The toy explanation for how it works is that we have people who take risks, and they have to be rewarded now and again, otherwise why would anyone do it? So it has to be possible to trade that risk too, so that the risk ends up in the appropriate place. It needs to be possible to run a business at a loss in order to search for profits (product-market fit, etc).
We seem to have taken this to an extreme that rewards people who haven't made something useful. If I have a great idea for new kind of lemonade stand, I can get it started at a loss, but if I can convince someone else to buy it, I can cash out with more than I put in. They can go and "develop" the idea and sell that up to someone else. Sounds fine, and should be fine, in theory. Most people could probably think of a few defenses: they're only losing their own money, losses impose a disclipline that forces them to listen to customers, and it's everyone's interest to make money in the end.
The downsides are not so obvious.
Everyone can start a lemonade stand, and sure enough there are loads of them all over. But who gets to try? People who can get access to the risk capital. It's not quite the same as the alternative world where ventures need to make money reasonably fast, or sink. It also means if you try on your own, you are competing with much more patient people who can afford to lose for longer. So now, you can't even try your own without giving a piece to someone else, who gets to decide who gets a shot and who doesn't.
I've considered this question a number of ways. The fact that capital holders are gatekeepers to innovation is unequivocally worse for federated innovation, but it has created an interesting class of companies which may never need to turn a profit yet still have a positive (and growing) net present value.
Take Wikipedia for example. They lose money running a high traffic service (edit: see below reply for clarification), but it's plain to see they hold a huge asset in terms of goodwill, usage, knowledge base, and their contribution to research and knowledge growth. Despite its operating losses, its capital value (which may be in the form of social capital) is huge and will likely remain well financed into the foreseeable future.
The fact that the service is free is not relevant: a startup offering an invaluable service that is based on years of user research, development and testing has developed an asset which helps other companies and companies pay what they think it is worth (or at the beginning a subsidized rate to take a risk to try it). Operating losses at most start ups are from continued R&D; but if they were to just declare the product as "done" and have a sufficient moat/network, they could rent seek on the asset for years - yet in many cases that's not what is best for anyone (company, clients or shareholders) - we continue to want them to innovate for the good of the product and there will be stakeholders that would rather finance this research in perpetuity to grow the underlying asset and thus the value of the product and company.
Inductively, that's a company with negative NOL but positive NPV. In the physical world this might be the same as an apartment complex that's expanding (forever). They may currently collect $1M in rent, but they are spending $2M on new construction. The new construction may bring in $5M over its 30 year lifespan but it will never be enough to outpace the immediate outlay of continued construction cost. As long as the time value of money is correctly attributed, this isn't a new idea - just one that's been pulled to an extreme.
Wikipedia does not lose money in any sense. Its revenue exceeds expenses, and net assets increase year over year. And in any case, the Wikimedia foundation is organized as a nonprofit.
Yes, they get enough donations to cover their costs, just like Uber has enough VC cash and loans to continue its operations. It's non profit tax status is not strictly relevant to the fact that you typically need at least as much as money as it takes to run your entity rather than less. In my opinion, this doesn't change the spirit of the point that Wikipedia doesn't make money from its free, high-traffic service but rather from favorable financing for its goodwill and assets similar to a not profitable startup.
Non-profits rely on donations as a revenue source. As opposed to investment, nothing is given in return. Not sure how you can compare that with VC cash or even loans.
> The Wikimedia Foundation relies on public contributions and grants to fund its mission.
The wiki (https://en.wikipedia.org/wiki/Wikimedia_Foundation) tagline suggests the underlying truth. Wikipedia gets ~half of its revenue from the investment-based endowment managed by the Tides Foundation. The leveraged capital is largely at the charity of large organizations (like google, amazon, etc) who have donated to that endowment over time, plus the remnants of their initial investment portfolio afaict.
Wikipedia would inevitably scale back in size without the continued charity of individuals and organizations around the world.
Being able to toss up a banner requesting donations on the 10th most visited website in the world is extremely valuable.
The Wikimedia foundation brought in US$104.5 million (2018) and only spent US$81.4 million (2018) even as their funding many projects independent from Wikipedia.
>We seem to have taken this to an extreme that rewards people who haven't made something useful.
My unpopular opinion is that the diversity push in tech ultimately comes down to everyone looking around nervously as they realize that who you are and what you look like counts more than how you think and what you can do - and what that means for the viability and sustainability of a space built on a mythos of meritocracy. There is an awareness that there are a number of perhaps raw, but good, products and potentially even careers (which may or may not require extra guidance to thrive) which are being passed over for gussied-up trivia and tripe, because the founders or team don't look the part.
That said, I don't know that profitability is ultimately the be-all-end-all of merit anyway. There are many services and institutions that should be run, even if merely at cost or in the red, because of the dividends they pay to society. I think we need to get better at identifying what those are, and especially at determining how much leeway to give them.
> I think it's an indictment of our current system.
Do you mean the USA, or tech in general?
In the UK, whilst there is VC money, it tends to be less, and more focused. I believe the bankruptcy laws in the US vs the UK are significantly different to the point where attitude to risk influences business start ups.
In the US, from this side of the pond, venture capital investment appears very cavalier, with VCs throwing money left, right and centre, hoping that they'll land on the next unicorn. In the UK, VC money is much more targeted on start ups with a plan to profitability.
The longer the easy money, stock-market-may-not-go-down regime continues, the more the lagging VC cultures like the UK and Europe will tend towards the US.
I'm not sure how the bankruptcy laws come into this though? Limited liability corporations exist everywhere, and there's mostly no suggestion of piercing-the-veil fraud or dishonesty.
That gave me an interesting thought. This would probably tend to make other countries catch up in the software industry, who don't have VC money, because they have to actually compete on merit and profit. This means they tend to take on problems with a real world application.
This isn't to say that they don't have funding, but the funding takes a more strategic approach of requiring real developments and profit, whereas a lot of US talent is tied up in adtech giants who cut products or in VC companies with no real path forward.
What we see is the opposite. Money gratituiously thrown at things like Uber and AirBnB destroys any profitability in those market segments and affect business models and profitability in related market segments.
Sorry I wasn't clear. The vast majority of businesses operating anywhere (not just USA) aren't organized as limited liability entities.
In the case of this particular tweetstorm, the business was likely not incorporated as the author kept feeding it from his own bank account.
Also note a parallel comment referring to the consequences of corporate bankruptcy in the UK. I used Switzerland as an example. The US is an extreme outlier; this has long been cited by many people as a factor in its success (though the belief is hardly universal or there would by now be many others who copied the example).
> In the case of this particular tweetstorm, the business was likely not incorporated as the author kept feeding it from his own bank account.
That is a terrible assumption. Of course the business was incorporated. There is nothing stopping you from investing money into an LLC or corporation. That's how VC funding works.
Regarding bankruptcy, under some circumstances you can’t become a company director ever again. In the uk it’s not something you can just do on a whim, and wind up a company.
The dynamics is very similar in cheap money world to non-cheap money world.
Investors always look for the best risk weighted return. Startups are risk-apetite constrained not money constrained.
Also, it's a big employment program. Think of it like that. The central bank injects money into the system, it gets allocated based on expected risk-weighted returs (adjusted for some other factors like social hierarchy, access, ESG, etc).
The formula is the same. Simple product sectors (where there are no network effects, and no other kind of moat either) are basically pay to own markets. Now in cheap money world it's an endless fight between companies with enormous warchests.
Still, as others mentioned in the twitter thread there are bootstrapped successful apps (eg. todoist), but they are completely at the mercy of user preferences. When a next such app comes some of their users will switch over. Sure, maybe the market is stable enough for them to have a small slice for the foreseeable future.
> We seem to have taken this to an extreme that rewards people who haven't made something useful.
Asana is useful. That’s why it’s growing.
The company continues to lose money not because the product isn’t useful, but because it’s so useful and popular that the investors choose to spend more money capturing market share than organic growth would allow.
So is the use of opiods and painkillers, at the right scale.
VCs and the Softbank's of the world willing to spend so much of "other people's money" like they have a never-ending fountain of it make it really hard to find out what is the right scale of things.
Even with Amazon which is often criticized for not paying dividends or running without profits for so long, they knew that the revenue was there and that Bezos could turn a few knobs whenever he wanted to slow down on growth investment and start collecting some profits. Is that true for Asana? How much more market share do they need to get to actually being profitable? What would happen if they slowed down their marketing spending?
If it's been nearly a decade for a glorified to-do list app and they still aren't profitable, then it is in fact not useful enough to justify the effort invested. That's what market signals mean.
The toy explanation for how it works is that we have people who take risks, and they have to be rewarded now and again, otherwise why would anyone do it? So it has to be possible to trade that risk too, so that the risk ends up in the appropriate place. It needs to be possible to run a business at a loss in order to search for profits (product-market fit, etc).
We seem to have taken this to an extreme that rewards people who haven't made something useful. If I have a great idea for new kind of lemonade stand, I can get it started at a loss, but if I can convince someone else to buy it, I can cash out with more than I put in. They can go and "develop" the idea and sell that up to someone else. Sounds fine, and should be fine, in theory. Most people could probably think of a few defenses: they're only losing their own money, losses impose a disclipline that forces them to listen to customers, and it's everyone's interest to make money in the end.
The downsides are not so obvious.
Everyone can start a lemonade stand, and sure enough there are loads of them all over. But who gets to try? People who can get access to the risk capital. It's not quite the same as the alternative world where ventures need to make money reasonably fast, or sink. It also means if you try on your own, you are competing with much more patient people who can afford to lose for longer. So now, you can't even try your own without giving a piece to someone else, who gets to decide who gets a shot and who doesn't.