Why Are Startups Losing So Much Money?

Well in tech there are also higher barriers to entry brought about by the anticompetitive behaviour of the incumbents. Hence startups need to invest more until they are profitable or are killed by the incumbents.

Imagine starting an ad-tech company now and in 2000. Or VR, Wearable, media streaming, hosting etc.

"If all you heard was VC hype, you could be forgiven for thinking that start-ups have driven American growth in recent years. Far from engines of American innovation and technological progress, however, the start-ups of the last few decades have yielded, at best, slow-burning losses for investors."

In some sense, HN is a steady stream of VC hype.

Because for some reason people who think a boiler plate app that tracks your suitcase is a $4 billion business.

I’m not saying the reasons in this article are wrong, but they feel like only part of the whole. A few other reasons, and this isn’t a comprehensive list either:

1. It takes a long, long time to go from launching a company to an IPO, the point at which you get access to adequate capital to invest for the long term. Google went public around 6 years after forming. The expectations of what it takes to be a public company are very different today, and highly conservative. The point of going public is to raise capital but it feels like you already have to be a mature late stage company to go public now. That’s why companies are waiting 10 years, and soon 15 years, to go public.

2. Companies could go public with sub-Billion-Dollar valuations not that long ago. Amazon wasn’t even worth $500 million at its IPO, and had only around 250 employees. Now you have to be a unicorn partway through your journey towards an IPO, and even then, most unicorns end up falling apart before becoming public.

3. These days, once you’re public, you’re under a lot of pressure to show ever improving financial numbers. Sure some companies are exceptions and are given room to invest for the long term, but that’s not typical. This is why many companies lose valuation after IPO. It’s hard to keep growth up quarter after quarter to the necessary levels to defend a high multiple.

4. Incumbent companies are a problem in many ways. One way is that they control distribution channels and can take away the margin of smaller players that have no choice but to go through the incumbents. Look at Apple not paying anything for OpenAI on its phones. Or Apple and Google charging unjustifiable percentage based fees for apps because of the lack of competition. Or how Walmart bullies manufacturers that want to sell their products into basically zero margin. Or the seller fees Amazon charges. And so on.

5. There aren’t many real moats. You can struggle and iterate and find product market fit only to have some big company copy your great idea. Or maybe some other startup with more connections and better funding copies you. But we’ve seen big tech copy small players many times over now. Microsoft copying Slack with Teams and then giving it away as part of the Office bundle is a great example of the abuse.

6. As products and services have become better, they set a higher bar for new companies to surpass. If some existing product is the product of thousands of people working for tens of years, it’s hard to break in. There isn’t a real way to incrementally iterate to the point of being competitive before running out of money.

7. There is competition from low cost countries that make many categories of products impossible to innovate in, if you are in a higher cost area.

8. Regulations. Sure, many of them were created with the best intentions. But regulations end up being easy for big rich incumbents to meet and impossibly expensive for startups. Talk to founders of any startup in healthcare or fintech and you’ll find they either are in a constant struggle of losing money to achieving regulations or are crossing the line on not meeting them.

9. Taxes. Big companies know how to navigate them and how to minimize what they pay. They can play around with sophisticated schemes or simply balance profits and losses from different parts of their business to hold onto as much money as they can. A small company doesn’t have the time, resources, or even awareness to play these games.

10. Customers expect a lot for little. Consumer startups are hard because everyone wants things to be free. Business startups are better but hard to break into - it helps to have connections to purchasers at target customer companies. Even then, many businesses expect that they get things for free or a low cost just because they have little room to spend themselves. The really high margin megacorps are powerful enough to just build everything in house. So all you can go after is that middle group of companies. There’s only so much economy to chase as a customer.