Wednesday, May 10, 2017

Why Do Investors Keep Funding Insolvent Start-ups?

After taking a look at a post on The Verge about Snap Inc's latest round of losses for Q1 2017, it got me thinking about just how similar the investment environment is compared to the dot-com burst in the early 2000s. The resemblance is something to be concerned about.

For those who didn't or don't wish to read the source article, Snap Inc, owner of the popular social media app Snapchat, essentially doubled its losses for the first quarter of the year. During Q1 2016, they burned through $104 million in cash. This year, they burned through $208 million.

Snapchat had a $3 billion IPO last year, and their expenses continue to grow in spite of having great growth in revenue. Remember: Their expenses doubled in a year's time. Anyone with common sense knows that this isn't sustainable and the firm will never be able to turn a profit. Snapchat doesn't even know when they will, if ever, be able to turn a profit. They also are having trouble reaching their own audience for the purposes of advertising or otherwise revenue-generation in general.

I use Snapchat as a great example of the general trend, but they're not the only ones. Silicon Valley is known for the number of start-up businesses that it has, and equally for the absurd amount of venture capital that flows into the region. For me, all of this looks like another repeat of the dot-com burst in the early 00s. Too much speculation in any industry creates a bubble that's bound to burst eventually. It's happened with internet firms, it's happened with the housing market, and it's happened with the stock market. Based on recent trends, I believe that the stock market and real estate are going to crash again as well.

uBlock Origin: you decide what enters your browser
The default solution for these firms seems to be putting all bets on advertising as the way to generate revenue like it's the 2nd coming of Jesus or something, but smarter people should know better. Snapchat's userbase is composed mostly of teenagers, and of course, millennials. Young people, in general, have upset the ad market due to the ushering in of aggressive advertisement and content blocking software, such as the uber-popular uBlock Origin browser extension. This, combined with the massive amount of supply for advertisements in general, has substantially lowered the value of them. Millennials and teenagers despise advertisements, and placing too many into an app is a good way to make them consider other options. Good luck with getting them to pay for social media; I know I wouldn't pay.

What about native advertising, though? While there has been an increase in the use of "native" advertising, especially on YouTube, it requires more effort and is more difficult to perform effectively compared to standard, run-of-the-mill banner ads. Native ads also have the same opportunity of putting off an audience as standard ads but at an increased cost.

At the end of the day, I wouldn't invest in a firm like Snapchat. Personally, I believe the risk just isn't worth any potential reward, no matter how far it is into the long-run. They would need to create a feasible way to generate revenue before I'd consider themselves stable. I hope that they don't turn hostile against their userbase like other start-ups do, most notably (again, in my opinion) Disqus. When the investors at Disqus started calling their money back, they created a much more centralized version of their comment system that removed a lot of customization options for publishers/brands, all while introducing ads via the "discovery box" and almost forcing ads on every site that uses Disqus, including Techman's World.