Undervalued offers
Recently, in Silicon Valley, they talk a lot about fast-growing companies, rated highly enough, but which will face problems in the coming years. GVA LaunchGurus translated for you an article by Fred Wilson, the founder and managing partner of two venture capital firms: Flatiron Partners and Union Square Ventures, about a start-up earnings strategy with a negative gross margin.
Fred Wilson:
Bill Gurley recently said:
"I think we will see dead unicorns soon."
')
Mike Moritz said recently:
"A lot of unicorns will soon die out"
But how will this happen?
The most likely scenario: what provided these companies with growth (and high cost) will turn sideways for them. I'm talking about a negative gross margin.
We saw a lot of fast-growing companies that made money with a negative gross margin. This means that they sell the product for less money than they spend on its production.
An example is the provider of “services on demand”, which does not take into account the salaries of employees, so the services provided seem cheaper than they really are. Why does a startup choose this approach? To meet the demand for the service naturally. The goal is to plant a person for a cleaning service, car sharing, food delivery, subscription to various gymnasiums, providing these services at a very attractive price, and then, when users "sit tight", increasing the cost of these services.
Or another example - the services provided by start-ups themselves: the ability to track cargo via API, process payments through API, provide employee benefits and provide benefits. All these services are expensive. This is not only software. Some suppliers provide services not at actual cost, but at a lower price in order to conquer a larger chunk of the market. As a result, the company is growing rapidly, and gross profit is negative. Again, the companies that choose this path hope that they will be able to raise prices after they reach a certain level and hook many customers.
There are other examples of companies with a negative gross margin, but the above techniques are more often used.
The problem is that raising prices, or reducing production costs by increasing volumes, to get a positive gross margin is much more difficult than many people think. If there are other start-ups on the market that compete with you for the same services, then you cannot raise prices without losing customers (if they, of course, do not firmly on your service). And most customers do not care. Increasing volumes to reduce prices may work, but if similar services are offered on the market, the supplier you are forcing to reduce volumes may simply give up your supplies to another competitor offering a higher price.
That is, such a strategy can work if you are a monopolist in the market, and you are the only partner for customers and suppliers in your field in the city. But given the amount of start-up capital in the market, and the number of entrepreneurs running business projects that are similar in nature, I think it will be very difficult for many companies to become monopolists (which contradicts what I wrote here recently)
Of course, some companies will succeed using a similar strategy. Getting a huge advantage over competitors, attracting a lot of money to the scorched earth tactics and pushing competitors out of the market is suitable for some companies. But not as many as the capital market is.
And most companies in the market that grow like mushrooms after rain for a negative gross margin will eventually realize that the market will soon get tired of this strategy, and it will force them to work with a positive gross margin. This in turn will reduce the growth rate of companies, and in the balance we get a bunch of half-dead businesses with zero profit, but with billions of assets and a huge cost. That is what Gurley and Moritz predict. And they are not alone.
________________________________________
Fred Wilson is the founder and managing partner of two venture capital firms: Flatiron Partners and Union Square Ventures. Currently lives in New York and has been involved in venture capital since 1986. Fred earned a bachelor's degree in mechanical engineering from MIT (Massachusetts Institute of Technology) and an MBA from the Wharton School of Business at the University of Pennsylvania. Fred lectures at the Faculty of Economics and Entrepreneurship at New York University and is an active member of several communities and non-profit organizations. Fred's articles are available on the AlwaysOn website or on AVC.
Fred Wilson:
Bill Gurley recently said:
"I think we will see dead unicorns soon."
')
Mike Moritz said recently:
"A lot of unicorns will soon die out"
But how will this happen?
The most likely scenario: what provided these companies with growth (and high cost) will turn sideways for them. I'm talking about a negative gross margin.
We saw a lot of fast-growing companies that made money with a negative gross margin. This means that they sell the product for less money than they spend on its production.
An example is the provider of “services on demand”, which does not take into account the salaries of employees, so the services provided seem cheaper than they really are. Why does a startup choose this approach? To meet the demand for the service naturally. The goal is to plant a person for a cleaning service, car sharing, food delivery, subscription to various gymnasiums, providing these services at a very attractive price, and then, when users "sit tight", increasing the cost of these services.
Or another example - the services provided by start-ups themselves: the ability to track cargo via API, process payments through API, provide employee benefits and provide benefits. All these services are expensive. This is not only software. Some suppliers provide services not at actual cost, but at a lower price in order to conquer a larger chunk of the market. As a result, the company is growing rapidly, and gross profit is negative. Again, the companies that choose this path hope that they will be able to raise prices after they reach a certain level and hook many customers.
There are other examples of companies with a negative gross margin, but the above techniques are more often used.
The problem is that raising prices, or reducing production costs by increasing volumes, to get a positive gross margin is much more difficult than many people think. If there are other start-ups on the market that compete with you for the same services, then you cannot raise prices without losing customers (if they, of course, do not firmly on your service). And most customers do not care. Increasing volumes to reduce prices may work, but if similar services are offered on the market, the supplier you are forcing to reduce volumes may simply give up your supplies to another competitor offering a higher price.
That is, such a strategy can work if you are a monopolist in the market, and you are the only partner for customers and suppliers in your field in the city. But given the amount of start-up capital in the market, and the number of entrepreneurs running business projects that are similar in nature, I think it will be very difficult for many companies to become monopolists (which contradicts what I wrote here recently)
Of course, some companies will succeed using a similar strategy. Getting a huge advantage over competitors, attracting a lot of money to the scorched earth tactics and pushing competitors out of the market is suitable for some companies. But not as many as the capital market is.
And most companies in the market that grow like mushrooms after rain for a negative gross margin will eventually realize that the market will soon get tired of this strategy, and it will force them to work with a positive gross margin. This in turn will reduce the growth rate of companies, and in the balance we get a bunch of half-dead businesses with zero profit, but with billions of assets and a huge cost. That is what Gurley and Moritz predict. And they are not alone.
________________________________________
Fred Wilson is the founder and managing partner of two venture capital firms: Flatiron Partners and Union Square Ventures. Currently lives in New York and has been involved in venture capital since 1986. Fred earned a bachelor's degree in mechanical engineering from MIT (Massachusetts Institute of Technology) and an MBA from the Wharton School of Business at the University of Pennsylvania. Fred lectures at the Faculty of Economics and Entrepreneurship at New York University and is an active member of several communities and non-profit organizations. Fred's articles are available on the AlwaysOn website or on AVC.
Source: https://habr.com/ru/post/297542/
All Articles