The Decadence of Venture Capital: How Modern Unicorns Are Bred
By: Ilya Pestov
Tags: VC, Startup, Investing, Tech, Finance

This article was motivated by an excellent publication in The New York Times with the headline “Farewell, Millennial Lifestyle Subsidy”. The author of this work describes a golden time when everyone rode an extremely cheap Uber, got their laundry delivered by Washio, and their house cleaned by Homejoy. He recalls valets from Luxe and his experience of buying a used car, delivered to him in a giant bow by Beepi at a mystically low price. All these companies provided “investor-subsidized service”. Most of them simply burned tens of millions of venture dollars and closed, the survivors are raising prices.

For years, these subsidies allowed us to live Balenciaga lifestyles on Banana Republic budgets. Collectively, we took millions of cheap Uber and Lyft rides, shuttling ourselves around like bourgeois royalty while splitting the bill with those companies’ investors.

Back in 2018, the same author wrote that the entire economy was starting to resemble MoviePass, the subscription service whose irresistible, deeply unprofitable offer of daily movie tickets for a flat $9.95 subscription fee paved the way for its decline. Such companies trying to defy the laws of gravity with business models that assumed that if they achieved enormous scale, they’d be able to flip a switch and start making money at some point down the line. This strategy is called “blitzscaling” and only a few manage to implement it, but many want to try it.

The columnist’s culminating thought is refined especially: “hiring a private driver to shuttle you across Los Angeles during rush hour should cost more than $16, if everyone in that transaction is being fairly compensated. Getting someone to clean your house, do your laundry or deliver your dinner should be a luxury, if there’s no exploitation involved. The fact that some high-end services are no longer easily affordable by the merely semi-affluent may seem like a worrying development, but maybe it’s a sign of progress.”

Continuing the topic, there is an interesting article “DoorDash and Pizza Arbitrage”. One man noticed that DoorDash was selling pizza from a friend’s restaurant for $ 16, even though it cost $ 24. The service paid the restaurant the full amount and there were dozens of such orders. That is, DoorDash actually subsidized 30% of the cost of pizza to its customers. How do you like this growth hack?

It’s no wonder that the historically profitable GrubHub has gradually gone show losses in income statements. I wrote about the wild dumping by Uber Eats, Postmates, DoorDash in vc.ru (like TechCrunch in Russia) yet in 2019. This was evident from the numbers and statistics, but many pointed out to me the network effect and other fantasies of exclusivity that theorists make up about “unicorns” that grew up in a couple of years in order to somehow justify their chronic losses.

Two years have passed, and now food delivery services are intensively raising commissions along with the prices of the menu itself. Their service fee, depending on the location, has increased by tens and even hundreds of percent. However, DoorDash is still in terrible losses. And many people continue to believe in the network effect and the permanent improvement of the business model due to this, but it seems more that the “disruption” consisted only in selling $1 for 70 cents.