Reefer Madness

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\"jet.comPardon my ‘60s pot metaphors of late.  There’s just maniacal, seemingly drug-induced behavior happening and it seems to be going viral across many industries.

In particular, I think there’s a lot of legalized pot being passed around among Internet start-ups, and their investors are smoking the stronger weed.  I mean, look at this photo of Marc Lore, founder of Does he not look high as a kite and giggling his brains out? Hey, he just snookered his fellow investors out of $225 million over the past year for a hallucinatory, cockamamie idea that, in my opinion, will go up in…well, smoke.

This isn\’t going to end with the initial $225 million big ones.  Apparently “Marco” rolled an even stronger joint for the good old boys and expects to raise hundreds of millions in additional capital by year-end. This could raise’s value to $3 billion, up from its current value of $600 million. And, by the way, a recent Wall Street Journal article said, “ has possibly the highest valuation ever among e-commerce startups before their official launch.” Huh?

I know. I know.  You’re waiting to hear what this fantastic business is.  Well, guess what?  There is no business.  That’s one of the symptoms of reefer madness.  And if they keep smoking the stuff, who knows how high the valuation may go.  However, for it to continue to climb, the investors have to keep smoking and dumping more capital into the hallucination. But once reefer madness reaches its peak, the bubble pops, or keeping with the metaphor, the hallucination does go up in smoke.

The Hallucination Called

Talk about madness. This guy Lore is combining parts of the Amazon financial model (you don’t need to make any money, therefore, you can undercut all competitor’s prices) with part of Costco’s model (charge an annual members-only club fee which is ultimately intended to be its only profit).  “Ultimately” is the operative word.  Amazon, after more than 15 years, still isn’t making any money.

So what’s Lore’s strategy for  Go directly after Amazon’s customers by underpricing them on millions of items?

Think about this through the smoky haze. Amazon isn’t making any money and is underpricing everybody in the world. And now is going to underprice the “underpricer” of all times. Plus, he claims he will be profitable in 2020 (that’s five years from now folks), generating $20 billion in revenues, including 15 million membership customers at $49.99 per year — or $750 million in profits.  Reminder: It took Amazon 15 years to lose its way to about $90 billion in revenues, and they’re still losing money.

Road to Innovation: New Money-Losing Models

It gets worse. Lore is racing to scale the business, which also requires enlisting millions of third- party products or retail partners on the site.  However, while doing so, if customers order something that does not have in inventory, a jet employee will order it directly from the third-party retailer’s site (Nordstrom for example), to be shipped directly to the customer.  So, Jet will end up paying the difference between the price posted on its site and the price paid (by Jet) to Nordstrom.  Plus it will pay higher shipping costs, since its deal for the members-only annual fee is free shipping and returns for orders over $35 —  on top of its rock bottom prices.

By the way, Nordstrom has subsequently demanded to be taken off of Jet’s site.

Jet calls this third-party model their concierge service.  I call it a money pit and yet another innovative way to lose even more money.  But hey, those doped up investor pals of Marco are going to just shovel more capital his way.

How bad is this concierge model?  Lore figures about a third of Jet’s business will be generated from this ridiculousness until he reaches some magic number of revenues, at which time Jet will have all the products, brands and third-party retailers it will need to fulfill all orders.

The Wall Street Journal tested this model of craziness. The projected concierge service resulted in Jet losing about 50% on the total sale. When scaled to the 2020 $20 billion revenues goal, if a third of that estimate is through the “money pit” service, you do the math.  The loss number is too big to get my brain around.

As a test, reporters from the Journal bought 22 items from Jet. What happened?  The Journal reported, “Twelve were shipped to the Journal by retailers such as Walmart, JC Penney and Nordstrom, according to sales receipts. Jet’s prices for the same 12 items added up to $275.55, an average discount of about 11% from the prices Jet paid for those items on other retailers’ websites. Jet’s total cost, which also includes estimated shipping and taxes, was $518.46.”

Am I reading these numbers correctly?  Is this a loss of about 50%?  If a third ($6 – $7 billion) of Mr. Lore’s $20 billion in revenues in the future magical 2020 year of scale consists of concierge-sold goods, do I actually extrapolate a loss of about $3 to $4 billion?

If that scenario plays out, Mr. Lore’s dopers are going to need to smoke something a lot stronger to continue feeding this crazy hallucination.

Are We Witnessing a New Form of Capitalism?

One definition of capitalism: “an economic and political system in which a country\’s trade and industry are controlled by private owners for profit, rather than by the state.” Did I read “controlled by private owners for profit?”  Yes, profit is a very important part of our so-called capitalistic system.

So what is going on with the absurd investing behavior playing out across so many Internet start-ups? It’s fueled by newly printed, cheap money, trillions of it. And it ends up in the hands of the “masters of the universe,” who have a “casino-like” greed, and who are high on the dope generated ideas of  the razzle dazzle uses of technology and  the Internet.

The use of capital to launch promising new business ideas is a good thing if the survival of the fittest sheds losers, and does so quickly. The use of an absurd amount of capital to pump up the valuations of very risky ideas with questionable profit potential, to take them public and make millions through trading, and worse, support their money losing models for years, is abominable.

Worse, it is not capitalism; and worse yet, it fuels bubbles that portend the next collapse of our financial system.

So smoke on, Mr. Lore, along with your merrily doped up investors.  But be careful, you won’t be giggling for long.



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