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Circle of Competence Issue #78

QUOTE OF THE WEEK

Tricks and treachery are the practice of fools that don’t have brains enough to be honest. – Benjamin Franklin

FOOD FOR THOUGHT

Insights on VC pricing: lessons from Uber, WeWork, and Peloton (Musings on Markets)

Damodaran wrote a wonderful piece this week on the pricing of current IPO's and focused on Uber, WeWork, and Peloton as particularly notable examples of market froth where revenue growth is more important than a path to sustainable cash flows:

"After all, the most successful user-based companies, such as Facebook and Amazon Prime, have shown how having a large user base can provide a foundation for new products and profits. However, there are companies that focus just on adding users, using badly constructed business models and pricing products/services much too cheaply, hoping to raise prices once the users are acquired. MoviePass is an extreme example of user pursuit gone berserk, but it had no trouble attracting venture capital money, and I fear that there are far more young user-based companies following the MoviePass script than the Facebook one."

This, to me, was the key point in his argument. Bill Gurley, the notable VC investor, has wondered aloud whether some of the current tech businesses are pricing their services at $.50 on the dollar to fuel growth. My only question for this type of business model, from an investor's perspective: does it really seem that Uber (competes with rental car agencies and Lyft), Peloton (a fancy internet bike/treadmill/fitness company), and WeWork (a short term office rental company with emerging competitors) have pricing power and ancillary opportunities that will result in a path to profitability going forward? As Damodoran points out, they certainly don't spell out a path to sustainable cash flows in their S-1, forcing investors to question whether or not their business models will be sustainable in the long run. Speaking of sustainable business models...

MoviePass to shut down after September 14th (The Verge)

MoviePass raised $70M, charged users the effective price of one movie per month, and paid variable costs on each movie watched - is it any wonder that such a business model would fail from the beginning if carried forward ad infinitum? Of course, there were high minded visions of putting pressure on theaters to share more revenue if MoviePass drove higher attendance and to use data they collected to offer ancillary services, but I mean, come on: