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Comment by freehunter | Hacker News Reader

The problem with your suggestion that these laundry companies will write their own app is that they probably won't. They're probably eking out a small profit, and adding the cost of hiring a programmer as well as technical customer service and delivery drivers massively out of their reach. What makes me say this? Well, are there any nationwide dry cleaning chains? What is the markup on dry cleaning? How successful are the best dry cleaning shops? And, as mentioned, they lean towards being run and staffed by immigrants. They can make a living, but I would doubt it affords them enough of an income to run a silicon-valley startup.

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The difference between the established small business and these startup "businesses" is that the startups are well-connected, usually young white males, that get access to Sillicon Valley's Wall Street money spigot. They don't have to worry about such mundane things as profit so they can try to take over a market and destroy hundreds of small businesses that were bootstrapped slowly over years of toil. If the small businesses somehow were able to get access to free investment money I'm sure they could also come up with creative ways to expand since they know their market well.

How could they destroy hundreds of small businesses, if they themselves were not profitable?

It seems like you want to have your cake and eat it. You want to criticize these guys for out-competing small businesses, but you also want to claim they aren't really doing good business, that they are just wasting their investor's money.

> How could they destroy hundreds of small businesses, if they themselves were not profitable?

Not OP, but small businesses have to use operating margins to make payroll and pay for capital goods. 'Startups', through what essentially boils down to predatory pricing, can burn through investor cash to acquire customers leaving the entire market at a loss.

NYMag actually does a decent job explaining it a bit:

http://nymag.com/daily/intelligencer/2014/04/problem-with-pr...

This is based on the unjustifiable assumption that the author knows better than the VC's and other investors. In particular, the author somehow knows that these company's won't be able to turn a profit, even though the VC's and investors surely believe the company will.

The VCs don't always believe it'll turn a profit, a lot of times they are hoping for a big buyout payday.

A big buyout is equivalent to turning a profit, since the buyer will expect to profit from their purchase.

No it's not. A company being profitable is different than a company turning a profit specifically for it's initial investors. The profitability of a company post-buyout is murky. We're also talking about VCs getting in on profitable businesses ventures, not tech conglomerates. If a VC makes their money by finding hot trending startups that later get bought out, they're not really investing in a company that profits on the merits of the business plan alone. A lot of the big buyouts are based on buzz, and often the valuations are overblown when compared to actual ability to profit. Expected profits != actual profits.

It's not based on the presumption that the author knows better than the VCs. It's based on the very real fact that profitless VC-funded startups are competing based on unsustainable prices with the goal of raising prices in the future once their competition has been starved out.

It's market manipulation (but not the type that rises to the level of impermissible market manipulation).

It's easy to make this allegation, but very hard to substantiate it, since there are many factors that influence profit, and just because a company isn't profitable now, doesn't mean that the only way they can become profitable is by starving out their competition and then raising prices. Can you give a single instance of a venture backed startup actually causing price increases after driving out their competition?

Amazon epitomises this.

How does Amazon empitomise this? What goods have they raised the prices of (and why I say raise, I mean relative to the price before Amazon, not that Amazon merely increased their own prices).

You might want to take a look at http://bits.blogs.nytimes.com/2014/05/23/amazons-tactics-con...

It certainly seems like Amazon is beginning to exercise their strength as a monopsony to gain unfair advantages and extend their business into new areas without actually competing on merits.

I don't see how a single instance of Amazon misusing their monopoly power, equates to price rises across the board. So far I imagine the overall affect of Amazon has been to reduce consumer prices.

Amazon tends to (ab)use their monopoly power through things like shipping costs.

As an emporium of everything, Amazon already has a distinct advantage. Even if prices are higher on Amazon than other e-commerce sites, it makes sense for me to use Amazon because I can get 2, 3, 4 products shipped at once. That can be a big saving.

Additionally, Amazon subsidised widespread free shipping on low-ticket items for many years, in the UK they have only recently gotten rid of it[1].

That free shipping policy, while great for consumers in the short term, did starve out a lot of their competition.

And of course, the larger Amazon gets, the better shipping rates they can negotiate. My orders are now delivered to me by a "Amazon Logistics". It seems they've finally achieved full vertical integration.

[1]: http://www.bbc.co.uk/news/technology-23423305

VCs also anticipate they'll be wrong a majority of the time about a company. That means, a substantial amount of the time (maybe a majority of the time?), they'll be throwing a lot of money at "disrupting" existing businesses with no successful alternative.

But since profitability is better thought of in terms of averages or expectations, it makes no difference if the companies in question are all moderately profitable, or a few extremely profitable companies, and some non-profitable ones.

If the business fails, then it has disrupted existing businesses for no gain. But if it becomes extremely profitable, then presumably it has made some cost savings in order to be able to do so, and so deserves these profits.

If the average business is profitable, then the investment is justified, both for the investors, and from the point of view of society as a whole.

> How could they destroy hundreds of small businesses, if they themselves were not profitable?

The same way venture funded startups destroy bootstrapped, profitable startups: by massively outspending them.

Venture backed companies can get away with it for as long as investors will support them, regardless of how profitable their business may or may not be.

Even if they're not ultimately viable and fail, the pressure can be enough to crush the viable but not venture-funded businesses in the interim.

So why would VC's fund these company's?

Already covered, but again: even if the strategy is only successful 10% of the time, if that successful 10% more than makes up for the 90% failure rate, the strategy will be attractive.

I will repeat my answer here: Your point is irrelevant because to be profitable really means to be profitable on average (or in the language of statistics, to be profitable in expectation). So a business that may be very profitable 10% of the time, and unprofitable 90% of the time, is equivalent to a business known to be moderately profitable.

It's not irrelevant, you're just not getting the point in the first place. You (still) seem to be conflating the profitability of the VC versus the profitability of each individual venture he invests in. They are not at all equivalent, as I've helpfully pointed out for you.

As such, they can 'disrupt' stable markets that are largely profitable and efficient, and that basically do not need disruption, by throwing tons of cash at them. Most of the time these ventures are not profitable (though they still disrupt the market - negatively!), but the occasional hit makes up for that and makes the strategy net profitable for the VC, even as 90% of what he invests in flames out.

No, I am equating the profitability of the VC with the profitability on average, of the individual ventures they invest in. That is, the mean profit of the individual ventures.

If the VC is profitable, then the average venture is profitable, and therefore, on average, they have a positive impact on the markets they are involved in.

EDIT: in case it wasn't clear, every use of "average" by me refers to the mean, not median. So 10% vs 90% doesn't matter as long as the 10% is high enough.

Ok, so you've destroyed 10 small businesses and replaced them with 9 startups that fail after 18 months, and 1 that becomes a massive success. That's a win for the VC, and those 10 startups are "on average" profitable.

But it's still a loss for society because now we don't have those 9 small businesses or their 9 "disruptive" replacements.

Because they need to look busy? Because the "2 & 20" fee structure incentivises them to pursue strategies that lose money on average but are high-variance?

If there's enough profit in there to support a company dedicated solely to an app, there's enough profit for it to be worth the laundry service provider (hey, there's a new acronym: LSP) pushing them out of the way, no?

> are there any nationwide dry cleaning chains? What is the markup on dry cleaning? How successful are the best dry cleaning shops?

These all seem like bigger knocks on the viability of Wash.io et al than anything else.

> And, as mentioned, they lean towards being run and staffed by immigrants. They can make a living, but I would doubt it affords them enough of an income to run a silicon-valley startup.

Putting aside the "Those People don't know how to make money like we do" argument, this strikes me as short-sighted. Because clearly the startups think there's enough money in laundry to support Silicon Valley lifestyles, right?

Of course, they could be wrong about that... but again, in that scenario I'd be worried more about the future of the startups than of the people actually doing laundry at scale.

There's a middle ground. The average small-time laundry operation definitely doesn't have the kind of cash flow to produce a serious challenger app.

And restaurants don't have the means to produce their own restaurant management software, or the software stack necessary to enable deliveries. But these two features are commonplace in restaurants because of white-label middleware providers.

Here in NYC I've been seeing more and more restaurants advertise their own website as a way to order delivery, as a way to get around Seamless/GrubHub's per-transaction take, and offering discounts to switching to their platform.

Both directions are viable. Wash.io and their kind can, with significant capital, eventually do laundry themselves and eliminate the individual laundry shops entirely. Likewise, individual laundry shops stand a realistic chance of purchasing middleware and cutting out the aggregator frontends.

And, as mentioned, they lean towards being run and staffed by immigrants. They can make a living, but I would doubt it affords them enough of an income to run a silicon-valley startup.