can't compare companies that were born and matured in different markets with different dynamics to those founded in the past 10-15 years. It's apples and oranges.

How’s that working out for them? Name one tech company founded since Facebook that has been massively successful - ie massively profitable.

Becoming a massively profitable megacorp isn't the only winning formula.

Were Linkedin, Instagram, Beats by Dre, WhatsApp, Tableau, Skype, GitHub, MuleSoft all failures because they were acquired for billions, making lucrative paydays for their founders and investors?

You missed the other part of the equation. No one said that all VC money was dumb. The conversation is about billions of funding going down the drain like in the case of Uber compared to the paltry sum inflation adjusted raised by the tech behemoths before they went public and became profitable.

Beats by Dre raised less than $1 billion in funding.

https://www.crunchbase.com/organization/beats-by-dr-dre

WhatsApp raised less than $70 million.

https://www.crunchbase.com/organization/whatsapp#section-ove...

From looking at Crunchbase, Instagram didn’t raise any outside funding.

None of the companies you listed raised anywhere near what Uber, Lyft and AirBnb raised.

That might be because none of these companies are operating in the real world while Uber, Lyft and AirBnB do.

Netflix - created in 1997 with profit from selling Reed Hasting previous company. They IPOed 5 years later in 2002 don't see anything about VC money. Could be some but definitely not the Softbank model back then.

What are those dozens of counter examples?

The big profitable tech companies today didn’t raise billions in VC money.

Literally every single company in the top 6 of the S&P 500 was financed via private VC-style funding at the beginning.

Whether the numbers crept into the billions when the company was private or public is irrelevant. The point is that for a company to reach scale, they need billions in funding from somewhere.

Somebody has to take the risk, and all investors want returns for that risk. Public market growth investors want rapidly growing companies just as VC investors do.

One would assume that there are different styles of VC-style funding, with different time horizons. My original point isn't disputing the need for the existence of VCs in some funding cases- I'm not DHH arguing that every startup needs to bootstrap- my point is that this cycle has shown that VCs pumping in dumb money while chasing unrealistic fast returns has led to self-fulfilling failures, and a toxic culture that promotes that. The original statement:

> do you want to grow slowly and steadily over a 20+ year period only to find that the economics don't work, or do you want to fail fast with some extra waste in the middle

Seems highly dubious because you can take a perfectly fine business model and create an unattainable, doomed-to-fail situation out of it by subjecting it to unrealistic expectations, as we have seen in dozens of examples from the current bubble. Stress testing is not useful if it sets artificial pressures that destroys the business.

None of the top six companies were funded by billions of dollars that were lit on fire like today’s companies.

The early companies like Apple and Microsoft were started with a few million not even a billion in today’s dollars. As I said earlier, Microsoft didn’t even need the later rounds of funding and wanted to bring expertise on board.

The only one of the current top tech companies that weren’t GAAP profitable at IPO is Amazon and even it used its own operating cash to fund growth.

Are we talking about investment strategy or cherry picking data for the sake of arguing?

1. There are plenty of companies on the path to IPO that didn't take 1B+ in VC money 2. The "sharing" platforms are expensive investments because there are so many players fighting for market share.

We're talking about a strategy of fast growth vs slow and steady. All the companies we've mentioned so far invested in fast growth early on, whether from VC or reinvestment.

That's a false dichotomy. We're also talking about rates of fast growth vs. unrealistic hyper-growth. I'd argue that as the current tech bubble inflates, we've leaned towards the latter. [0]

[0] https://news.ycombinator.com/item?id=23094568

Let's leave it at this then: if capital is completely miss-allocated and a bubble has been inflating over the last 5-10 years as you claim, then we'll hear the proverbial pop in the next three to six months as a rapid pullback in consumer spending unwinds nearly all VC backed growth stage companies.

Congrats, we're already in the early stages of the pop. But I'm also not claiming that capital is completely misallocated, that's another all-or-nothing false dichotomy on your part. I'm saying that the current VC climate has been dominated by a toxic culture of chasing hyper-growth in many inappropriate cases, killing companies that otherwise have fine business models by subjecting them to stressful expectations. You can take a strategy that works in some cases and apply it in a wasteful, unrealistic way. That is called a cargo cult. Even before this virus crisis we saw earlier this year and last year companies in the SoftBank portfolio experiencing layoffs in the fallout of WeWork's demise. Onwards, not "nearly all VC backed growth stage companies" will be unwound, but the ones funded under the most reckless of terms will be in grave risk. If you haven't seen the bubble popping, you haven't been paying attention.

I’m not cherry picking data. Look at the top profitable tech companies today and compare the amount of money invested in them before they became profitable to the Uber and Lyft’s of today.

Amazon is the outlier when it comes to the lack of GAAP profitability for years, but even it was cash flow positive.

Isn’t this textbook survivorship bias? Dozens of successes out of how many failures and how much misallocated capital?

Ask that to someone trying to find housing off Sand Hill Road in Palo Alto.

Well, no, because for each VC portfolio, it's either profitable off the survivors, or it isn't.

The point is that from the perspective of investors, the survival of an individual startup is an irrelevant metric. What they're interested in is the profitability of the whole portfolio.

And so far, a 90% failure rate with <5% wild success is a profitable formula. As long as that remains true, they have no reason to change it.

There were two changes in the "Softbank model" -- first was investing at this scale without a real network effect or any sort of "moat," and the other was just the sheer speed of the investment -- an avalanche instead of a snowball. A company like WeWork doesn't have any real reason that it needs to grow hyper-fast -- it's a Ben and Jerry's.

https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...

Doordash tried that, with Doordash Kitchens. Don't know why, but their pseudo-restaurants in Redwood City, such as Rooster and Rice, have dropped off the Doordash site.

The traditional silicon valley approach would be to fund new ways of doing delivery. And behind the most click-worthy headlines, that is what is happening! [1].

[1] https://techcrunch.com/2020/04/09/starship-technologies-is-s...

I also don't think that food delivery is something that needs to happen at a global scale. The market is local enough that you can have one player for every city or region that can grow organically, charge lower rates, and be beneficial for everyone involved.

>Maybe food delivery services isn't solvable using the Silicon Valley method -- use insane amounts of rich people's money to subsidize product hyper-growth to only later monopolize said market to re-coop earlier losses.

I tend to agree, and also because I don't think food delivery can be easily decoupled from the preparation (for ready-to-eat orders). I mean, restaurants have done it profitably for ages, but whenever one of these SV companies tries it, I hear all kinds of stories about how, unless everything goes right, the whole process becomes tedious an frustrating.

Like, the order's wrong, and it has to restart through Uber's whole system. And the runners can't look inside to verify the order because (legitimate) health regulations. And it just ends with an unsatisfied customer who has some credit on the app.

But I do think there is a way to SV-ize food delivery, like if they could get economies of scale to work for food delivery. Imagine this:

A restaurant knows at least one customer needs their dish to start prep at 5:30pm. The website indicates they're starting one then anyway, so you get a discount for ordering the same food to start at the same time.

Meals can be batched easily -- it costs them much less than N times to scale up the order to N servings or customers.

Ditto for (in urban areas) delivering to the same building or block. If they only have to stop once, they can offer a discount to anyone ordering the same thing in the same building.

This is exactly the kind of thing where it pays to be a broad platform that everyone's on, and has kinds of monopoly profits, and provides legit consumer value.

(Disclaimer: I registered a domain name suitable for this kind of service but haven't otherwise advanced it.)

> runners can't look inside to verify the order

I was an Uber/Lyft driver, and I tried delivery a couple times way back before covid-19. One pickup was 5 identical, unlabeled containers, two of which were special orders. Having worked in restaurants before, there was no way in hell I wasn't going to visually check them (also I don't recall this being prohibited before). Turns out, one was wrong-- so the other 4 got cold while that one was re-made and I sat for 20 minutes. All told, it took me 45 minutes to bring mostly cold food to an unhappy person and I made about $4. Not. Sustainable.

It sounds like you have some good ideas and are thinking in the right direction, though. Streamlining your whole operation to minimize the possibility of errors and reduce wait times is one of the most important things to focus on in my book. Give people fewer choices.

In reality, there is no choice between:

A) Silicon Valley-style hyper growth

or

B) Slow and steady growth

Choice B is not actually an option if you want to change human behavior and actually benefit from economies of scale. This is because of the nature of competition and the power of habit. If it takes you 20 years to go national, then competitors will have cemented themselves in each region you try to operate.

And because humans are creatures of habit, it will be ridiculously expensive to get them to change their behavior even if you offer a comparatively better service.

> Choice B is not actually an option if you want to change human behavior and actually benefit from economies of scale.

But there's little or no economies of scale in the delivery business. A citywide delivery service would be equally efficient whether operated by a local company or a multinational. The local company may even have an advantage in terms of knowing their customers better. The only economy of scale I see is access to cheap VC capital.

The Bay Area’s dual refusal of housing and transportation made the delivery apps necessary in the first place, so I agree it may not be a great place to look for a solution. If housing and retail space were more abundant there would be more options within my immediate area, and if transportation were better my “area” would be even larger than it is now with what’s comfortable to reach on foot.

Are you sure Dominos actually profits on the delivery itself, or do they just offer it at/below cost to sell more pizzas?

Delivery is profitable for dominos. But the real money, well that is in garlic bread.

all restaurant business is just a ploy to get people to buy soda

Alcohol and coffee are also helpful.

No, it's not. The most you can charge for a soda is $3 around here. Even if you make 95% profit ($2.85), pretty much every single food item will make far more profit. A $12 salad will net you $9, a $15 dollar pasta will probably net you $12, a $40 steak will net you $20, and so on.

Gross profit matters far more than profit margin. Also the best way to be profitable is to increase sales relative to fixed costs, rather than trying to squeeze every dime out of limited sales.

Dominos is arguably quite a bit larger than the mom & pop restaurant I did delivery for, but... for us it was break-even or a very tiny loss. I don't remember exactly the number, but delivery was $5; $5 charged to the customer, $5 paid to the driver. I think it was waived for large orders (>$100?), but those were pretty rare. Tips were all for the driver as well. On a good night, you could make $20-30/hr; on a holiday night (New Year's Eve was my favourite), it'd be more like $40-$50 once you factor in the tips.

Was it overall a living wage as a sole source of income? No, not at all. There was usually only a small window every day when people actually wanted delivery. Was it good money for the number of hours worked? Sixteen year-old me sure thought so!

Dominos is famous for charging more for delivery than for takeaway. Their "$4 delivery" is no more accurate to the true cost of delivering a pizza than the "delivery fee" of their competitors.

I think it's not solvable with human delivery workers. Hopefully someone tries to do it with robots when we get there.