Angst towards unsustainable startups
Imagine a board with 1000 dots, each representing a business idea. Only a few of these dots correspond to ideas that are sustainable and profitable. Entrepreneurs strive to find these few profitable dots as there is disproportionate reward for finding one. A good dot creates a profitable enterprise, aligning the incentive of all stakeholders -- founders, investors, employees and customers. Everyone is participating in a positive sum game and thus becoming better off.
If we remove the constraint of idea being viable economically, every idea becomes a good idea. Any idea, can attract significant investment, and sustain for years if not decades.
So what is wrong if that happens? Why should one be concerned about startups burning money to run their business?
There’s nothing wrong with running a business that is unsustainable. Infact many businesses are bound to be loss making for years until they achieve profitability. AI companies themselves are like that. It starts becoming concerning when these businesses start having positive sum outcome for few stakeholders consistently. If the idea is not viable economically, the game is inherently negative sum. And a negative sum game ensure there is a loser. If the same stakeholder is losing every time, then it becomes unfair to them.
If the game was inherently negative sum, it shouldn’t be able to align every stakeholder involved. If I told you let’s play a game where I win and you lose everytime, you are not aligned with me, and you wouldn’t play that game.
You may still play a zero or negative sum game if the outcome was random — that is why lottery exists. But if the outcomes of a negative sum game were biased towards one stakeholders, then it’s never a good thing.
The real losers in these scenarios are often retail investors, customers, and employees who invest time, money, and effort into what they believe is a growing and profitable venture.
The story of Theranos is a stark reminder of the perils of the valuation game in startups.
If founders or investors are consistently able to extract positive sums out of negative sum games, one would find more people jumping into these positions. This will become the default trajectory many would start imitating.
The broader implication of this dynamic is that it encourages a culture where finding a profitable and sustainable business idea is undervalued. Instead, the focus shifts to creating hype and securing high valuations, regardless of the underlying business model's viability.