razor blades

One way to make e-commerce work is to sell high margin products online — ideally, products that are necessarily high margin in the brick and mortar world to account for distribution costs. Therefore, going online cuts out the middlemen and you can profit even while selling for less. Proven examples include eyeglasses, cosmetics, baby products, and so on.

Re/code has a fascinating story on another example: Harry’s, for razor blades. What makes Harry’s so interesting is that the company raised $197 million on a $350 million valuation on basically zero revenue (they have sales, but at a level insignificant relative to the size of investment).

In short, investors are investing solely on the basis of potential.

Re/code is painting this as yet another example of technology’s growing bubble. But let’s dive deeper — far from a being sign of investor irrationality, this transaction might actually make rational sense.

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