MINNEAPOLIS -- Maybe it's hard to imagine what could have changed so much that what made financial sense not even a year ago -- spending about $336 million for the food delivery company Bite Squad or investing in WeWork at a $47 billion valuation -- can seem silly now.
The reality, of course, is that nothing changed. Those deals were silly then, too.
The recent massive write down in value for the Minneapolis delivery company Bite Squad by the company that bought it earlier this year is just another part of the same collapse of magical thinking that buried the proposed public offering of WeWork's parent.
Capital had flooded into these companies based on their plan of growing as fast as possible, hoping to make money ... someday. A reckoning was inevitable.
It's always hard to know why hype triumphs over prudence for a long time, but telling the difference when you are in the market seems difficult for even the best thinkers. But from a distance it never made sense that companies could be valued like explosively growing technology firms when they still relied on a lot of cars, expensive office space or people who needed to get paid.
It's clearly possible to make money in a service business that pays for thousands of people driving around in thousands of individual vehicles. That's pretty much what Ecolab Inc. does, for instance, and it's thriving. But it's not fundamentally a technology business.
The We Co. was so eager to mask that its WeWork rented out office space that it ripped off a concept from software and called its business "space as a service."
A technology business is just not like anything WeWork was doing. In software it might take what seems like a lot of money to get the first version in the hands of customers, but once enough are on board the profits should grow much faster than sales.
That's one way to think of a business idea called operating leverage, a measure of how much the profits will increase as sales grow. Growing software firms need more code writers to work on version 2.0 and customer service people to handle more problems, but at some point a new software customer can be added at an additional cost of near zero.
The boss can come in Monday morning and find that 100 new customers got some questions answered by a chat bot over the weekend and then downloaded the software and started a paid subscription.