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Are funded startups anti-competitive?

18 Apr

Let’s start this post with a hypothetical…

Imagine a town with a supermarket and a bakers. The bakers has a sensible, sustainable business model, is profitable and provides a good living for its staff. They make ‘better’ bread than the supermarket and some customers decide that that’s important to them. The supermarket bread is not ‘bad’ either. One day the supermarket decides that it doesn’t want the competition. It has a substantial war chest and start giving bread away for free. This is not sustainable for the supermarket, but it doesn’t need to be. After a short period the bakers loses too many customers and closes. Now the supermarket can put prices back up to their normal prices – or beyond.

We’d all agree that this is not a good situation and, in fact, the state regulates against this activity.

Now consider 2 startups. A has a sensible, sustainable business model, customers and profit. B takes a huge injection of capital. B can then offer a similar (even slightly ‘worse’) product or service for free.

Is this situation any different from our hypothetical example? There is no legislation to curb this activity and, clearly, the investors in startup B must have envisaged an exit based on a sustainable business.

So, my question to you is “is this anti-competitive?”. I look forward to your comments.

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1 Comment

Posted by on April 18, 2012 in Startups

 

One response to “Are funded startups anti-competitive?

  1. Warren

    April 20, 2012 at 1:09 am

    For bread-based startups, yes it’s anti-competitive. Software-based startups are a different animal because of the complexities involved. Typically they must find a unique niche and exist in that space long enough for it to become a viable industry. In theory, the intellecutal capital that they have amassed is unqiue enough that competitors can’t possibly catch up. That’s why we see a lot of buyouts occur – because the cost to build an equivalent is dramatically more than the cost of purchasing outright (and by comparison, bread is a low-tech, well established and non-variable industry). Something like that anyway.

     

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