Good products and bad business

Over the past 15 years, smart digital ideas have captured the imagination, transformed habits, and reshaped industries and economies.

It might seem surprising, then, that so many great digital products of this generation come from bad companies.

Spotify has reshaped music, but the company is still trying to figure out how to make a substantial profit. Uber has changed cities and has become a way of life for some bikers and drivers. The company also spent far more money than it took in its 13-year life.

App companies like DoorDash, Instacart, and gopuff they’ve hooked some Americans into delivering restaurant meals, groceries, or essential items, but hardly any company that brings fresh food to our doors has made it work financially. Robin Hood it has helped make investing accessible and fun, but it did not make trading in free shares profitable. Twitter is a cultural force, but it is never been good company.

There are some tech stars who are also (likely) big companies, including Facebook, Airbnb, and Zoom Video. But how have so many companies with transformative technologies broken the rule that a company dies if it fails to balance its checkbook?

The optimistic view is that we want companies like Uber and Robinhood to have the time and money to honor their products, win as many customers as possible, and solve money problems later. And some of these digital stars are profitable, depending on how you define “profits”.

The disappointing idea is that we may be living in a technological mirage, and the persistence of companies that shouldn’t survive has robbed us of true lasting innovation. Let’s take it out:

Maybe this is what a revolution looks like.

Last year, Uber spent nearly half a billion dollars more than it has generated – and that was a big improvement. If Uber were a family business, it probably would have long since disappeared. The belief that the technology disruption has just begun and that investors’ hopes of cashing in on it has kept Uber moving forward.

Supporters of the company say Uber is a losing canoe by choice. Uber has expanded into many cities and countries at the same time rather than going slow and has exploited its popularity by expanding a hub for transportation and deliver meals, grocery shop, liquor and other goods at our door.

The hope is that this is Step 1 on Uber’s journey to something bigger, better for all, and profitable. A similar transformation is taking place at Spotify, which is trying to overcome the ugly math of music streaming by expanding into potentially profitable businesses. podcast. Instacart wants pivot from being a grocery delivery broker also sell software to supermarkets to run their businesses. (Software tends to be very profitable. Grocery delivery is not.)

In many ways, this is exactly what we should want. Because investors have believed in their business plans, companies with good ideas have the time and money to dream big, expand and understand how to offer customers what they want and ultimately generate real profits.

Amazon is a famous example of a company spending more money than it brought in in some of its early years – a temporary condition until it had both a good product and a great deal. Up until the last couple of years, Netflix also needed to keep borrowing money to stay afloat. And some companies, including DoorDash and Spotify, aren’t profitable by conventional accounting measures, but they bring in more money than they spend.

Or maybe hope has clouded common sense.

The other possibility is that these digital ideas never made economic sense in the first place and were bolstered by the misplaced hopes of investors. From this point of view, this generation of “profits? what earnings? ” digital businesses are like a homeowner trying to expand a house with a rotten foundation.

In the margins newsletter, financial writer Ranjan Roy and his collaborator Can Duruk have repeatedly stated that the winning digital ideas of the last decade weren’t necessarily the smartest ones, but the ones with the most money to try (and keep trying).

“When there is so much capital focused on the wrong idea, we may never find the right idea together,” Roy told me. “It is a perversion of capitalism”.

What an opportunity we’re missing, Roy he asked, explore alternative restaurant delivery business models that might work best for diners, restaurant owners, couriers, and delivery companies? Maybe Uber burned a lot of other people’s money and canceled the ability for other companies and governments to improve transportation. Instead of Spotify’s entrenching a payment model that didn’t work for most musicians, alternative approaches may have thrived.

Those companies that haven’t found a way to make their products work financially have become like a forest that hasn’t been cut down by dead trees and undergrowth. The new life does not have the oxygen to flourish.

I find it disorienting that over a decade in a profound period of digital change, it is still unclear how the history books will reflect on this moment. Are we at the beginning of lasting alterations due to the technological turbo in the world around us? Or was this all a well-funded dream?

  • How Elon Musk makes business decisions: The richest person in the world and the future owner of Twitter acts largely out of “whim, fantasy and the certainty of being 100% right”, my colleagues reportedbased on interviews with people who worked with Musk.

  • Chinese censors can’t keep up: Bloomberg Business Week writes that online citizen complaints about the Chinese government’s Covid-19 policies are overwhelming the legions of government censors tasked with deleting critical posts from popular apps. (Subscription may be required.)

  • “You’re about to learn what Twitter is.” A local television newscast from the early days of Twitter explains this strange new online addiction. Twitter started in 2006, so this segment wasn’t that long ago!

To say hello to this surprisingly fast platypus.

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