
The rise of the “successful” unsustainable company - yannickmahe
http://blog.asmartbear.com/unsustainable-companies.html
======
cs702
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>

[2] [http://www.forbes.com/sites/nathanvardi/2012/10/05/zynga-
kee...](http://www.forbes.com/sites/nathanvardi/2012/10/05/zynga-keeps-
crashing-but-mark-pincus-is-having-a-great-year/)

~~~
cs702
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.

------
api
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.

~~~
pg
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.

~~~
tptacek
I am with you on how misplaced the enmity towards --- well, at least Groupon.
But there have been well-known public companies that did badly that were
essentially scams, such as during the channel stuffing scandals of the late
1990's. So while I sympathize with your irritation at the "Groupon is a Ponzi
scheme" meme, the last sentence of your comment is simply wrong; it's wrong
directly (a counterexample would be Sanjay Kumar) and it's wrong in what it
implies.

~~~
pg
If anything that supposed counterexample supports my point that the
accusations these people casually make in HN comment threads are so much more
drastic than they realize that they're their own reductio ad absurdum. Running
a public company that's a scam tends to entail criminal behavior. Especially
nowadays.

~~~
tptacek
CA didn't start out as a deliberate scam, and continues to run today despite
being essentially a scam for many years. The companies we're talking about
today --- Groupon, Zynga --- don't have long enough track records as publicly
traded entities for us to presume they're run in good faith; variants of the
things that got Kumar sentenced probably aren't even crimes when they happen
during mezzanine funding, when the people being "scammed" are sophisticated
investors.

You implied, Zynga isn't a pump-and-dump scheme because Mark Pincus still runs
it, and nobody would inflict the management of a poorly-performing public
company on themselves. Well, that's just not true.

There are better arguments against the assertion that Groupon is a pump-and-
dump scheme than "it must suck to be Andrew Mason these days" (it does not
suck to be Andrew Mason, by the way). For instance, Groupon was open about its
liabilities and the enormous risks it faced, and its whole industry sector was
very carefully scrutinized.

I'm done arguing this point. My nerdly brain just couldn't handle the idea
that being Andrew Mason in Q4'12 is so painful that simply holding his job
imputes him credibility.

~~~
mkramlich
> My nerdly brain just couldn't handle the idea that being Andrew Mason in
> Q4'12 is so painful that simply holding his job imputes him credibility.

Agreed. If Pincus and Mason are having a hard time now, I'm sure they can have
a good cry in their mansion or on their yacht, weekends in Aspen, luge lessons
in Zurich, private Zoroastrian monk mentoring, perhaps a custom birthday song
written by the Rolling Stones -- you know, the typical way of handling such
hard times as these.

------
mindstab
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?

~~~
scott_s
Twitter sells access to its raw firehose. You may not be willing to pay for
it, but many large companies are.

~~~
bane
Right, it's akin to a wire service for news organizations, and it's priced
similarly not surprisingly.

------
hammock
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.

~~~
nkohari
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
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.

~~~
jasonlotito
> Actually it does work that way.

And then you go on to provide an example completely opposite of what he was
saying.

~~~
wtvanhest
I took both the poster I replied to and the poster above his under
consideration when I replied. Finance doesn't require all companies be
sustainable, only that some companies grow enough to offset losses taken on
unsustainable companies.

It is a general principal of how investments work.

~~~
nkohari
In my understanding, the person I was replying to was saying that the actual
value of equity isn't relevant, because capital cycles through the economy. I
was saying that was absolutely not true, because the only reasons anyone would
buy equity is to either 1) because they expect the equity to appreciate in
value, or 2) to receive dividends or profit-sharing of some kind.

The situation you described is a reasonable diversification strategy, but you
had the expectation of appreciation with each purchase. You hedged your bet,
and lost less, but you still believed that each position would appreciate in
value.

~~~
wtvanhest
I believe the OP is referring to the industry life cycle.
[http://www.investopedia.com/exam-guide/cfa-level-1/equity-
in...](http://www.investopedia.com/exam-guide/cfa-level-1/equity-
investments/life-cycle-analysis-industry-life-cycle.asp#axzz2AAZvInp0)

If the OP is referring to that cycle, his question seems valid to me.
Investors choose companies at various stages because they believe they will
“exit” (not just VCs, all investors) at a higher level than today. When a
company gets to the end of an industry life cycle, their price/earnings
multiple is compressed and “value” investors step in thinking their new
strategy will let them enter a new market etc.

Every investor is taking risk and whether the timelines are short 2 to 3 years
or long 3 to 10 years before the investor expects the company to go in to
decline, every professional investor understands that someday the vast
majority of the businesses they invested in will fail. (I’m talking about
every type of investor, even stable growth mutual funds). Even if that means
it takes 20 years to fail.

I understand my point is highly nuanced and somewhat theoretical, but it is
grounded in finance literature and the OP’s question seemed more valid than
deserving the response, “that’s not how finance works”. I guess I was hoping
someone smarter than I would come along and propose some new framework or
possibly add some insight so I rebutted your post.

------
wtvanhest
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
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
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-
ye...](http://www.turnaroundletter.com/largest-bankruptcies-this-year)

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
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.

------
nsns
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".

~~~
rndmize
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.

------
ergest
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
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
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.

------
nicholassmith
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.

~~~
grey-area
_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?

~~~
patmcguire
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.

------
arbuge
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.

------
zwieback
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.

------
joonix
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.

------
welebrity
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?

------
javajosh
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! :)

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

~~~
brianobush
I think that he is referring to a second "rise of"

------
webwright
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.

------
001sky
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.

------
OldSchool
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
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?

------
jacques_chester
My experience with WPEngine was terrible.

~~~
GFischer
Could you elaborate? / Have you already elaborated on a blog post? :)

~~~
jacques_chester
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>

Anyhow. It turns out that I'm not alone.

~~~
GFischer
Thanks, just saw it as the top story on HN, so I guess you're right.

------
dochtman
Also, Facebook.

------
michaelochurch
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).

