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Tell HN: Unicorns aren't ad-supported
131 points by Animats on Oct 12, 2015 | hide | past | web | favorite | 59 comments
Looking at the "Complete list of unicorns"[1], something stands out. Out of the top 50 startups by valuation, only three, Snapchat, Pintrest, and Vice, are ad-supported. The others all sell a product or service paid for by its users. Advertising may have powered the first dot-com boom, but it's not powering this one.

[1] https://www.cbinsights.com/research-unicorn-companies/

Startups are the penny stocks of the 21ht century. Buy 4% of a company for 40 M$, talk a lot about how this company is valued at 1 B$, wait until enought people belive it, make an IPO, take the money and run (a.k.a. pump and dumping). Would Jordan Belfort still be in business he would high probably be a VC.

You might be right, except that very few are going public compared to historical numbers.

Right, but most VC's want an exit, acquisition or IPO. They are not in it for the next 20 years or so. They are waiting for the right market conditions. Which happens when the public really buys the hype and will spend their money buying up stocks after IPO. They can't go public preemptively.

Anyone else surprised by Blue Apron and Hellofresh making the list?

I can't imagine there are two multibillion dollar food recipe delivery subscription companies.

Is this as crazy as I think it is?

HelloFresh has a montly sales of 20 million. Lets assume they get a margin of 40% (which is just my guess). Then they can pay off these investments within 31 years. And I did not even consider their rapid growth.

40% sounds hysterically optimistic. Typical margins in the restaurant business are around 3%, and while HelloFresh's model and costs are obviously pretty different, they're still grappling with restaurants as competitors and dealing with many of the same problems: supply chain management, perishable product, hygiene and quality are a major concern, labor-intensive business, etc.

Also, given the rate at which HelloFresh is throwing around free boxes and discount coupons and special offers here in Australia, I would be astonished if they're profitable at all.

Its a massively profitable business model (at least once you've got the initial momentum building via discounts and freebies out of the way).

Lets look at their "Classic Box" (https://www.hellofresh.co.uk/food-boxes/classic-box/), which is £39 a week for three meals. I priced up what I could see of the box contents using Hubbub (https://beta.hubbub.co.uk) - largely because I work there, and so know my way around, and it came to a little over £20, and that's without any real effort to match the portion sizes they're shipping, I could probably get it down to more like £15 just by buying just the amount of each ingredient needed for the meals being made, and going direct to the producer rather than via high street shops who are going to be adding their own margin.

That leaves, pessimistically about £20 to cover delivery, and the customer's share of central costs such as recipe development, packing, and the usual business expenses of a web based company. At the sort of volume they're doing, I could see them easily making 40% profit, and potentially more than that.

So the question should now be, do they have a sustainable competitive advantage, or are these high profit margins vulnerable to being competed away?

The only real advantage they have at the moment is momentum, and lots of VC money allowing them to survive much higher customer acquisition costs than otherwise. Otherwise, they're a specialised variant of online grocery ordering, which at least in the UK is a huge and very competitive market. They even have the advantage of being able to mail orders, because they're not trying to deliver anything frozen, so logistics is essentially just a case of negotiating a decent rate with a courier.

I'd be really surprised not to see quite a few companies pop up in the same sector, there are already a couple I know of, possibly targeting particular niches such as oriental food.

"Typical margins in the restaurant business are around 3%"

But restaurants have much higher real-estate costs, typically need more staff, need to stock a wider range of product... plus, product that spoils in customers' fridges was still paid for.

"Also, given the rate at which HelloFresh is throwing around free boxes and discount coupons and special offers here in Australia, I would be astonished if they're profitable at all."

If they're a high growth company in a niche with high growth competitors and sticky customers, being profitable at all would be a horrible move.

They are not (directly) competing with restaurants, but with supermarkets. They have clear benefits above supermarkets, as they do not have to throw away food. They directly send it to their customers. Furthermore, their food prices are a lot higher than buying it yourself in a supermarket.

HelloFresh buys in bulk, so spices/nuts etc. are especially packed for one box. Which becomes really inexpensive if you serve the same kind of food world wide. This massive globalization is (or will be) their competitive advantage.

It depends if you are talking net margins or gross margins.

The previous poster's calculation of taking 31 years to earn a billion at 40% of $20m/month assumes net margins.

Hellofresh is a Rocket Internet clone, so not too surprising that it looks exactly like Blue Apron.

Not a clone. Hellofresh was founded in 2011 ( http://goo.gl/Dct4ZY ) and BlueApron in 2012 ( https://goo.gl/gCQ3SI )

"HelloFresh is actually a clone of Swedish company Middagsfrid"


Food is pretty important in people's lives.

That doesn't stop ~60% of new restaurants from failing, though.

It doesn't stop grocery stores from having something like 1% margins, either.

I'm surprised by the dearth of companies with manufactured products, especially since this is an international list. All I see are the 6 listed as "hardware" + SpaceX.

Edit: plus Trendy and Theranos and probably a few more from the other categories.

After working on hardware teams in various capacities for 6 or 7 years, I'm not surprised. Startups need momentum - especially massively successful startups. And hardware, at this point in time, isn't something that you can easily build momentum with.

Don't get me wrong, I don't think this is because of any inherent difference between hardware and software. Sure, the requirement to physically build something adds a bit of a delay, but computer simulation is so good these days that the actual building bit is pretty infrequent. Plus, turnaround time is usually pretty short - two weeks lead was pretty standard for the shops I've worked with and at.

No, the problem IMO is that frankly, our software is shit. The end users of, for example, Solidworks, aren't the people paying for the software, so there's no direct market feedback. Mechanical design software was some of the earliest software ever written, and it's been some of the slowest to change. The hiccups are negotiable if you're working serially and alone, but the second you want to do parallel development on something, or to collaborate with anyone else, you're stuck throwing workaround after workaround on an already slow process. And then there's the catastrophic state of CAM software, BOM integration, inventory management, keeping the books on all that... everything is its own walled system, nothing talks to anything else, and everything sucks. I've spent literally days before duplicating information between Arena and Solidworks drawings -- and they even actually have an integration.

I'm wholly convinced hardware unicorns are so rare because the toolchain we use to build hardware is so bad. It stays bad for historical and short-sighted economic reasons. That is to say, the whole situation is ripe for change. And it's not hard to do, either: I coded up 85% of an MVP for a solid model merge tool that would make solidworks files more or less git compatible in just a month or two. If you want to play with that, it's a hacked-up VBA macro called smgimport/smgexport available here: https://github.com/Badg/SolidworksUtils. I have a lot of thoughts on how to do this right. If you're working in this space and want advice, I'm happy to help.

I think your point regarding how bad hardware-design software is correct.

But I think that understates the many other problems with hardware.

Just off the top of my head, the following are problems that are incredibly hard to solve for any new hardware company:

Distribution (how do you get your device into the physical and online stores where people buy)

Logistics (how do you bring the parts together, make sure you always have the correct parts, ship them to distributors etc)

Fast followers (If you do have a good device, why can't an existing manufacturer copy what you made and use their better distribution to outsell you and their bigger scale to get better prices on parts?)

Regulation (Many hardware devices need certification of various kinds before you can even try to sell them. I'm not opposed to this, but it is harder than in the software world)

etc, etc

So I am definitely making a development-centered critique. Partly that's because most of my experience is in development, and I have very little experience in high volume product or DTC. However, I also think that the software problem is a whole lot wider than design, and that the state of software for hardware companies as a whole (including logistics!) is abysmal.

Distribution of physical product to stores is something unique to consumer goods, and for physical hardware I think that landscape is currently experiencing a great deal of change. Even ignoring marketplaces like Amazon, we're starting to see the emergence of distribution / fulfillment as a service, and the burden of entry into the online retail market is much lower. Many very successful hardware startups have gone in this direction first, only arriving at brick-and-mortar retail stores once the company is large enough and established enough to spare the resources to keep that up.

Logistics and supply chain management are basically managed by software at this point, but because there's no effective integration between software (even packages that have the integration botch it) means that it's actually in some ways made into a harder problem because the data is stored in 10 "convenient" places rather than a single unconvenient place.

The fast followers / competitors problem is, I think, actually a bigger problem for the software industry than the hardware industry, with the exception of offshoring. If you offshore, particularly to China, and don't have a very good relationship with the factor(ies) you're working with, this is a very real risk, if the entirety of the widget is being produced by that one factory. With more complex widgets, this risk is substantially mitigated. In general I'd say this is more a function of the quality and uniqueness of the product coupled with your execution on it than something inherent to hardware. This is not, however, a problem that good hardware software will solve. The ability to rapidly develop things will actually make this worse. I don't have a problem with that! Execution is everything, even in entrenched industries, and Davids have always managed to topple Goliaths.

Regulation is also, in my mind, being held up by software. There's certainly a component that's out of your control - once you fire off the paperwork, you just sit and wait - but there's a lot you can do to smooth the approval process on your own end, and a lot of that has to do with proper design documentation, which is once again suffering from terrible software.

I'm not trying to say that having better software for hardware will fix everything. It certainly won't. But, I do think it is the single greatest limiting factor by far in hardware production. I would estimate it consumed 80% of my productivity or more. It's an astounding timesuck.

For something this complex, you may have an easier time with C#. All of your enumerations get Intellisensed, for example.

I also recommend creating a standalone C# application, rather than trying to fit in the confines of a typical Solidworks Macro. Sure, you don't get a little button in the toolbar saying 'Export/Import', but instead you have the full flexibility of a console (or graphical diff potentially) application.

In the short term (I noticed your last commit was 7 months ago), you may/may not know about the Solidworks 'Compare' utility. In 2015, Tools->Compare. In the Solidworks Tutorials there is a small and trivial example of using it.

Interesting idea overall of trying to encapsulate a SLDPRT as a yaml. I imagine that assemblies are going to be a bear in this fashion.

Have you looked into trying to reverse the SLDPRT file format? It must be possible if other companies are offering the option to import a SLDPRT (I believe the last time I used Creo there was a MVP importer).

I'd definitely have an easier time overall with C#, no questions asked. I actually tried it briefly, but after a week of not being able to get a development environment communicating with Solidworks, I decided it was unjustified for making an MVP.

It's actually been a whole lot longer than 7 months since I worked on it. The whole thing was basically one monolithic commit I did after writing the snapshotting utility while doing release documentation for a product I was managing. Since then (and even while I was working on it) I've thought of a lot of much better approaches to this than I was taking with the macro. The macro was just a very early proof of concept. I'm also not totally sold on the yaml choice, I can see a lot of reasons to go with an open binary format -- but I think part of the success of JSON has been predicated on its choice of universally-parseable text. The ultimate goal would be to create a new CAD program marketed towards the sub-$100 software market. I'd couple that with a version control system specifically tailored (even if just in UI) to a hardware workflow, and then get recurring revenue from a github-like service. Really neat project and I'm confident I could execute on it successfully.

Except I've actually put this project on hold while I work on something more important to me - creating, implementing, and financially sustaining an open, encrypted, distributable social networking protocol (https://www.ethyr.net/blog/muse-101.html). Fixing solid modeling is an awesome and potentially very lucrative endeavor, but it's much less timing sensitive (and much less personally meaningful) than my current project is.

Why? It's pretty hard to build defensible margins on hardware. GoPro is the last company I can think of that did it and they have plenty of challengers.

Certainly that's the case in crowded industries like personal electronics manufacturing, but there's plenty of room for companies with new technologies or new markets (e.g. DJI with drones or Magic Leap with VR Tech)

Clearly VCs are underfunding advertising backed companies.

Based on the past 150 years of so of history, ad-supported companies have consistently delivered excellent returns. First the newspaper empires, then TV, then Internet.

I agree. Advertising leverages an unknown variable pricing structure to it with potential deep pocketed buyers. As long as you have the "viewers" you are golden. As with everything it is better when someone else is paying than when you are buying.

Don't you think there's a bit of a selection bias there?

Well.. yes? Isn't that sorta, kinda the point?

Additionally, exactly the criticism could be made for this list.

The big problems the world/USA are currently working through are

1. Preventing Global Warming / Dealing with what's already occurred etc

2. Unaffordable / low quality healthcare etc

3. Income Inequality / Affordable higher education etc

There's a bunch of big problems, but I bet you could make the case that they go in those 3 categories above. The point is none of these are solved by having a fancy animated website that makes money via ads. Facebook/Google/Reddit etc created a bunch of value by connecting everyone. They were a necessary unicorn for the time, and they can still be replaced.

But if you're looking to create a unicorn, you need to set your sights on solving the big problems.

I would ignore #2. That's going to end up single-payer (as it should) in the next 5-10 years.

How come Valve isn't on the list?

Valve has never taking funding[0] - which is how the Unicorns got their valuation: they were funded at a particular value (eg in AirBNB's April 2014 round they took $475M at $10B valuation[1]).

[0] "Valve is self-funded.We haven’t ever brought in outside financing." pg 3, http://www.valvesoftware.com/company/Valve_Handbook_LowRes.p...

[1] https://www.crunchbase.com/organization/airbnb/funding-round...

Interesting. So that means Gabe Newell owns essentially all the stock?

Probably because they have zero intent to IPO, where unicorns do.

VICE is awesome ... I don't care how they make money, as long as they bring news to the people.

It's my personal unicorn!

I thought journalism was supposed to be unbiased.

It's supposed to be at least true... VICE frequently fails this test in subjects I am familiar with. For example, I watched thier ISIS documentary on the weekend, it's full of staged battles.

But I admire them, they have figured out post mainstream post adblock monetization of news.

This is true for all journalism: as soon as it's about something you know anything about, you will notice there are lots of errors.

There's no such thing as unbiased people. Admitted bias is better than pretending to be unbiased.

VC money powers them.

Not for most (or at least many)

Airbnb, Xiaomi and Palantir are probably profitable now. That's 3 out of the first 5, and I suspect that is broardly correct for most if the list.

Palantir takes regular enormous infusions of VC money. My guess is that they are in expansion mode still, but aren't profitable (or not profitable enough to bankroll their own expansion).

A lot of these companies are taking VC money to pay out the founders and/or early employees.

Atlassian is a good example[1]. Early employees sold their shares directly to the VC fund - none of the money went to the company.

That's pretty common - in the couple of years before Facebook float VCs were buying their way in anyway they could.

[1] http://www.smh.com.au/it-pro/business-it/atlassian-valued-at...

That's unrelated to to their business models.

Until you reach the point where you don't have to close a new round each year to keep meeting payroll you don't have a business model.

I'm not quite sure what your point is. Or I know what your point is but I'm not sure how it's related to discussion of ad-based vs paid because it's true for both, ad-based as well as paid.

I think the OP's point is that when the VC money is gone, they might have to go towards adverts in some way if they struggle to monetise otherwise, so it's too early to say that they are not ad-supported

Heh, "Updated in Real Time", like a unicorn flight tracker board.

Yeah, Palantir is selling a product. The product consists of information about you. But they have no ads on their page, then this must be ok.


Facebook is a publicly traded company. "Unicorns" are private companies valued at over $1 billion.

Google is ad supported. And the ultimate unicorn.

"Unicorns" are private companies valued at over $1 billion.

Google is.

Interesting point. Apropos of not much, a lot of them use paid advertising in some form to drive awareness of their products or services, though.

Though, I haven't heard of approximately 95% of the companies listed...

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