The Rabid Capitalist

Professor Glenn A. Okun

The weak end of the venture capital industry, approximately 80 percent of firms operating today, employs a rigor -free investing process.  They are punch-drunk sailors that attempt to trade the private capital markets by throwing money at themes, not ventures.  They rely on manic acquirers and the initial public offering market to provide exits for these concept investments in order to bail them out of fundamentally unsound private companies.  While venture capitalists that play this game of musical chairs may make money occasionally, their counterparties often get burned.  The online meal delivery industry, a creature financed by venture capitalists, is a classic example of this approach.

The online food delivery space was a creature of the gig economy theory.  Platforms could match temporary workers on a one-off basis to do tasks as needed.  Gig businesses were based on the erroneous notion that the next generation of workers wanted to avoid commitments, prizing their freedom over maximum income.  These ventures relied on the idea that consumers would pay high prices for task-oriented services performed by itinerant laborers as a substitute for the customers’ efforts.

Many gig ventures, including food delivery firms, had a moment of high demand during the pandemic.  Necessity dictated that consumers pay for these services because lockdown conditions precluded their own efforts.

Venture capitalists threw kerosene on the capital destruction bonfire by funding these ventures in their pursuit of market share over profitability.  It should not surprise anyone that these firms were not only unprofitable during the customer acquisition phase when they bought market share with discounted prices subsidized by venture capital, but also during the last few years when customers refused to pay market prices. 

These venture capitalists have been culpable of backing firms with foreseeably bad business models and low perceived value, imitable service offerings.  Consumers have been unwilling to pay high fees for a low value-added service.  They readily have substituted their own effort in order to avoid being gouged.

The market share over margin approach has had a long history of failure, defined as bankruptcy or unsatisfactory return on investment.  During previous investment bubbles, venture capitalists funded the pursuit of eyeballs and clicks with subsidized, below-market prices, leading to the destruction of capital, jobs and firms.

The meal delivery firms, specifically Deliveroo, Just Eat Takeaway, Delivery Hero and DoorDash, have generated massive operating losses.  Investors have been abandoning their stocks as a result.  Massive investment losses have been incurred.

The aforementioned firms cannot generate acceptable financial performance under these conditions.  It is not surprising that they are abandoning their strategy or attempting product expansion strategy in the hope that they can deliver other goods for improved financial results.

The Rabid Capitalist anticipates that these companies are dead ends.  Venture capitalists deserve credit for funding start-ups with foreseeably unproductive strategies and business models.  Acquirers and public equity investors should avoid them.

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