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Tech Startups Face New Investor Mandate: Profits Over Discounts

The discounts and freebies many tech startups have used to lure customers-- free lunch delivery, $3 beauty products and bargain taxi rides -- have fallen out of favor with investors who are losing patience with the failure of these companies to turn a profit. From a report: The proliferation of subsidized products and services from venture-capital-backed startups over the past decade reflected a rush by investors to fund the next behemoth consumer-tech company. The thesis: Create a market leader with loyal customers hooked by attractive deals delivered at the touch of a smartphone app. Once the company got big enough, profits would flow and the subsidies could end.

Startup investors are re-evaluating that approach. Following a year of dismal performances from companies that were heavily subsidized by venture capital, investors and board members are pressuring companies to figure out a more profitable business model, tech deal makers and startup founders say. Investors want startups to become less dependent on raised capital to cover the cost of customer discounts, such as e-commerce startup Brandless selling home and beauty products for a fraction of the cost of shipping, ride-hailing companies Uber UBER and Lyft discounting the cost of their rides, and meal-delivery service Postmates offering coupons for $100 off delivery fees.


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