The modern era is full of really impressive things. From sliced bread that doesn’t go stale, to fully electric cars, to healthy well-regarded delivery food you can order off of an app.
Would it also surprise you to find out of those only two have more income than expenses, one led to commercial profits, and one of those is already defunct? Sliced bread was profitable and competitively viable, and hence was widely adopted. Fully electric cars have yet to make profit (though Tesla does have substantial revenue, it still depends on venture capital and Elon Musk). Spoonrocket is no matter how well regarded in Yelp reviews, gone, kaput, etc. It certainly shows that good/impressive ideas need not be profitable. We can even look to high speed rail. Impressive? Yes. Cool? Yes. But it’s extremely rare for it to make profit. If we look at high speed rail as a public good with positive externalities, state spending could justify it. But there would be high speed rail across the USA if private firms saw money in it. If banks thought there was money in it, they’d provide the loans. These concepts are very cool, very interesting, and should they be profitable would potentially be game-changing.
Right now, that’s not where tech is. Tech, in my opinion, is largely pie in the sky, at least at the early valuation and startup stage. The encouraged model in tech right now differs pretty substantially from normal business models, form what I’ve seen. The following is admittedly a bit caricatured.
- Find a problem and a way to solve it (Ideally the solution is COOL)
- Acquire massive venture capital
- Keep on developing it, and continue to take on staff and venture capital
- Start considering how we’d make money with the product we’ve made.
- If we don’t know, just say we eventually will.
- Get really high valuation
- Find a problem which would be solved with a product or service. Think about how we’d monetize this.
- Get enough money to start business. Not oodles more.
- Figure out what needs to be done and hire people to do it.
- Try to figure out where money is being made/lost. Determine margins. If your product is losing money, it’s not worth staying in business.
- We only have 10 employees, and make limited money, hence no valuation.
Yes. tech does scale better than physical business. But fundamentally businesses have business models that are meant to be profitable. When people start businesses, that’s what they think about.
Tech at least claims to be different. Disrupting is just another word for “finding a niche and taking market share.” Tech hs allowed for huge growth, and certainly has been successful. But the trope in tech is we find a solution, we solve it, we disrupt the market. If there isn’t a demand for something at a price that will offset cost, it won’t be profitable. And my concern is that startups may be betting that if a solution is cool it’s profitable. And that just hasn’t borne out.
If somebody starts a restaurant and says “We may not be making money but everyone LOVES it, cause it’s cheap and good, all we need to do is raise the prices and lower costs and it’ll be super profitable” would be laughed at. This just doesn’t happen in tech.