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Comment by code4tee | Hacker News Reader

The first .com implosion was broadly marked by companies that lacked revenue getting crazy valuations.

The current “.com” implosion is broadly being marked by companies that do have “revenue” but only by using VC cash to create “fake markets.”

The whole story of buying pizzas from a normal pizza shop for $20 and selling them for $18 through your “app” is the stereotypical example of the current .com implosion. Anyone can sell $2 bills for $1, but that’s not a business and no you can’t “make it up on volume” because the only reason people are using your app is because you’re selling something for a crazy low unsustainable price.

The take home lesson from the current unfolding implosion is that a great product does not magically just equal a great business.

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There was plenty of that with the first .com implosion. Many e-commerce sites actually did have customers (eg. my sister swore by Kozmo.com), it's just that they got them by selling goods for less than they paid for them, and then the customer base dried up once they had to actually make a profit.

The big scam now is in customer acquisition: companies spend more in marketing than the LTV of a customer and make up the difference with VC cash. This is a little bit easier to hide: you have positive gross margins, explosive revenue growth, and the appearance of a sustainable business, but once you take your foot off the gas and stop spending VC money your existing customers churn away and you can't acquire new ones. Google and Facebook are also making out like bandits from this, and may get hurt significantly when the bubble bursts.

Yes, the cost of customer acquisition is certainly part of the current mess. While probably not strictly a gross margin issue, in practice it in effect is since that is very much a direct cost associated with the transaction.

There are certainly a lot of these upside down companies spending $100 to obtain a customer so they can sell a product for $70 that costs them $60 to make.

The cost of acquisition is also the cost of retention. I moved to DoorDash exclusively during the pandemic because of DashPass. Before that I was mostly UberEats.

UberEats would need to win me back, at least if they want me before I got back to the office.

As I usually only order food for lunch or whatever for one person, I found that I never hit the DashPass minimum. Maybe I'm just not a fancy enough eater.

Pick a restaurant with a co-worker and it starts to make a lot of sense.

Doesn't work quite as well in the solo WFH environment.

I just order lunch and dinner at lunch time, and then reheat for dinner.

Every meal box company?

> The whole story of buying pizzas from a normal pizza shop for $20 and selling them for $18 through your “app” is the stereotypical example of the current .com implosion

Lets not have this be the lesson that people learn, please. This is not an actual strategy - think of it more as a coupon. There is plenty of reason to think that with economies of scale a single company COULD win out, not have to raise prices and keep on trucking, a la google/fb in the advertising space.

The problem is when multiple people realize this it become a cold war-esque capital arms race. That there is absolutely nowhere else within the economy to make a decent return on investment at a lower level of risk is what is driving all of this. We have 0% interest rates everywhere, and tons and tons of money sloshing around.

Its completely conceivable to me that the best thing to do to grow the economy at this point is to do UBI. That there has been no inflation while the government pumps TRILLIONS of dollars into the economy means none of that money is getting spent within the economy, just thrown away to prop up massive company debtloads.

"thrown away to prop up massive company debtloads."

This strikes me as unnecessarily reifying it.

I can print a $1 trillion dollar bill and give it to you. If we agree that you now owe me $1 trillion, it really doesn't have any effect on anything. It balances, we could repeat the exercise a trillion times, and assuming we both continue to believe in the meaning of that money, it has no effect on anything. The only rational thing for either of us to do is act as though it doesn't exist, even if we totally believe it does exist, because it balances.

I can't of course say that nothing bad will happen when people play weird games like this. But the essence of the game that we are aware of, it doesn't make sense to me to be afraid of. It's just writing large numbers on paper (or in databases). If the paper, or database records are destroyed, it's not wasting anything or consuming anything, unless something somehow became unbalanced.

Also - It's not the companies competing in the unicorn market, it's the VCs. The reason why there are no competitors to Uber and Lyft, is because the unit economy is completely broken. If you're not backed by billions of VC & banking money to let you lose on every transaction, the market doesn't really exist. It's artificially created on borrowed time, cashed out in IPO, and numbers shenanigans. VC's virtual limitless access to capital is dangerously giving them powers to choose winners and losers and control the markets, economies, and the fate of large workforces in the world.

I'll followup on this - its not the VCs, its the lack of investments that give a real return, which makes capital flow towards the higher risk things so it can seek a return.

> its the lack of investments that give a real return

The stock market has provided a tremendous real return over the decade since the great recession. And it's dramatically safer on average than venture capital. Let's say you waited until the market got back to the old highs (call it mid to late 2012), to put your money into an S&P 500 index - you're up close to 100% in a little over seven years, or 9-10% per year, an amazing return by historical standards, for doing nothing.

So no, it's not the lack of investments offering a real return. It's caused by the extreme scale of wealth outstanding now. That wealth isn't overall that desperate for a return, that's why so much of it has piled into government debt yielding zip, and only a tiny fraction by comparison flows into VC. The VC being deployed has scaled with the increase in the pile of wealth in the US and global economy broadly.

This is just a tiny subset of wealth seeking a very extreme return in exchange for taking on a lot of risk, not just seeking a good or great (what I think you mean by real) return. They're chasing an Alibaba, Facebook, Google type homerun. It's the literal thing that lured all that money into making a bad bet on Masayoshi Son's fund, his Alibaba riches. It's a diversification into lottery tickets, because hey, you could be a winner, you gotta play to win, only a small number of these lottery tickets are sold, and you know the people that control access to all the tickets.

Yep. The whole reason the SB Vision Fund exists is because some Saudis needed a place to park their oil wealth that traditional markets couldn't absorb.

Stock markets are very high risk though. Not on the same level as VCs, but buying an index fund is imo within one order of magnitude of funding 200 startups in terms of risk. If you can get 8% a year on your $100billion, I think anyone takes it.

Its that giant "conservative" investors can't get 4% in bonds, so they move into blue chip stocks. Blue chip stockholders have to run into smaller mid-caps and semi-mature startups. Series B funding has to move to VCs, all to get the same level of yield.

> That wealth isn't overall that desperate for a return

On the conservative end, pension funds etc functionally need to chase some amount of return or else they start to become insolvent. You can't hold at 0% forever, there's no point in being a pension fund at that point. Right now its not desperate for a return, because its trying to stay alive. But when they were making bets on WeWork its because they were looking for a massive return.

Even when the numbers aren't arbitrage it's appalling. Friends of mine will regularly order $8 of food for $20 delivered. And these companies still post massive losses after all that markup.

Meanwhile Walmart abandoned their RFID automatic checkout system because RFID tags cost more than the markup of bananas, their most commonly sold item.

Indeed, the price of food delivery apps is insane. I really don’t know where all the money is going. How can they overcharge so much for food and yet still have a loss? In addition to the service fee, delivery fee, and what you pay in tips, the actual price of the food items is sometimes (often?) more expensive in these apps than on the restaurant’s own menus.

It's because of how a "loss" is calculated.

Let's say that an average customer will yield $20 a year for the next 10 years in profit to Doordash. Depending on your discount rate the net present value of that customer is something like $150-175. If Doordash can acquire that customer for $100 worth of advertising and discounts that is a 50-75% return. Obviously they do that and do it as much as they can.

So what will their balance sheet look like if they can do that for 1 million customers? They'd spend 100 million dollars on advertising against a profit of 20 million dollars for a loss of 80 million dollars. Everyone on HN then makes fun of them for losing so much money and jokes about selling $2 for $1. But they actually turned 100 million dollars into 150-175 million dollars worth of customer value. In other words, they made a bunch of money this year and they just won't realize the profits until 5-10 years from now.

The problem is that delivery is a commodity business; there's not much of a moat keeping a DoorDash customer from going somewhere else. The customer is pretty likely to churn if a cheaper alternative shows up, they get cold food, whatever, in which case DoorDash isn't going to record their theoretical future profits.

Restaurant Food is not exactly a commodity. It's more a habit, and around 70% of people are loyal customers of some restaurants. And UberEats, for example, currently has helped to create 4000 virtual restaurant brands.

As for cost, at the scale UberEats, DoorDash, etc operate, there's no reason they wouldn't have access to the lowest cost providers.

I think this is an indication that consumer expectations on the cost having an item delivered in less time than it takes for a hot meal to cool down are not realistic. We've been conditioned to believe that it costs a couple of bucks (or nothing at all!) to provide this service thanks to the vertical integration of pizza shops and more recently other players. If we paid the true cost of having an item picked up and delivered to us within minutes then frankly most of us wouldn't bother.

>The current “.com” implosion is broadly being marked by companies that do have “revenue” but only by using VC cash to create “fake markets.”

The taxi market isn't fake. The food delivery market isn't fake. People paid for these things before Uber, Lyft, Doordash et Al

The problem is that investors see the possibility of a monopoly or duopoly forming. That means they're willing to throw stupid amounts of money at these companies in the hopes ending up on top.

The first time I got in an Uber and saw a Lyft sticker in the window and a driver with two phones on the dash is when I knew for sure this whole “new economy” was doomed.

Both the user and the supplier we’re just gaming multiple apps to find the best deal with no loyalty whatsoever. It basically just boiled down to which VCs wanted to subsidize the transaction the most.

I wrote about it here https://medium.com/@franz.enzenhofer/about-targeted-list-lan... and played around with the model since then a lot.

As long as a company does not have organic growth. Meaning Referral (existing customers bring in new customers) > Churn (losing customers) there just is no scenario where it will end well for the company.

Adding investor money for paid growth is at best a halfway decent accelerator, at worst noise that hides the real performance of a company.

That's not true. There are plenty of companies where referrals are non-essential or non-existent, but the company is able to turn $1 of advertising into an LTV of $20 even if the customer churns. Imagine an app that helps a woman through pregnancy, for example. The churn rate on its own doesn't mean that the product is necessarily trash and the lack of referral doesn't mean that the product isn't appreciated. Some buyers have needs on short timescales or do not naturally refer other buyers.

Yeah, that's the second exception in the article. RCLV - a real customer lifetime value to calculate your other costs against. But doing internet stuff since 1998 and startups since 2008 I have yet to encounter a LTV that is not full of.... wishfull thinking.

To stay longterm successful R > C!

I second this. I've worked for a variety of early and mid-stage startups in my career, and to varying degrees, all of them had a non-trivial amount of hand-waving in calculating their LTV.

Great example. People sign up for BabyCenter, maybe from a paid search ad. Nine months and done. Insanely high advertising CPMs there because first time parents are about to make life long purchasing decisions.

This is not a new startup strategy. VA Linux Systems, which had the dubious honor of having the largest "pop" on its IPO day, and signalling the end of the dot.com boom, was selling x86 Linux servers to its customers (including companies like Akamai) for $50 dollars under the BOM (Bill of Materials) cost. So it was losing money for every server before taking into account assembly, shipping, or R&D costs, but it made it up in volume. The revenue numbers were "up and to the right!". VA Linux systems was "successful" in that it IPO'ed and the Vulture Capitalists had a very successful exit. Unfortunately, it didn't do so well a year or two later...

VA Linux Systems had its IPO on December 9th, 1999. So 20 years later, people still haven't learned, and Venture Capitalists are still happily funding this model. Sometimes they appear to have been able to successfully exit, but sometimes not. For all that humans are smart enough to go to the Moon, humans are also really, REALLY dumb!

Yes. The strategy seems to assume that network effect is everything and neglects to recognize that, at the end of the day, PRICE is the critical factor for determining demand of these services (food delivery, taxi service, etc). Once the subsidies end, behaviors will change so you must have an actual plan for making your business profitable.

Yes, it’s as if the business models of these companies have forgotten all about price elasticity... especially when the “price” is crazy low (because you’re losing money hand over fist)

I like this. The takeaway from .com was revenue oriented. The takeaway from this bust is unit economic oriented.

Maybe? It seems that it is more about whatever metric VCs are excited about is what will lead to the next bubble. What are you measuring? Revenue? Is it viral coefficient? Is it revenue per customer? Is it lifetime revenue above acquisition cost?

Whatever it is that lands you the round will be the place that money gets burned to goose the metrics until the dollars run out or folks realize it was a phantom.

This has been posted here before, but formulating this idea as "Counterfeit capitalism" really gelled for me: https://mattstoller.substack.com/p/wework-and-counterfeit-ca...

I thought that the model was to underprice the market and force everything to go through your platform and then exploit the monopoly position once it is secure

Serious question, I am a total noob when it comes to investments. But let's say I want to bet on another ".com" implosion, what can I invest into to make that bet?

I feel like these unicorns are so ridiculous that they will surely fail sooner rather than later, is there a way to bet on this eventuality?

Unlike the .com implosion, the current unicorn market is propped up by VC funds and angel investors. By the time they IPO and you can short them, they're not really unicorns anymore simply by getting to that point.

While I agree with you, the problem is that shorting does have its own risks.

The saying goes: The market will stay irrational, longer than you can stay solvent.

So while your thesis is correct, it may be too soon. So you’d be wrong. You can also get caught up in a short squeeze, in which case you will be carrying heavy losses. Or if you buy a Put, then the derivative may expire worthless.

There are just too many insider trading manipulations that can happen behind the scenes, that you as a random investor are not privy to.

But, if you are lucky, and if you timed it correctly, then shorting a stock can net you a significant amount of money.

Well, sure, but the question was how to profit off of Unicorn demise. I don't think they were looking for riskless bets.

One of the reasons why these startup bubbles happen is that you can't short companies pre-IPO, nor can you short VC funds.

It's a good demonstration of why shorting is an important part of a healthy market, no matter what people like Elon Musk claim. It's the way that sanity fights back against bubbles and irrational exuberance.

To be honest that dynamic was basically the issue the last time around as well. Pets.com selling pet food for less than the shipping cost, delivery startups like UrbanFetch and Kozmo with no minimums, etc.

Dot-com bubble had similar business ideas as there are today. For example Webvan, online grocery store and delivery company.

Anyone remember Kozmo.com. Would perfectly fit with the unicorns of today.

https://en.wikipedia.org/wiki/Kozmo.com

Sounds like Postmates.

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