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The rise of the “successful” unsustainable company

360 points by yannickmahe 14y ago

api 14y ago
This is diplomatic and charitable. When I see a repeat pattern of GroupOn and Zynga type companies I see someone who knows how to pump and dump. It's not quite fraud but it's getting close, given how loose these sorts of people typically play the truth.
- antr 14y ago
  Agree on GroupOn and Zynga, and there are still plenty of popular services which are far from being economically sustainable and yet everybody says what a "great company" that is, when in reality all it is is a "great product/service" with no revenue proposition (still, kudos for building it). See Path, Foursquare, Turntable.fm, Tumblr, etc. If the liquidity from large companies such as FB, Google, AOL, Yahoo, etc. disappears, the value of the above mentioned startups will collapse. A big part of the startup ecosystem is a house of cards, unfortunately many first time entrepreneurs did not experience the .com rise and bust to understand what a downturn really looks like.
  - untog 14y ago
    I would actually exclude Foursquare from that list- they're building up a really interesting collection of business partnerships- the one with American Express was particularly significant. Doesn't mean all their money making problems are solved of course, but they're further down the line than turntable.fm are, who continue to confuse me in terms of their lack of business model.
  - hkmurakami 14y ago
    >See Path, Foursquare, Turntable.fm, Tumblr, etc. Gasp How could you forget Quora! :)
  - pron 14y ago
    To reiterate what I've said in my comment above, I'm not sure this is a downturn. A downturn implies some shift in the market, while this phenomenon is intrinsic to the particular startup economy. There might be a downturn in investment, though, as this inherent behavior gives rise to investment cycles.
- danso 14y ago
  I have to strongly disagree with comparing Groupon to any of the OP's failed examples. Groupon may well run into the ground, but consider that: a) It was the first big success in its space b) at its peak, hired dozens (hundreds?) of actual employees, even copywriters from journalistic institutions. c) Had a huge, huge base of customers Groupon's leaders should be faulted for the various strategies and actions that have put the company where it is. But Groupon did create a vibrant service out of something that seemed quite pedestrian (can't you just get coupons from the weekend newspaper?)...and a lot if its downfall comes from how easy it is to copycat it. Color, in contrast, had none of the above.
  - antr 14y ago
    Success? GroupOn isn't profitable, it hasn't even returned via income the equity invested + accumulated losses. Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.
    - danso 14y ago
      ...But not Bill Nguyen (at least with Color). I probably gave more than $200 to Groupon during the time that I found it useful. I checked into Color over a period of weeks and never stayed on for more than a minute. So while both are money-losing ventures, I think Groupon should still be ranked higher than Color.
    - hkmurakami 14y ago
      >Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone. Well I don't think anyone can successfully pitch investors and take millions of dollars of their hard earned (sometimes) money, but agreed on the other points.
      - antr 14y ago
        who is talking about raising capital? is raising equity capital a measure of a success? i'd say the contrary. equity is the most expensive source of financing. i've raised equity, and trust me, it's a mixed feeling.
- bduerst 14y ago
  I doubt it's fraud-level, but it is cashing in on the hype-machine in the silicon valley. If there wasn't a market for this, then we wouldn't be reading this article. VCs do due diligence - success for them isn't just funding a real business, but more along the lines of cashing out at the right moment.
  - pron 14y ago
    One thing to realize is that the "hype-machine" is a cornerstone of modern, capitalist, economy. So much in the economy is built around expectations, so I wouldn't single out silicon valley. Silicon valley, since it occupies the innovation/novelty niche, is just a exaggerated, caricaturized, even (not necessarily in a bad way), microcosm for the entire capitalist economy.
- drumdance 14y ago
  I think Groupon was/is overvalued, but I also think they can deliver value beyond leads. I believe they already offer a booking service, and they should be offering opt-in email, social management services, and other services that SMBs have already shown they will pay for. They may have grown too fast to do it under the Wall St microscope though.
  - roc 14y ago
    That's like saying Pets.com could have worked out -- given how readily people took to buying pet meds, food and accessories over the internet -- if only they hadn't grown so fast. Growing so fast is not only a problem of expectation, it's a problem of massive overhead that competitors don't have. That's going to harm their competitiveness in anything they do.
    - drumdance 14y ago
      The reason I said they grew too fast is I experienced this myself in the late 90s. I was with a public company that did email marketing services. That sector has turned out to be a massively profitable business. ExactTarget just went public about 6 months ago, and I know a lot of other private players who are doing very well. The company I was with failed because they bought into the "get big fast" meme that was driving consumer Internet companies. So they went on a acquisition spree, tried launching too many products when they should've just focused on their core, opened several international offices etc. AND they were already public, so they had to deal with all the BS that comes with that. The did all of this inside of two years. It was senseless. A company culture rarely scales that well. And it turns out that in most B2B markets (except for commodities like bandwidth), you don't need to grow that fast. You need to grow in a way that makes your customers happy, yes, but you don't have to worry about everyone suddenly adopting a new competitor (i.e. switching from Yahoo to Google). But when you have investors throwing money at you, it's easy to think that every decision you make is genius and that you can solve problems simply by throwing money at them. So to my original point. I think Groupon has multiple strategic options, but it may take them 3-4 years to see them through and in the meantime they have to justify their valuation to angry investors every 90 days. This would not be necessary if they hadn't bought into the "get big fast" mantra. However, I believe they do have lots of cash in the bank so they may still have time to turn it around. It will be painful and take years.
- deleted 14y ago
  [deleted]
- patmcguire 14y ago
  Groupon may never make money, but some company with a similar business model will eventually make a profit. What deal of the day sites offer that no one did before is an immediate and essentially limitless supply of customers. Even if most companies lose their shirt on that, there are going to be some industries and situations where infinite customers at a temporary loss makes business sense, and once the market for it becomes rational again someone will be able to do it better than they could internally and make a profit on it.
  - Tipzntrix 14y ago
    But that's what GroupOn was betting on to begin with!
  - drumdance 14y ago
    It was many years before Amazon.com made a profit. Compared to them Groupon is ahead of schedule.
- pg 14y ago
  Calling Zynga and Groupon pump-and-dump schemes is a mark of one's one's understanding of business in much the same way that believing vaccines cause autism is a mark of one's understanding of science. Mark Pincus and Andrew Mason are both still running these companies. Running a public company that's doing badly is extraordinarily painful. No one would bring that on himself.
  - majani 14y ago
    That's a rather off-colour reply, it has to be said, sir. First you resort to an absurd comparison in a poor attempt at snark, then you claim that Mark Pincus and Andrew Mason are severely pained by their lacklustre performance on the public markets, without providing any evidence of that. This deserves downvotes in my opinion.
    - knieveltech 14y ago
      Definitely not up to PG's typical standards for a reply.
      - api 14y ago
        I get the impression it pushed a few peoples' buttons because the startup culture likes to think it's morally superior to Wall Street.
  - ahi 14y ago
    Pincus and Mason may still be running them, but they both already cashed out big time.
    - staunch 14y ago
      Don't you see how that defies the notion that it was a pump and dump? Why would they (with tens of millions of dollars) stick around? No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.
- pron 14y ago
  I don't think it's fraud, or anything like it. After all, there is something so-far sustainable here, and it's not the companies; it's the pattern (which is not quite new), and fraud is never sustainable. I have a theory about why we see this pattern, and it starts with how those companies are financed. VCs fund many promising startups, often flooding them with money that can support the company for a long time, while maintaining a very active public image that perpetuates the sense that the company is successful. Not only is the actual business value hidden, VCs encourage the companies to not try to turn a profit, but to grow very, very quickly. This is, perhaps, what obscures the actual value the most. Now, why do VCs do that? Because they hope for a good ROI, and some of them do quite well (the entire portfolio taken together, of course). Some say that VC's true desired goal for a company is an IPO, but IPOs are rare, and, I think a good IPO (for anyone who's not Facebook) is only about 10x that of a good acquisition. So I believe, that it is the acquisitions (that outnumber IPOs more than 10x) that really drive the VC investments, and, in turn, the whole industry. But how can acquisitions be the bread-and-butter of the industry if so many of them fail (for the acquirer, that is)? Because, on the whole, acquisitions are still much cheaper for the acquirers than funding their own technology - or market - research. Instead of throwing a lot of money on large, money-hungry research departments, Big Tech would rather let a ton of entrepreneurs and VCs fight it out, and award the winners handsomely. The price they pay is far less than what they would have had to invest doing independent research. So, who loses? I'm not sure anyone does. Entrepreneurs get the independence, excitement, and the possibility of huge payoffs of a winner-takes-all market; VCs - well, some of them - do alright, and Big Tech saves a ton of money on thousands of employees they don't need to directly employ and manage. Oh, and bloggers and industry insiders get a lot of juicy gossip and cautionary tales. The one remaining question is, how come so many companies seem very promising, get good indications from the market, and then slowly (or quickly) declines. I don't have a good answer, but I do have a hypothesis. Web companies mostly compete in a global market. That means that in order for them to succeed, all relevant consumers must learn about them, and must learn about them quickly (fast growth, right?). But this is just not possible, because the average consumer can only keep in mind a bounded (and rather small) set of vendors. So, not only is, say, Groupon competing with uhmm, I dunno, Amazon, maybe for the purchase of some items, it is also competing with Zynga over my time. And not only that, it's even competing with Salesforce because there are only so many products I can even remember to use on a regular basis. And when new startups are funded, they are encouraged to very quickly get global attention, and - out with old, in with the new - novelty seeking consumers forget about yesterday's big thing. So all of these companies are competing with one another for attention, so the question is, how many fast-growth, global companies can even prosper at the same time?
nsns 14y ago
I think this is actually related to a larger (sea) change currently occuring in Internet culture: a transition to mass media; like TV, the music industry and Hollywood before it. The internet was very different a few years ago - a source for information and creativity, but easy access and growing acceptance (no doubt related to the rise of mobile platforms), have changed all this. Some startups today are just like pop acts or Hollywood productions: 1 out of 10 makes a killing, the others fail spectacularly. That's the mass media (gambling) busines, not a "bubble".
- pnathan 14y ago
  When I look at personal websites pre-Facebook, I see a different world. People seemed to be freer to be different. Maybe that's just nostalgia, and maybe that's just the effect of popularization.
- rndmize 14y ago
  I don't think it's like that at all. A startup that gets a lot of hype and carries that far enough to get acquired or IPO before crashing means that someone else is left holding the bag. TV, movies, games and music are invested in by the company that stands to make the money from them; they're seen through to the end.
wtvanhest 14y ago
What I am about to type is not an excuse for some of these companies, but rather an observation about all companies. Sustainability is relative. Very few companies "last forever", so the real questions are... What is an acceptable pattern of growth and what is driving the shorter lives of these companies?
- taylonr 14y ago
  That's a fair point. But I think if you look at most non-startup companies that stay around for 3-4 years they don't typically have the valuations that the startups do in the same time. For example, Joe's Plumbing shuts down after 2 years because Joe realizes he has to manage his books, do advertising, manage any junior plumbers etc. In the end he spends 50% of his time doing plumbing and 50% of his time doing "business." So he pays off his small business loan (maybe) of $100k and goes to work for Tom's Plumbing where at least he gets to do plumbing all the time. He had a run of 2 years, but at no point was his company sitting on millions of dollars.
  - wtvanhest 14y ago
    I wasn't referring to lifestyle businesses like you describe. I was referring to real companies with billion+ dollar valuations. Plenty of them fail (either reorg or liquidate), are bought and the products become useless etc. Here is a list of 2012's bankruptcies by assets: http://www.turnaroundletter.com/largest-bankruptcies-this-year http://www.turnaroundletter.com/largest-bankruptcies-this-ye... There isn't a single "software" company on the list. Now, I also understand that software companies are not as asset intensive, but it is hard to know what companies are "large" after a bankruptcy since their market caps approach zero. My point was specifically refering to real businesses, not lifestyle businesses.
    - zacharycohn 14y ago
      I don't think Joe's Plumming counts as a lifestyle business. He probably put in equal hours to a startup entrepreneur. Startup != Small Business != lifestyle business.
ergest 14y ago
Finally someone is talking about this! I've always felt that the "new" tech companies bring very little value to consumers and are thus not profitable long term (but of course the early investors and founders already made their money) The incentives of many VCs and "angels" are at opposite ends with sustainability, consumer value and long term success.
- veb 14y ago
  What kind of bugs me is why the small start-ups who are actually making money from day one don't really receive much money. I mean, $700,000 (pulled from thin air) in funding is good, don't get me wrong - but if they're making money and they have a decent business plan, why aren't THEY receiving $41,000,000 in funding?
  - codewright 14y ago
    Perceived addressable market or size of opportunity. VCs tend to care principally about how big it could get, to the exclusion of other potentially important principles. A good counter-example to Color is actually Bingo Card Creator. It's a great product, very well managed and fine-tuned by patio11, but it has a pretty rigid ceiling on its opportunity. VCs avoid businesses that seem limited or overly niche so as to create a limited maximal market opportunity. Another contrast would be anything in the ad business. It's such a huge business that a lot of startups that go into the ad industry end up making a sizeable amount of money fairly early on. VCs tend to be keen on advertising startups that want to build a large platform or catch-all service that all the buyers/content providers will want to use. Nevertheless, they'll still invest in smaller scope ad startups that have an opportunity to expand.
  - thematt 14y ago
    Because if they already have revenue, they have numbers around who and how many people are willing to pay -- there's at least something to go on and they get valued like any other company. Investors start with that and calculate forward how much they'd be willing to pay for future revenue and growth. The start-ups with no revenue don't have that, so they make guesses about what their market can or will be, which is often over inflated and rarely accurate, but nevertheless is the basis for how much people invest. Investors in this scenario take those numbers and then back into what they think the value should be. Or worse, they compare it to other hyper-inflated companies and arrive at a valuation via group-think.
Sakes 14y ago
It seems to me that there is nothing inherently wrong with these talented pitch men, people that get everyone excited about some venture even if there is no clear path to long term growth. If you could marry these people with others who have a proven track record of creating sustainable businesses maybe you would have some unstoppable force? But then again, maybe in order to pump and dump, you have to make certain decisions that are bad for building a company and good for raising funds.
jpdoctor 14y ago
Rise of? Apparently the author wasn't around during the 90s?
- brianobush 14y ago
  I think that he is referring to a second "rise of"
- pdog 14y ago
  Like a phoenix, it rises again.
nicholassmith 14y ago
Unfortunately it seems like a lot of the time people are building companies for exits, rather than long term products. There's exceptions of course, but how much of that is now the expectation that to get the funding to do something you've got to be aiming for $xm dollars at exit. I've got no problems with people exiting like that, but it makes me wonder where all the pressure to sell up and move on comes from.
- hnriot 14y ago
  This might be a good strategy - the skill set required to get a company off the group is very different from long term growth and sustainability. By exiting, the skills are compartmentalized. I worked for a company that made networking products, at the time they were ahead of Cisco's tech, but Cisco had by far better penetration into the CIO world. The sales cycle was too long for a small startup and we practically ran out of money just waiting for companies to evaluate our product. It was clear that the company would do far better inside an existing sales infrastructure, so we exited and moved on to things we did best. Not building a company for the long haul isn't necessarily a bad thing, provided the business itself has the ability to grow elsewhere.
- grey-area 14y ago
  I've got no problems with people exiting like that, but it makes me wonder where all the pressure to sell up and move on comes from. The pressure often comes from the VCs who put a lot of money down in an initial investment, and need at least some of their bets to pay off within a short time-frame. Are there any long-term VC funds which accept stock and then wait for dividends?
  - nicholassmith 14y ago
    I'm not sure, I can see it from the VC point of wanting to return on investment as fast as possible. It does seem like it creates an industry based on ship it, sell it.
  - patmcguire 14y ago
    It's generally too easy to game dividends - you can do lots of Hollywood accounting to make money without ever "making money." Companies also aren't obligated to pay a dividend even if they're profitable - see Apple up until about a year ago.
cs702 14y ago
Interestingly, Mark Pincus, who was Nguyen's co-founder in two of the 'pump-and-dump' schemes listed in the article (Freeloader and Support.com)[1], seems to be on an eerily similar path with Zynga.[2] -- [1] http://en.wikipedia.org/wiki/Mark_Pincus http://en.wikipedia.org/wiki/Mark_Pincus [2] http://www.forbes.com/sites/nathanvardi/2012/10/05/zynga-keeps-crashing-but-mark-pincus-is-having-a-great-year/ http://www.forbes.com/sites/nathanvardi/2012/10/05/zynga-kee...
- rndmize 14y ago
  Some details on Freeloader can be found here - http://www.inc.com/magazine/19980515/1128.html http://www.inc.com/magazine/19980515/1128.html (1998)
- cs702 14y ago
  In hindsight, calling Freeloader and Support.com "pump-and-dump schemes" was not entirely fair of me, because both companies had real products and customers. If I could edit my comment, I would refer to them as "overhyped startups ultimately doomed to failure in which the founders cashed out before the collapse." That seems more fair.
mindstab 14y ago
I'm surprised no one's mentioned Twitter. They are one of the most successful internet things and yet they still don't seem to have any really solid way to monetize that. They are now part of culture but are they revenue positive? The things they are doing lately don't make sense until you take that into account: Restricting 3rd party apps and APIs? Seems to be driving users away... Except that if all your users are costing you money, then less users is in fact good. And the only money making thing they seem to have is "paid tweets" that you are forced to see (aka ads) and so yeah, obviously they don't want 3rd party apps and APIs that could filter that one weak still mostly crappy source of money. So if they loose some freeloading users, why would they care. So yeah. Why has no one else mentioned Twitter in this discussion as the grand-daddy-king of unsustainable companies?
- rapind 14y ago
  Is restricting 3rd party apps and APIs really driving users away though? Do you have any data to back this up? I suspect it's having a negligible impact on their user count, but I'll believe you if you show me some data. I think their road map to financial success is mainstream media related (second screen etc.).
- eli 14y ago
  What's wrong with selling ads? You could argue that Twitter is doing it poorly, but I don't think it's fundamentally different from what, say, Facebook or LinkedIn are doing.
  - riffraff 14y ago
    doesn't LinkedIn make a bunch of money on their premium service?
- scott_s 14y ago
  Twitter sells access to its raw firehose. You may not be willing to pay for it, but many large companies are.
  - bane 14y ago
hammock 14y ago
Why does this idea exist that every company needs to be sustainable? Is it not the natural way of markets that 1) an opportunity is identified, 2) exploited for profit, until 3) competition drives profitability away? So long as capital stays productive, from a societal point of view it shouldn't matter whether it stays in one company for 20 years or moves from company to company every three.
- deleted 14y ago
  [deleted]
- taphangum 14y ago
  Sustainability is the ideal that (hopefully) we all strive for, because of the many negative effects of unsustainable business in the long term. Such as laying people off. Good point though.
- adgar2 14y ago
  Exactly. Money exists to be extracted from fools at their expense, whether those fools are your investors, employees, customers, or all 3. That's real value in the market at work.
- nkohari 14y ago
  Finance doesn't work that way at all, though. Capital is invested because of the potential of growth, and therefore return. You wouldn't buy stock in a company at $10 if you expected it to be worth $10 for the entire time you held the shares. It's not like the people who bought ZNGA stock at $10 were somehow rewarded with $7 worth of stock in some other company when their shares dipped to $3.
  - wtvanhest 14y ago
    Actually it does work that way. If I thought that 3 companies with questionable business models each had a 50% chance of becoming worth 3X their valuation in 2 years, it would probably make sense for me to invest in all 3 even if it meant they also each had a 50% chance of becoming worth zero in 2 years. Finance is very much built around the concepts of diversification and risk taking.
dochtman 14y ago
Also, Facebook.
001sky 14y ago
This is a great piece. As a business matter, its a "brilliant" arbitrage. Annuity != Perpetuity. If you can buy low (A) and sell High (P) you will do great. And its a lot easier to build an (A) than a (P) type biz. Lack of visibility (due to tech disruption) and short-attention-span (due to tech disruption) combine to make this a potentially evergreen business opportunity, especially for the unethical.
zwieback 14y ago
There's really only one underlying truth here: snake oil salesmen have been around since the day commerce began. The internet just broadened their methods and customer base.
OldSchool 14y ago
When Margo Georgiadis joined and then soon left GroupOn before the IPO, that said a lot. I'd imagine she had a hefty equity path lined up that she walked away from, so she must not have been pleased with what she saw. Unfortunately the markets tend to be pretty irrational so I didn't attempt it but we all could've made some extra $$$ shorting GRPN stock.
majani 14y ago
I wonder what people who strike it rich on vaporware tell their children when asked what they did to make money? I mean what does Mark Cuban tell his kids? "I built this website and it was shut down, but I'm bloody rich anyways, so..." I mean I personally would feel like a horrible role model to the children after that. Does this sort of information turn your children into thinking the end justifies the means?
webwright 14y ago
People might not remember this but Amazon was lambasted as an unsustainable company for many many years. People also said that Facebook would never make money.
arbuge 14y ago
Pump and dump works very well in tech unfortunately. Few VCs apply Buffetesque expectations of company durability to their investments, and (morals aside) objectively they don't need to. Alot of it is about selling to a greater idiot - either the hoi polloi on the stock exchange after an IPO, or an acquirer with rose-colored glasses if that's too much of a stretch.
jacques_chester 14y ago
My experience with WPEngine was terrible.
- GFischer 14y ago
  Could you elaborate? / Have you already elaborated on a blog post? :)
  - jacques_chester 14y ago
    I started writing a full reply above, then turned it into a blog post. I linked to a completely different blog post in a comment on another story, but someone noticed my blog post and submitted it: http://news.ycombinator.com/item?id=4692456 http://news.ycombinator.com/item?id=4692456 Anyhow. It turns out that I'm not alone.
    - GFischer 14y ago
      Thanks, just saw it as the top story on HN, so I guess you're right.
javajosh 14y ago
It does seem like a smart buyer would take into account the difficulties Bill Nguyen has had handing over companies to new owners and keeping them healthy. It's not necessarily malice, but something is going wrong. If a smart buyer sees it, then a smart investor is going to anticipate this, and perhaps be more cautious investing. But we do not see this behavior, and hence the mild outrage of this post. We gnash our teeth and tear our hair because of the irrationality of buyers and investors, because if only they were rational they'd invest in my idea, not his! :)
welebrity 14y ago
We are still in the verrrrry early days of the internet. Yes, now in 2012. There will be bigger online companies/assets/entities than there are today. Just wait & see. Every new industry has its "pitchmen", and an anxious horde of "brilliant investors" who chase the supposed money(see: suckers) like a gold rush. History has way too many examples. Nguyen charmed the greedy masses, and everyone enjoyed their rôle. Only time highlights the mistakes by the start-up, the VC, and the eventual buyer. Tuesday morning QB-ing at it's best. In Silicon Valley, there will still be Nguyen adVoCates lining up for the next company . . . Black & White?
joonix 14y ago
But Nguyen understands the arithmetic of Silicon Valley, and anyway he isn't one to reflect. "I never get emotional," says Nguyen, who hasn't spoken to his parents in six years. "I can have the biggest argument with someone, and five minutes later, I won't even remember that it happened." He's not even particularly attached to his name. In third grade, he had a crush on a classmate whose mother asked him his name. "I go, 'Vu.' She goes, 'Bill,' and I go, 'Aha!' And all my friends have called me Bill since then," recalls Nguyen. "My whole point was, I don't care what people call me. It's like, whatever's easier for people, I'm totally cool with it." He adds, "There is no Vietnamese person in the history of the world born with the name Bill. It's a total facade." ...This guy's a psychopath.
michaelochurch 14y ago
The takeaway from this is that VC-istan has turned into a celebrity economy. The most relevant trait of a celebrity economy is the importance of visibility (and the vicious politics surrounding who gets to be visible). If everyone (most relevantly, the investor community) knows you're a 5.5, that's better than being a 10 that no one has ever heard of. This has been my observation. I've met plenty of very successful founders (people that the HN crowd would have heard of) who are just not very impressive. It also gets under my skin when VCs say, "we don't invest in ideas, we invest in people". To which I say, "then most of you should be fired, because you suck at that." Honestly, VCs are a lot better at picking ideas. Sure, a lot of these "social" apps are lame, but VCs actually do an excellent job of choosing what ideas to fund, given the constraints they face and their objective function (variance-agnostic expectancy maximization, 1-10 year payoffs). That they do well. On the other hand, they seem to be doing a lousy job of picking people (and at that, I would do a better job than 90+ percent of them).

360 points by yannickmahe 14y ago

api 14y ago

This is diplomatic and charitable. When I see a repeat pattern of GroupOn and Zynga type companies I see someone who knows how to pump and dump. It's not quite fraud but it's getting close, given how loose these sorts of people typically play the truth.

antr 14y ago
Agree on GroupOn and Zynga, and there are still plenty of popular services which are far from being economically sustainable and yet everybody says what a "great company" that is, when in reality all it is is a "great product/service" with no revenue proposition (still, kudos for building it). See Path, Foursquare, Turntable.fm, Tumblr, etc. If the liquidity from large companies such as FB, Google, AOL, Yahoo, etc. disappears, the value of the above mentioned startups will collapse. A big part of the startup ecosystem is a house of cards, unfortunately many first time entrepreneurs did not experience the .com rise and bust to understand what a downturn really looks like.
- untog 14y ago
  I would actually exclude Foursquare from that list- they're building up a really interesting collection of business partnerships- the one with American Express was particularly significant. Doesn't mean all their money making problems are solved of course, but they're further down the line than turntable.fm are, who continue to confuse me in terms of their lack of business model.
- hkmurakami 14y ago
  >See Path, Foursquare, Turntable.fm, Tumblr, etc. Gasp How could you forget Quora! :)
- pron 14y ago
  To reiterate what I've said in my comment above, I'm not sure this is a downturn. A downturn implies some shift in the market, while this phenomenon is intrinsic to the particular startup economy. There might be a downturn in investment, though, as this inherent behavior gives rise to investment cycles.
danso 14y ago
I have to strongly disagree with comparing Groupon to any of the OP's failed examples. Groupon may well run into the ground, but consider that: a) It was the first big success in its space b) at its peak, hired dozens (hundreds?) of actual employees, even copywriters from journalistic institutions. c) Had a huge, huge base of customers Groupon's leaders should be faulted for the various strategies and actions that have put the company where it is. But Groupon did create a vibrant service out of something that seemed quite pedestrian (can't you just get coupons from the weekend newspaper?)...and a lot if its downfall comes from how easy it is to copycat it. Color, in contrast, had none of the above.
- antr 14y ago
  Success? GroupOn isn't profitable, it hasn't even returned via income the equity invested + accumulated losses. Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.
  - danso 14y ago
    ...But not Bill Nguyen (at least with Color). I probably gave more than $200 to Groupon during the time that I found it useful. I checked into Color over a period of weeks and never stayed on for more than a minute. So while both are money-losing ventures, I think Groupon should still be ranked higher than Color.
  - hkmurakami 14y ago
    >Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone. Well I don't think anyone can successfully pitch investors and take millions of dollars of their hard earned (sometimes) money, but agreed on the other points.
    - antr 14y ago
      who is talking about raising capital? is raising equity capital a measure of a success? i'd say the contrary. equity is the most expensive source of financing. i've raised equity, and trust me, it's a mixed feeling.
bduerst 14y ago
I doubt it's fraud-level, but it is cashing in on the hype-machine in the silicon valley. If there wasn't a market for this, then we wouldn't be reading this article. VCs do due diligence - success for them isn't just funding a real business, but more along the lines of cashing out at the right moment.
- pron 14y ago
  One thing to realize is that the "hype-machine" is a cornerstone of modern, capitalist, economy. So much in the economy is built around expectations, so I wouldn't single out silicon valley. Silicon valley, since it occupies the innovation/novelty niche, is just a exaggerated, caricaturized, even (not necessarily in a bad way), microcosm for the entire capitalist economy.
drumdance 14y ago
I think Groupon was/is overvalued, but I also think they can deliver value beyond leads. I believe they already offer a booking service, and they should be offering opt-in email, social management services, and other services that SMBs have already shown they will pay for. They may have grown too fast to do it under the Wall St microscope though.
- roc 14y ago
  That's like saying Pets.com could have worked out -- given how readily people took to buying pet meds, food and accessories over the internet -- if only they hadn't grown so fast. Growing so fast is not only a problem of expectation, it's a problem of massive overhead that competitors don't have. That's going to harm their competitiveness in anything they do.
  - drumdance 14y ago
    The reason I said they grew too fast is I experienced this myself in the late 90s. I was with a public company that did email marketing services. That sector has turned out to be a massively profitable business. ExactTarget just went public about 6 months ago, and I know a lot of other private players who are doing very well. The company I was with failed because they bought into the "get big fast" meme that was driving consumer Internet companies. So they went on a acquisition spree, tried launching too many products when they should've just focused on their core, opened several international offices etc. AND they were already public, so they had to deal with all the BS that comes with that. The did all of this inside of two years. It was senseless. A company culture rarely scales that well. And it turns out that in most B2B markets (except for commodities like bandwidth), you don't need to grow that fast. You need to grow in a way that makes your customers happy, yes, but you don't have to worry about everyone suddenly adopting a new competitor (i.e. switching from Yahoo to Google). But when you have investors throwing money at you, it's easy to think that every decision you make is genius and that you can solve problems simply by throwing money at them. So to my original point. I think Groupon has multiple strategic options, but it may take them 3-4 years to see them through and in the meantime they have to justify their valuation to angry investors every 90 days. This would not be necessary if they hadn't bought into the "get big fast" mantra. However, I believe they do have lots of cash in the bank so they may still have time to turn it around. It will be painful and take years.
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patmcguire 14y ago
Groupon may never make money, but some company with a similar business model will eventually make a profit. What deal of the day sites offer that no one did before is an immediate and essentially limitless supply of customers. Even if most companies lose their shirt on that, there are going to be some industries and situations where infinite customers at a temporary loss makes business sense, and once the market for it becomes rational again someone will be able to do it better than they could internally and make a profit on it.
- Tipzntrix 14y ago
  But that's what GroupOn was betting on to begin with!
- drumdance 14y ago
  It was many years before Amazon.com made a profit. Compared to them Groupon is ahead of schedule.
pg 14y ago
Calling Zynga and Groupon pump-and-dump schemes is a mark of one's one's understanding of business in much the same way that believing vaccines cause autism is a mark of one's understanding of science. Mark Pincus and Andrew Mason are both still running these companies. Running a public company that's doing badly is extraordinarily painful. No one would bring that on himself.
- majani 14y ago
  That's a rather off-colour reply, it has to be said, sir. First you resort to an absurd comparison in a poor attempt at snark, then you claim that Mark Pincus and Andrew Mason are severely pained by their lacklustre performance on the public markets, without providing any evidence of that. This deserves downvotes in my opinion.
  - knieveltech 14y ago
    Definitely not up to PG's typical standards for a reply.
    - api 14y ago
      I get the impression it pushed a few peoples' buttons because the startup culture likes to think it's morally superior to Wall Street.
- ahi 14y ago
  Pincus and Mason may still be running them, but they both already cashed out big time.
  - staunch 14y ago
    Don't you see how that defies the notion that it was a pump and dump? Why would they (with tens of millions of dollars) stick around? No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.
pron 14y ago
I don't think it's fraud, or anything like it. After all, there is something so-far sustainable here, and it's not the companies; it's the pattern (which is not quite new), and fraud is never sustainable. I have a theory about why we see this pattern, and it starts with how those companies are financed. VCs fund many promising startups, often flooding them with money that can support the company for a long time, while maintaining a very active public image that perpetuates the sense that the company is successful. Not only is the actual business value hidden, VCs encourage the companies to not try to turn a profit, but to grow very, very quickly. This is, perhaps, what obscures the actual value the most. Now, why do VCs do that? Because they hope for a good ROI, and some of them do quite well (the entire portfolio taken together, of course). Some say that VC's true desired goal for a company is an IPO, but IPOs are rare, and, I think a good IPO (for anyone who's not Facebook) is only about 10x that of a good acquisition. So I believe, that it is the acquisitions (that outnumber IPOs more than 10x) that really drive the VC investments, and, in turn, the whole industry. But how can acquisitions be the bread-and-butter of the industry if so many of them fail (for the acquirer, that is)? Because, on the whole, acquisitions are still much cheaper for the acquirers than funding their own technology - or market - research. Instead of throwing a lot of money on large, money-hungry research departments, Big Tech would rather let a ton of entrepreneurs and VCs fight it out, and award the winners handsomely. The price they pay is far less than what they would have had to invest doing independent research. So, who loses? I'm not sure anyone does. Entrepreneurs get the independence, excitement, and the possibility of huge payoffs of a winner-takes-all market; VCs - well, some of them - do alright, and Big Tech saves a ton of money on thousands of employees they don't need to directly employ and manage. Oh, and bloggers and industry insiders get a lot of juicy gossip and cautionary tales. The one remaining question is, how come so many companies seem very promising, get good indications from the market, and then slowly (or quickly) declines. I don't have a good answer, but I do have a hypothesis. Web companies mostly compete in a global market. That means that in order for them to succeed, all relevant consumers must learn about them, and must learn about them quickly (fast growth, right?). But this is just not possible, because the average consumer can only keep in mind a bounded (and rather small) set of vendors. So, not only is, say, Groupon competing with uhmm, I dunno, Amazon, maybe for the purchase of some items, it is also competing with Zynga over my time. And not only that, it's even competing with Salesforce because there are only so many products I can even remember to use on a regular basis. And when new startups are funded, they are encouraged to very quickly get global attention, and - out with old, in with the new - novelty seeking consumers forget about yesterday's big thing. So all of these companies are competing with one another for attention, so the question is, how many fast-growth, global companies can even prosper at the same time?

nsns 14y ago

I think this is actually related to a larger (sea) change currently occuring in Internet culture: a transition to mass media; like TV, the music industry and Hollywood before it. The internet was very different a few years ago - a source for information and creativity, but easy access and growing acceptance (no doubt related to the rise of mobile platforms), have changed all this. Some startups today are just like pop acts or Hollywood productions: 1 out of 10 makes a killing, the others fail spectacularly. That's the mass media (gambling) busines, not a "bubble".

pnathan 14y ago
When I look at personal websites pre-Facebook, I see a different world. People seemed to be freer to be different. Maybe that's just nostalgia, and maybe that's just the effect of popularization.
rndmize 14y ago
I don't think it's like that at all. A startup that gets a lot of hype and carries that far enough to get acquired or IPO before crashing means that someone else is left holding the bag. TV, movies, games and music are invested in by the company that stands to make the money from them; they're seen through to the end.

wtvanhest 14y ago

What I am about to type is not an excuse for some of these companies, but rather an observation about all companies. Sustainability is relative. Very few companies "last forever", so the real questions are... What is an acceptable pattern of growth and what is driving the shorter lives of these companies?

taylonr 14y ago
That's a fair point. But I think if you look at most non-startup companies that stay around for 3-4 years they don't typically have the valuations that the startups do in the same time. For example, Joe's Plumbing shuts down after 2 years because Joe realizes he has to manage his books, do advertising, manage any junior plumbers etc. In the end he spends 50% of his time doing plumbing and 50% of his time doing "business." So he pays off his small business loan (maybe) of $100k and goes to work for Tom's Plumbing where at least he gets to do plumbing all the time. He had a run of 2 years, but at no point was his company sitting on millions of dollars.
- wtvanhest 14y ago
  I wasn't referring to lifestyle businesses like you describe. I was referring to real companies with billion+ dollar valuations. Plenty of them fail (either reorg or liquidate), are bought and the products become useless etc. Here is a list of 2012's bankruptcies by assets: http://www.turnaroundletter.com/largest-bankruptcies-this-year http://www.turnaroundletter.com/largest-bankruptcies-this-ye... There isn't a single "software" company on the list. Now, I also understand that software companies are not as asset intensive, but it is hard to know what companies are "large" after a bankruptcy since their market caps approach zero. My point was specifically refering to real businesses, not lifestyle businesses.
  - zacharycohn 14y ago
    I don't think Joe's Plumming counts as a lifestyle business. He probably put in equal hours to a startup entrepreneur. Startup != Small Business != lifestyle business.

ergest 14y ago

Finally someone is talking about this! I've always felt that the "new" tech companies bring very little value to consumers and are thus not profitable long term (but of course the early investors and founders already made their money) The incentives of many VCs and "angels" are at opposite ends with sustainability, consumer value and long term success.

veb 14y ago
What kind of bugs me is why the small start-ups who are actually making money from day one don't really receive much money. I mean, $700,000 (pulled from thin air) in funding is good, don't get me wrong - but if they're making money and they have a decent business plan, why aren't THEY receiving $41,000,000 in funding?
- codewright 14y ago
  Perceived addressable market or size of opportunity. VCs tend to care principally about how big it could get, to the exclusion of other potentially important principles. A good counter-example to Color is actually Bingo Card Creator. It's a great product, very well managed and fine-tuned by patio11, but it has a pretty rigid ceiling on its opportunity. VCs avoid businesses that seem limited or overly niche so as to create a limited maximal market opportunity. Another contrast would be anything in the ad business. It's such a huge business that a lot of startups that go into the ad industry end up making a sizeable amount of money fairly early on. VCs tend to be keen on advertising startups that want to build a large platform or catch-all service that all the buyers/content providers will want to use. Nevertheless, they'll still invest in smaller scope ad startups that have an opportunity to expand.
- thematt 14y ago
  Because if they already have revenue, they have numbers around who and how many people are willing to pay -- there's at least something to go on and they get valued like any other company. Investors start with that and calculate forward how much they'd be willing to pay for future revenue and growth. The start-ups with no revenue don't have that, so they make guesses about what their market can or will be, which is often over inflated and rarely accurate, but nevertheless is the basis for how much people invest. Investors in this scenario take those numbers and then back into what they think the value should be. Or worse, they compare it to other hyper-inflated companies and arrive at a valuation via group-think.

Sakes 14y ago

It seems to me that there is nothing inherently wrong with these talented pitch men, people that get everyone excited about some venture even if there is no clear path to long term growth. If you could marry these people with others who have a proven track record of creating sustainable businesses maybe you would have some unstoppable force? But then again, maybe in order to pump and dump, you have to make certain decisions that are bad for building a company and good for raising funds.

jpdoctor 14y ago

Rise of? Apparently the author wasn't around during the 90s?

brianobush 14y ago
I think that he is referring to a second "rise of"
pdog 14y ago
Like a phoenix, it rises again.

nicholassmith 14y ago

Unfortunately it seems like a lot of the time people are building companies for exits, rather than long term products. There's exceptions of course, but how much of that is now the expectation that to get the funding to do something you've got to be aiming for $xm dollars at exit. I've got no problems with people exiting like that, but it makes me wonder where all the pressure to sell up and move on comes from.

hnriot 14y ago
This might be a good strategy - the skill set required to get a company off the group is very different from long term growth and sustainability. By exiting, the skills are compartmentalized. I worked for a company that made networking products, at the time they were ahead of Cisco's tech, but Cisco had by far better penetration into the CIO world. The sales cycle was too long for a small startup and we practically ran out of money just waiting for companies to evaluate our product. It was clear that the company would do far better inside an existing sales infrastructure, so we exited and moved on to things we did best. Not building a company for the long haul isn't necessarily a bad thing, provided the business itself has the ability to grow elsewhere.
grey-area 14y ago
I've got no problems with people exiting like that, but it makes me wonder where all the pressure to sell up and move on comes from. The pressure often comes from the VCs who put a lot of money down in an initial investment, and need at least some of their bets to pay off within a short time-frame. Are there any long-term VC funds which accept stock and then wait for dividends?
- nicholassmith 14y ago
  I'm not sure, I can see it from the VC point of wanting to return on investment as fast as possible. It does seem like it creates an industry based on ship it, sell it.
- patmcguire 14y ago
  It's generally too easy to game dividends - you can do lots of Hollywood accounting to make money without ever "making money." Companies also aren't obligated to pay a dividend even if they're profitable - see Apple up until about a year ago.

cs702 14y ago

Interestingly, Mark Pincus, who was Nguyen's co-founder in two of the 'pump-and-dump' schemes listed in the article (Freeloader and Support.com)[1], seems to be on an eerily similar path with Zynga.[2] -- [1] http://en.wikipedia.org/wiki/Mark_Pincus http://en.wikipedia.org/wiki/Mark_Pincus [2] http://www.forbes.com/sites/nathanvardi/2012/10/05/zynga-keeps-crashing-but-mark-pincus-is-having-a-great-year/ http://www.forbes.com/sites/nathanvardi/2012/10/05/zynga-kee...

rndmize 14y ago
Some details on Freeloader can be found here - http://www.inc.com/magazine/19980515/1128.html http://www.inc.com/magazine/19980515/1128.html (1998)
cs702 14y ago
In hindsight, calling Freeloader and Support.com "pump-and-dump schemes" was not entirely fair of me, because both companies had real products and customers. If I could edit my comment, I would refer to them as "overhyped startups ultimately doomed to failure in which the founders cashed out before the collapse." That seems more fair.

mindstab 14y ago

I'm surprised no one's mentioned Twitter. They are one of the most successful internet things and yet they still don't seem to have any really solid way to monetize that. They are now part of culture but are they revenue positive? The things they are doing lately don't make sense until you take that into account: Restricting 3rd party apps and APIs? Seems to be driving users away... Except that if all your users are costing you money, then less users is in fact good. And the only money making thing they seem to have is "paid tweets" that you are forced to see (aka ads) and so yeah, obviously they don't want 3rd party apps and APIs that could filter that one weak still mostly crappy source of money. So if they loose some freeloading users, why would they care. So yeah. Why has no one else mentioned Twitter in this discussion as the grand-daddy-king of unsustainable companies?

rapind 14y ago
Is restricting 3rd party apps and APIs really driving users away though? Do you have any data to back this up? I suspect it's having a negligible impact on their user count, but I'll believe you if you show me some data. I think their road map to financial success is mainstream media related (second screen etc.).
eli 14y ago
What's wrong with selling ads? You could argue that Twitter is doing it poorly, but I don't think it's fundamentally different from what, say, Facebook or LinkedIn are doing.
- riffraff 14y ago
  doesn't LinkedIn make a bunch of money on their premium service?
scott_s 14y ago
Twitter sells access to its raw firehose. You may not be willing to pay for it, but many large companies are.
- bane 14y ago

hammock 14y ago

Why does this idea exist that every company needs to be sustainable? Is it not the natural way of markets that 1) an opportunity is identified, 2) exploited for profit, until 3) competition drives profitability away? So long as capital stays productive, from a societal point of view it shouldn't matter whether it stays in one company for 20 years or moves from company to company every three.

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taphangum 14y ago
Sustainability is the ideal that (hopefully) we all strive for, because of the many negative effects of unsustainable business in the long term. Such as laying people off. Good point though.
adgar2 14y ago
Exactly. Money exists to be extracted from fools at their expense, whether those fools are your investors, employees, customers, or all 3. That's real value in the market at work.
nkohari 14y ago
Finance doesn't work that way at all, though. Capital is invested because of the potential of growth, and therefore return. You wouldn't buy stock in a company at $10 if you expected it to be worth $10 for the entire time you held the shares. It's not like the people who bought ZNGA stock at $10 were somehow rewarded with $7 worth of stock in some other company when their shares dipped to $3.
- wtvanhest 14y ago
  Actually it does work that way. If I thought that 3 companies with questionable business models each had a 50% chance of becoming worth 3X their valuation in 2 years, it would probably make sense for me to invest in all 3 even if it meant they also each had a 50% chance of becoming worth zero in 2 years. Finance is very much built around the concepts of diversification and risk taking.

dochtman 14y ago

Also, Facebook.

001sky 14y ago

This is a great piece. As a business matter, its a "brilliant" arbitrage. Annuity != Perpetuity. If you can buy low (A) and sell High (P) you will do great. And its a lot easier to build an (A) than a (P) type biz. Lack of visibility (due to tech disruption) and short-attention-span (due to tech disruption) combine to make this a potentially evergreen business opportunity, especially for the unethical.

zwieback 14y ago

There's really only one underlying truth here: snake oil salesmen have been around since the day commerce began. The internet just broadened their methods and customer base.

OldSchool 14y ago

When Margo Georgiadis joined and then soon left GroupOn before the IPO, that said a lot. I'd imagine she had a hefty equity path lined up that she walked away from, so she must not have been pleased with what she saw. Unfortunately the markets tend to be pretty irrational so I didn't attempt it but we all could've made some extra $$$ shorting GRPN stock.

majani 14y ago

I wonder what people who strike it rich on vaporware tell their children when asked what they did to make money? I mean what does Mark Cuban tell his kids? "I built this website and it was shut down, but I'm bloody rich anyways, so..." I mean I personally would feel like a horrible role model to the children after that. Does this sort of information turn your children into thinking the end justifies the means?

webwright 14y ago

People might not remember this but Amazon was lambasted as an unsustainable company for many many years. People also said that Facebook would never make money.

arbuge 14y ago

Pump and dump works very well in tech unfortunately. Few VCs apply Buffetesque expectations of company durability to their investments, and (morals aside) objectively they don't need to. Alot of it is about selling to a greater idiot - either the hoi polloi on the stock exchange after an IPO, or an acquirer with rose-colored glasses if that's too much of a stretch.

jacques_chester 14y ago

My experience with WPEngine was terrible.

GFischer 14y ago
Could you elaborate? / Have you already elaborated on a blog post? :)
- jacques_chester 14y ago
  I started writing a full reply above, then turned it into a blog post. I linked to a completely different blog post in a comment on another story, but someone noticed my blog post and submitted it: http://news.ycombinator.com/item?id=4692456 http://news.ycombinator.com/item?id=4692456 Anyhow. It turns out that I'm not alone.
  - GFischer 14y ago
    Thanks, just saw it as the top story on HN, so I guess you're right.

javajosh 14y ago

It does seem like a smart buyer would take into account the difficulties Bill Nguyen has had handing over companies to new owners and keeping them healthy. It's not necessarily malice, but something is going wrong. If a smart buyer sees it, then a smart investor is going to anticipate this, and perhaps be more cautious investing. But we do not see this behavior, and hence the mild outrage of this post. We gnash our teeth and tear our hair because of the irrationality of buyers and investors, because if only they were rational they'd invest in my idea, not his! :)

welebrity 14y ago

We are still in the verrrrry early days of the internet. Yes, now in 2012. There will be bigger online companies/assets/entities than there are today. Just wait & see. Every new industry has its "pitchmen", and an anxious horde of "brilliant investors" who chase the supposed money(see: suckers) like a gold rush. History has way too many examples. Nguyen charmed the greedy masses, and everyone enjoyed their rôle. Only time highlights the mistakes by the start-up, the VC, and the eventual buyer. Tuesday morning QB-ing at it's best. In Silicon Valley, there will still be Nguyen adVoCates lining up for the next company . . . Black & White?

joonix 14y ago

But Nguyen understands the arithmetic of Silicon Valley, and anyway he isn't one to reflect. "I never get emotional," says Nguyen, who hasn't spoken to his parents in six years. "I can have the biggest argument with someone, and five minutes later, I won't even remember that it happened." He's not even particularly attached to his name. In third grade, he had a crush on a classmate whose mother asked him his name. "I go, 'Vu.' She goes, 'Bill,' and I go, 'Aha!' And all my friends have called me Bill since then," recalls Nguyen. "My whole point was, I don't care what people call me. It's like, whatever's easier for people, I'm totally cool with it." He adds, "There is no Vietnamese person in the history of the world born with the name Bill. It's a total facade." ...This guy's a psychopath.

michaelochurch 14y ago

The takeaway from this is that VC-istan has turned into a celebrity economy. The most relevant trait of a celebrity economy is the importance of visibility (and the vicious politics surrounding who gets to be visible). If everyone (most relevantly, the investor community) knows you're a 5.5, that's better than being a 10 that no one has ever heard of. This has been my observation. I've met plenty of very successful founders (people that the HN crowd would have heard of) who are just not very impressive. It also gets under my skin when VCs say, "we don't invest in ideas, we invest in people". To which I say, "then most of you should be fired, because you suck at that." Honestly, VCs are a lot better at picking ideas. Sure, a lot of these "social" apps are lame, but VCs actually do an excellent job of choosing what ideas to fund, given the constraints they face and their objective function (variance-agnostic expectancy maximization, 1-10 year payoffs). That they do well. On the other hand, they seem to be doing a lousy job of picking people (and at that, I would do a better job than 90+ percent of them).