There are other examples out there of companies with negative gross margins, but these two categories are where we’ve seen a lot of this kind of behavior. Again, the companies that are doing this are hoping that once they get to scale and users are “locked in”, they can raise prices. This results in fast growth but negative gross margins. And there are providers in the market who are not passing through the true cost, in effect subsidizing the cost of the service, to gain market share. All of these examples have a real cost component to them. It can be a service provided to startups, like the ability to ship via an API, or the ability to process payments via an API, or the ability to pay your employees or give them benefits. The idea is get users hooked on a home cleaning service, a ridesharing service, a food delivery service, or a gym roaming service by bringing it to market at a price point that is highly attractive and then, once the users are truly hooked, take the price up. Why would an on-demand startup take this approach? To build demand for the service, of course. It can be an “on-demand” service provider that subsidizes the cost of the workers on its platform so that the service seems like it costs less than it actually does. Which means they sell something for less than it costs them to make it. We have seen a tremendous number of high growth companies raising money this year with negative gross margins. The most likely scenario is the thing that has been driving growth (and valuations) for these companies ultimately comes home to roost. “There are a considerable number of unicorns that will become extinct.” “I do think you’ll see some dead unicorns this year” There’s been a lot of talk coming out of silicon valley lately about fast growing companies with high valuations that are going to face problems in the coming year(s).
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