Gee, You Think?

It seems that the investment strategy which drives most of the tech industry may be little more than stock fraud with a high tech gloss.

So says Adam Rogers at Business Insider.

Where have I heard that before?  Oh ……… Right it was me, here, here, here, here, here, here, and here.

Welcome to the club:

In 2016, Matt Wansley was trying to get work as a lawyer for a tech company — specifically, working on self-driving cars. He was making the rounds, interviewing at all the companies whose names you know, and eventually found himself talking to an executive at Lyft. So Wansley asked her, straight-out: How committed was Lyft, really, to autonomous driving?

"Of course we're committed to automated driving," the exec told him. "The numbers don't pencil out any other way."

Wait a minute, Wansley thought. Unless someone invents a robot that can drive as well as humans, one of America's biggest ride-hailing companies doesn't expect to turn a profit? Like, ever? Something was clearly very, very screwy about the business model of Big Tech.

"So what was the investment thesis behind Uber and Lyft?" says Wansley, now a professor at the Cardozo School of Law. "Putting billions of dollars of capital into a money-losing business where the path to profitability wasn't clear?"

Wansley and a Cardozo colleague, Sam Weinstein, set out to understand the money behind the madness. Progressive economists had long understood that tech companies, backed by gobs of venture capital, were effectively subsidizing the price of their products until users couldn't live without them. Think Amazon: Offer stuff cheaper than anyone else, even though you lose money for years, until you scale to unimaginable proportions. Then, once you've crushed the competition and become the only game in town, you can raise prices and make your money back. It's called predatory pricing, and it's supposed to be illegal. It's one of the arguments that progressives in the Justice Department used to bust up monopolies like Standard Oil in the early 20th century. Under the rules of capitalism, you aren't allowed to use your size to bully competitors out of the market.

The problem is, conservative economists at the University of Chicago have spent the past 50 years insisting that under capitalism, predatory pricing is not a thing. Their head-spinning argument goes like this: Predators have a larger market share to begin with, so if they cut prices, they stand to lose much more money than their competitors. Meanwhile their prey can simply flee the market and return later, like protomammals sneaking back to the jungle after the velociraptors leave. Predatory companies could never recoup their losses, which meant predatory behaviors are irrational. And since Chicago School economists are the kind of economists who believe that markets are always rational, that means predatory pricing cannot, by definition, exist.

………

"We think real world examples are not hard to find — if you look in the right place," Wansley and Weinstein write. "A new breed of predator is emerging in Silicon Valley." And the mechanism those predators are using to illegally dominate the market is venture capital itself.

………

On its face, it also seems to prove the point of the Chicago School: that companies can never recoup the losses they incur through predatory pricing. Matsushita and Brooke Group require that prosecutors show harm. But if the only outcome of the scaling strategy used by Uber and other VC startups is to create an endless "millennial lifestyle subsidy," that just means wealth is being transferred from investors to consumers. The only victims of predatory pricing are the predators themselves.

Where Wansley and Weinstein break important new ground is on the other legal standard set by the Supreme Court: recoupment of losses. If Uber and WeWork and the rest of the unicorns are perpetual money losers, it sounds like the standard isn't met. But Wansley and Weinstein point out that it can be — even if the companies never earn a dime and even if everyone who invests in the companies, post-IPO, loses their bets. That's because the venture capitalists who seeded the company do profit from the predatory pricing. They get in, get a hefty return on their investment, and get out before the whole scheme collapses.

"Will Uber ever recoup the losses from its sustained predation?" Wansley and Weinstein write. "We do not know. Our point is that, from the perspective of the VCs who funded the predation, it does not matter. All that matters is that investors were willing to buy the VCs' shares at a high price."

Let's be clear here: This isn't the traditional capitalist story of "you win some, you lose some." The point isn't that venture capitalists sometimes invest in companies that don't make their money back. The point is that the entire model deployed by VCs is to profit by disrupting the marketplace with predatory pricing, and leave the losses to the suckers who buy into the IPO. A company that engages in predatory pricing and its late-stage investors might not recoup, but the venture investors do.

"The single most important fact in this paper is that Benchmark put $12 million into Uber and got $5.8 billion back," Wansley says. "That's one of the best investments in history, and it was a predatory pricing."\

The issue is not monopolistic or predatory behavior.  This is flat-out boiler room type fraud. 

You do not need to change the minds of judges about Robert Bork's poisonous and corrupt theories on antitrust.  It/'s just stock fraud.