Comment by H8crilA | Hacker News Reader

Comment by H8crilA | Hacker News Reader

It is so frustrating with all those recent tech startups how much they're spending on sales and marketing: https://www.sec.gov/Archives/edgar/data/1559720/000119312520...

How does one figure whether the business will keep growing without blasting people's faces with ads? If so much spend on ads is required to generate revenue growth then there will either never be profits or the revenue growth will stall (and thus the equity is worth rather little), if ads are not required then why are they spending so much on them, or maybe when will they stop spending.

All the "heroes" of the tech boom (Facebook, Google, Apple, Microsoft) did not suffer from this problem - they were profitable before going public.

It feels like this time we're in an advertising bubble. Nearly every single S-1 submitted to HN has this feature.

I am genuinely puzzled by this, if someone can offer some perspective on how can you model something like this I would be grateful - what assumptions you'd be making here.

The general idea here is that there will only be one major winner who will capture the market due to network effects.

So scaling as fast as possible is the #1 goal, because if you don't someone else will and you'll go out of business.

Therefore sales and marketing is a huge factor in growth. Then the idea is, once you've grown as much as you can and it's too hard for others to compete because of your entrenched network effects, you can reduce sales and marketing to a a reasonable, highly profitable level.

That's it in a nutshell and it works in any market with strong network effects, which AirBNB strongly fits into, in facts it's a poster child for the concept. Yelp is another good example -- sign up all the restaurants before a competitor does.

There are a lot of different business models out there, which you can study (and MBA programs teach you). This is just one model, and it's a legitimate one. Google, Facebook, Microsoft and Apple all have different models from it (and all drastically different from each other as well).

This is a common misconception I see on HN.

To evaluate ad spend, you don't look at just short-term return. There's a reason that "lifetime value" is a critical concept for companies. It's fairly normal in large companies that, in a given year, you may spend more on ads than you gain from those ads - but you expect the customers you gain from them to continue spending over many years.

So you may spend $100 to gain a customer who spends $20 in the first year... then $40 in the second... then $80 in the third... now all of a sudden your return on that was positive, three years later.

These are the kind of ads you want to buy, even if in the short term it looks bad. These large marketing expenses should have compounding benefits over many years. The people who care about the short term like that are not the investors you want and not the people you're trying to please.

Okay, so how would you model that? Can you be precise? What's the lifetime revenue generated by $1 of ad spend? This number is critical, because if that number is too low then the equity is, mathematically, worthless. It's not about patience, it's about whether you're compounding a number that's >1 or a number that's <1. I just cannot tell.

Yes, companies have ways to do this with a decent amount of precision and accuracy based on existing user behaviors. They can often even be detailed enough to know that LTV differs depending on the channel that the customer was acquired by (e.g. organic vs. Facebook ads vs. search ads) and tailor their ad spend accordingly.

I don't know what AirBnB's numbers are, companies aren't required to disclose this and they guard it very closely :)

Yeah but as an investor why would you buy this stock, and at which price level if so? My point of view is that of an investor - how would I know if they're compounding up or down. Is it a zero? Is it great? All you're saying is "trust the management".

I am not saying they're doing a bad job, I am merely saying that it looks difficult to tell. Remember, the management has a huge incentive to sell you the stock regardless of the future value of the business, it's your job to figure out if it is a good idea.

I'm not saying "trust the management", I'm telling you how an investor would think about it. High spend on marketing can absolutely be justified. Additionally, there's rarely enough public info to allow any investor to independently verify whether it's justified in a specific scenario or not. But if an investor thought that there was positive ROI on that spend, they're not going to fret too much about how large that amount is - as long as it's bringing in a positive return.

Sorry for ad hominem, but it simply seems that you haven't thought about how to value (determine the price of) securities.

Incidentally, half of those companies you've mentioned are in the top 50 spenders for marketing [1]. I'd hazard to say that they are all in the top 100 in global spend.

[1] https://howmuch.net/articles/worlds-top-50-biggest-advertisi...

Well yeah but that's because of how massive they have become (thanks to being profitable and internal compounding). Their marketing spend in terms of % of revenue is not comparable to the late IPO up-starts, they make very very very healthy margins.

I am not saying advertising is bad, or that it doesn't work, or that you shouldn't do it. Nothing of this sort. It's just unclear to me what's the plan for eventually returning anything to the shareholder. All of the eventual value depends on this.

Considering their revenues they would be in top 100 ad spend even with conservative ad budgets.

However, I think H8crila meant that they did not spend that much on advertisement around the time they ipoed.

I understood what was meant. Companies don't just start marketing once they have multi billion dollar profitability.

If you're consumer focused, you spend on marketing, if you're business focused, you spend on sales. There are few examples to the contrary (Google, Atlassia, for example).

AirBnB early on was sniping Craigslist vacation listings[1], and now they have the resources, and scale to market directly. If AirBnB isn't doing it right, what constitutes the 'right' time to spend on marketing?

I'm curious as to how some folks would respond to this, and why.

[1] https://growthhackers.com/growth-studies/airbnb

Welcome to the long slow Japanization of the world economy. Most "growth" is hardly-sustainable cannibalization delaying the inevitable.

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