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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Comments on “Another Way To Make Money On Free: Invest In Free, Short The Disrupted”

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Dima says:

Long term short? uh...

The only problem with this is the mechanics of a short sell. To short sell a stock you “borrow it” and pay interest.

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

b1-66er (user link) says:

Re: Interesting Idea, But Real?

This is interesting, but I’m not sure I buy that people do it. I work in the Silicon Valley, know a ton of VC’s and everyone just laughs when I ask about it — the typical VC mind is you have to make 10x off your investment.

So are you *really* expecting to get a 10x return in the combination of money you had to invest in the freebie company, and the short (options would be far far more likely here that short selling of actual stock).

It’s more like conspiracy theory.

Let’s go a step further:

I’m going to watch 24 hours of TV straight this weekend, “for free.” Am I hurting any of the paid TV viewers by doing this?

stormin says:

Re: Long term short? uh...

First of all I don’t think they’d pick targets to disrupt as big as MS. And seconly they don’t really need a vastly superior technical product. They’re givin it away for free – remember? When you’re talking an OS it may be hard to get people to adopt but with smaller-ticket or service items this may work.

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.


Anonymous Coward says:

Re: Long term short? uh...

It doesn’t have to be as bad as you make the interest rate sound. I operate on margin quite often, and short stock on fairly regular occasion, and the interest I get billed at the end of the month is always dwarfed by gains. That 8-10% rate is APY, of course, and catching a fast 5% in a couple days, or 13% as I did on Rambus last week (wth, they get sued, went up — but hey, I’m happy, I was long) obviously blows the interest rate in to the area of triviality.

Mike says:

Ideal industry already exists though...

… in Hollywood and the “entertainment” companies. All the VC’s have to do is find the companies that are going to come in and get it right (free music, pay for concerts as you’ve mentioned before) for the industry to be disrupted.

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.

Kirill says:

No Subject Given

Quite interestig idea. But seemingly it should be combined with something else. You couldn’t make big money just on overeaction of the stock market especially if we are speaking about big sums. If you suppose to go on the strategy you can get anti-dumping actions. So i think it’s relevant for existed companies like a mean in trade wars. IMHO

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