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This is why Tech stocks are tanking

Unit economics have always been a bit like gravity. They bring everything back to earth.

For 5-15 years tech companies have been burning vast sums of cash in order to try to launch, rather like a rocket going into space.

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There was always this assumption at some point they may reach orbit. That the network effects, or moats or strong brand recognition, or reduced competition, or economies of scale or a new technology, would somehow make gravity no longer apply.

For a while, near endless, near free cash has allowed companies as varied as Allbirds, Spotify, Overstock, Pinterest, Snap, Chewy, Wayfair, Casper, Glossier, Carvana, Zillow, Lyft, Warby Parker, WeWork or Airbnb, to lose money each and every quarter. Often with loses rising as revenue increases. Their cumulative losses to date are vast, Uber ($29.1 billion), Airbnb ($6.3 billion), WeWork ($14 billion), Lyft ($8.3 billion), Teledoc Health ($8.1 billion), so how many years before these funds could ever be returned with future income?

The free cash acted like rocket fuel, meaning while gravity wasn’t there, it didn’t matter, as all that mattered was progress towards growth. We could suspend judgement and saw all cash raised as the way to get users. The higher they got, the better. The more they raised, the more proof in the model.

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And analysts looked to Amazon as the poster child for this, it always seemed that once a size was reached, costs could be reduced and profitability was there. Netflix offered similar hope, and more recently Tesla showed economies of scale can work.

The problem is, all this thinking was based on the idea that being a “tech” company magically made the future bright, that selling furniture online, or shoes, or cars or shampoo online was intrinsically better than selling instore.

That streaming music, had to be a better business than making music.

That being a marketplace, had to be better than owning assets.

That having customer data would change everything. That being in a fast growing sector, is more important than one where tech is that helpful.

We had mail order catalogue shopping for nearly a century, but it slowly flopped

We may have to accept that technology in some categories doesn’t change everything, in particular, it doesn’t allow bad ideas to become good. Often it’s simply lubricating, rather than reinventing biz models. It’s often following the same mistakes as the past, as if smartphones changed logistics or human nature.

The sad thing is we tarnish all “tech” companies with the same brush, companies as intrinsically flawed as Carvana or Wayfair, burning cash hopelessly on acquisition of customers they shouldn’t want, are placed alongside companies like Lemonade or Roku, or Ocado, which actually use tech in a way that totally changes the economics and biz models of a category.

I long for the day we can consider how much of a difference tech makes to categories, and judge companies on this basis



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