Reading this, an old joke and something Hemingway wrote come to mind.<p>The old joke is about a retailer whose margins were very thin but wanted to attract more customers, so the retailer decided to have a big sale. After looking at the proposed discounts, an assistant questioned the strategy, noting that they would lose money on each transaction. The retailer said, "That's okay -- we'll make it up on volume!"<p>The Hemingway bit is this gem from The Sun Also Rises: "'How did you go bankrupt?' Bill asked. 'Two ways, Mike said. 'Gradually and then suddenly.'"<p>It's understandable for startups who don't yet have a business model not to make any money. In fact, that's what one expects of them. But unicorns are NOT startups; they're fairly sizable businesses that already have a business model, with large organizations, lots of overhead, repeatable processes, etc. It is <i>very</i> risky for companies at such a late stage in their life cycle to still be losing money on every incremental dollar of revenue!<p>Someone should start a Unicorn Death Watch ;-)
It'll be a sad (and pricey) day in San Francisco when everything starts costing the right price. (I'm looking at you, Lyft Line and Caviar and Square.)
It (sincerely) baffles me that Fred has to make this point, and that it's not treated as obvious.<p>People who are deeper into startup world than me, what is the thought process that makes you think you can scale up a money-losing venture and have the math work out? Is it based on the hope of raising prices, or being acquired before funding runs out, or pivoting?<p>There are a lot of smart people in this game, so there has to be some intermediate mental leap that I'm not understanding.
This reads like another iteration of a bubble alarm, which has been going off since 2007 at least (<a href="https://news.ycombinator.com/item?id=9860603" rel="nofollow">https://news.ycombinator.com/item?id=9860603</a>). I like the sound of what Fred's saying, it gives my sensibilities about business a soothing caress, but the reality is that people have been expecting these businesses to start failing en masse for almost 10 years now and so far most of them are still around.<p>As long as there's no better vehicles for investment, these companies will probably be able to keep doing what they're doing.
I wonder if companies like door dash/ instacart are operating at negative margins?<p>Uber tinkering with price too much has not gone down well with uber drivers in bay area either.
Well, yeah. That's what the current bubble is based upon, private equity speculation.<p>It should be pointed out, though, that you can't really analyse many of these startups by looking at their income statements in this fashion, because even their future monetisation strategies are being speculated about. That is, they aren't expected to have healthy bottom lines yet. They're doing this on purpose.<p>Ultimately, private and public investors <i>will</i> analyse the bottom lines of these companies, but when that happens, there'll be bigger problems to face than a few orgs with unhealthy gross profits struggling, i.e. the bubble will burst.<p>Incidentally, I'm not sure why the article is specifically talking about gross margin. Especially since most of these company's costs relate to human resources and servicing debt and so on, and not inventory and production. It seems like operating profit or net profit would be a better single figure to focus on.
The bigger problem I see is that all the service oriented startups are getting into a market that can't work. Yes, there obviously is demand for cheap services. But there is no way to provide cheap services at scale and turn a profit. The costs of providing a service don't go down as you get bigger. At some point you just can't drop wages anymore.
At the same time, you can't just increase prices, since that would immediately kill demand. There is demand for cheap services. There is no demand for reasonably priced services. The problem is not that raising prices would allow the competition to undercut them. If they raise prices, people would just clean their homes themselves etc.
The example of this I've been benefiting from lately, is Jet.com. They keep handing out $x or 20% type discounts, to go with free shipping on items already priced for low margins.<p>I can't imagine how much money they must be burning right now. With Jet recently abandoning their business model, they're either somehow making enough on what they're selling as is, or they're in bad shape and desperate to bring in customers.
It took Facebook quite a while before they became profitable. The issue is with the lack of lock in. The "on demand" and service type startups are easier to substitute. It's just another challenge though. I could see Uber reach a point where they raise prices by 25% and I'd still pick them over another service with fewer drivers available.