Warn clients keen to invest in a startup that their money could end up subsidizing some guy’s lunch.
It’s a strange thought, but New York Magazine finance writer Kevin Roose points out that many tech startups—like San Francisco’s SpoonRocket, which delivers gourmet food—are taking losses on their products and services, at the expense of investors and bricks-and-mortar competitors.
The strategy is to build a company’s customer base now with deals and raise prices later. In the mean time, the company subsists on venture capital. Established competitors who don’t have deep-pocketed investors can’t compete, and eventually fold, explains Roose.
The problem is, it’s hard to distinguish between companies that are strategically profitless, and the ones that won’t have earning potential down the road.
Read more here.