Comment by johnvschmitt | Hacker News Reader

Comment by johnvschmitt | Hacker News Reader

As opposed to how VC's drain competitor's adwords budgets?

Meaning, this is too often how I see competitive bids going over time:

1) You sell a widget for $100, and it costs you $50, so you spend $10 on the ad, & make $40 margin.

2) Your competition gets in, & has similar price/costs, & bids $11 on the ad.

3) After a few iterations, you both bid $49.50 for the ad, making near zero (positive) margins & stay in business.

4) But, VC-backed businesses enter that market. The VC (rightly) tells the startup that they aren't going to make profit in the first year anyway, but they MUST show user-growth. And, here's the VC money to pay for user growth.

5) So, the VC-backed startup bids the ads up to $100+, far above profitability for legit bootstrapped or existing profitable companies.

That's how the ad budgets can be drained in the ecosystem.

I know a lot of investors here that don't want to take the blame for this impact and may downvote me, but I do see this happening for many keywords over time. I don't need to be popular on this issue.

There is a difference between actively and maliciously targeting adwords to destroy people's money and healthy competition b/t pools of capital/businesses.

You are engaging in false equivalence.

I'm not saying that the VC-backed company is intentionally or maliciously poisoning the healthy profit of the competition.

I'm saying that it's an unintentional byproduct of the otherwise naturally healthy approach to "grow first, profit later". Just like, I'm about to release a free game in the app market, no IAP, no cost, as I'm generous. But, that can & does have unintended consequences in the ecosystem to make it harder for those who do need to profit from their similar work.

Fair enough but by bringing it up in a thread about someone with a botnet screwing people over...its pretty reasonable to conclude that is what you meant.

Whilst most VCs aren't doing anything anywhere near as patently unethical as funding a Clickfraud-as-a-Service app, if they're "disrupting" competition through little more than willingness to make negative profit margins on each sale, that competition ends up just as screwed if their pockets aren't as deep. Either if way they're spending money on making you poorer rather than themselves richer in the short term it's not unreasonable to point fingers.

Admittedly, incumbent monopolists are usually far more cynical in this regard, but they're also more likely to get slapped by regulators for this kind of behaviour.

Good points & over all, I really appreciate the rational, yet learning/confrontational discussions here.

I was just trying to spread the word to other startups that the auction-based paid advertising model might work initially, but gets really tough to sustain as it naturally evolves.

In a non-auction based method, the evolution to "zero margin" may be a slower process. Yet those non-auction methods of paid advertising (billboards, magazine, TV) are just horrible for tracking & closing the loop as to be obsolete, and are often too expensive for startups to even enter anyway.

The best advertising is to realize that your customer service/support function is not an cost, but rather an investment in word-of-mouth advertising. Investing in great customer service is often the best modern marketing.

As an aside, I'd like to add this bit of information: People get up in arms when a large "corporation" or "well-established player" in the market throws their capital weight around to bud out budding investors by selling at a loss. But, as you can see in this thread, they turnaround and have a completely different take on the matter when it's a "VC-backed startup" using its newly-acquired capital to drown out competition while it's slowly losing money.

This is why we need anti-trust law. There are cases where throwing your capital around is appropriate, and there are cases where it is anti-competitive.

Pretty much this ;)

"There are cases where throwing your capital around is appropriate"

I'm curious where you think this is the case? Remember, your arbitrary definition of appropriate might not be the same as others'. I probably won't go either way, as I think anti-trust laws in general are not appropriate, but that's a different discussion.

Moreover, may I ask what your moral argument is for such laws? From the looks of it, most people would say: "If you have a lot of money, then you're not allowed to use it to your advantage if we perceive it as predatory". With such vague terms (unless you can make it more explicit), and it will most certainly end up having a favoritist bureaucracy grow around it.

Same effect exists in restaurant industry, mainly in the low-end brand-less family-owned space.

Restaurant enters the space, decides to compete on price to build up audience to rake in the profits later on, giddily watches a competitor or two go out of business. Few months later another restaurant enters the same space, see the beginning of the paragraph.

I think the effect that you describe can happen. You seem to be suggesting that it's controversial, but I don't see it. If they want to make a loss and pay that much, good luck to them. They must be doing it with the expectation that it will somehow be worth it in the long-run, and it's their money (or the VC's money) that they're playing with.

They're doing it with the expectation that deeper pockets can substitute for innovative / better products.

Sometimes they're right.

if the product by the bootstrapped startup is indeed more innovative (read: better), then it won't (or at least, shouldn't) matter that the VC backed startup tries tactics like this. If both their products are generic/simple, then yes, draining your competitor's ad budget is akin to you having more budget to spend. Advertising is a zero sum game after all.

But that's not true either. The very point of VC funding is that it allows you to be able to do things and achieve better growth than any bootstrapped could dream of, so even if the bootstrapped companies product is far more innovative, they can easily be squashed. That sucks, although I don't see any way of fixing it. An excellent product isn't enough, as well all well know.

>if the product by the bootstrapped startup is indeed more innovative (read: better), then it won't (or at least, shouldn't) matter that the VC backed startup tries tactics like this.

Life is unfair. You can either be in denial about that or learn to live with it.

This is why it is always hard to compete with startups. You sell an app, they bring out a free app. They don't have to make money like regular people, they just need users to get backing. You need money because you are a regular person.

Like open source developers stealing the money of commercial software vendors?

There's this thing called CTR. If you can get that up and be more innovative than your VC-backed competitors, you can stop whining on Hacker News on Friday nights. Just sayin.

Though the HN guidelines discourage it, I thought I'd let you know why I downvoted your comment: "stop whining" and "just sayin".

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