Another Way To Make Money On Free: Invest In Free, Short The Disrupted
from the sneaky,-sneaky dept
Over the years, we've discussed many different business models that involve "free" stuff. Most of them focus on how the free stuff should be viewed as free promotions for something else that can be sold. Of course, that doesn't need to be the only business model for free. Over at TheStalwart, they've cooked up an idea that's quite amusing. A combo VC/hedge fund that invests in startups that give away things for free (open source, free classifieds, or anything like that). However, instead of expecting to make money directly from that investment -- then you just short sell the companies in the industry likely to be disrupted by such new entrants. The investments never have to make money directly at all. Of course, this assumes the disruption happens relatively quickly and that the disrupted industry doesn't respond (or, at least, responds poorly), but why mess with the simple elegance of this arbitrage idea by getting into the details?
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Long term short? uh...
The arbitrage in this novel and quite cool idea is so incredibly risky that...well... even more than VCs would do.
When would you short the competitor's stock? Would you pay 5%? 8%? interest on the shorted stock only to find that the company you were shorting was not disrupted enough to drop their stock price?
You would also have to have a pretty clear competive landscape which is non existent. To try to short sell Microsoft, you'd have to succeed in crushing them on all fronts. Even with someone like Intuit - a fairly focused company - would require damaging them on multiple sales channel.
I'd say - sounds clever but a little overengineered
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Interesting Idea, But Real?
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Re: Interesting Idea, But Real?
Wouldn't the analogy be more like investing in free online video games and streaming media and short selling TV networks that aim for the same demographic?
Hey... or bloggers shorting newspaper stock?
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It reminds me...
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Re: Long term short? uh...
And the crucial third element of the strategy is that the stock market almost always overreacts to news. You don't actually need to disrupt a business. If you get an article or two in wide circulation (or just a rumor among those who trade) that business A giving away product X may undermine business B selling product Y - that's probably going to be enough to send Ys price down far more than the situation would really call for if everyone was acting rationally.
Very risky - yes. Kind of underhanded and devious - certainly. But doable? I think so.
-stormin
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Ideal industry already exists though...
Sounds like a plan to me - anyone wanna get rich?
I know nothing of investing, shorting and the VC business. I'm just trying to throw out an idea.
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Re: Long term short? uh...
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