![]() ![]() Their research may also discourage venture predation outright. Wansley’s and Weinstein’s insight could transform the assessment of predatory pricing cases in the courts. “I don’t think most VCs come into an investment thinking ‘we’re gonna win with predatory pricing.’ But I think once they have an investment where it seems like there’s some growth potential, and they know that consumers are very sensitive to cost, then all of a sudden, predatory pricing looks attractive,” he added. Still, it can be a tempting “fallback strategy,” Wansley said. In fact, they think it’s relatively rare and that this is a “recent development.” After all, a lot of things have to go right for venture predation to work at Uber’s degree of success. To be sure, Wansley and Weinstein don’t believe that every venture firm is actively engaging in predation. And in turn, the lack of market competition results in lower-quality products. This harms the consumer, too, by reducing choice and raising prices. “But if there was never any real technology to begin with, we question whether it’s creating any value.” “If a company is not profitable, then you have to ask, is social value being created? And if social value is created trying to develop a technology and it just never really works, that’s okay because there’s still important learning done there,” Wansley said. Venture predation is just plain “wasteful,” Wansley told Fortune. Among those costs is the harm to innovation.īy misallocating capital towards anticompetitive practices rather than socially-beneficial and productive products, venture capitalists-who often claim to help founders transform society through innovation-are actually stifling innovation. ![]() Wansley and Weinstein argue that there is a tremendous social cost to venture predation. ![]() “They seek out startups with the potential for rapid, exponential growth and push them to take risks to realize that potential.” Harm to innovation The unpredictable likelihood of seeing returns “makes VCs focused on upside potential and relatively insensitive to downside risk,” the authors write. But Uber never had a superior product or cost efficiency, according to the authors, and in order to maintain its market share against Lyft and other ride-hailing services, it had to maintain its low prices. “They just need to create the impression of future profitability, so they can sell their shares at an attractive price,” Wansley and Weinstein write.įor instance, Uber, one of the main examples in their research, raised $24 billion from investors and used some of the cash to subsidize cheaper fares for riders and higher pay for drivers, quickly driving taxis out of the market. But if you’re a venture capitalist, it doesn’t matter. The key point here is that cutting prices below cost is unsustainable for a company. Then, once the startup has a dominant market share, the venture capitalists, and often the startup founders, cash out through an acquisition or initial public offering by selling their shares to investors who believe the startup can recoup the costs of predation. Next, the startup uses its stockpiles of cash to price its goods and services below cost, eliminate competition, and rapidly seize market share. First, venture capitalists load up a startup (the “venture predator”) with money. Venture predation is a three step strategy. ![]()
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