Can we really crown Uber king already?
I haven’t written anything in a while, but Gary V commented on one of my tweets this weekend so I’m feeling particularly HUMBLE and full of GRATITUDE and I’m ready to EAT DIRT in order to execute.
I crush 30-40 😉
— Gary Vaynerchuk (@garyvee) October 26, 2019
…and I’m PISSED I went to college. (Google Gary V if you aren’t understanding these jokes, and Gary, if you’re reading, I’m only kidding!)
Kidding aside, say what you want about the guy, but everyone needs a little kick in the ass once in a while and I’m using this as mine.
I recently saw this scary article about Adam Neumann, CEO of WeWork, and his company’s rapid fall from $47b to $8b seemingly overnight.
Since the article came out, WeWork has been forced to lay off 4000+ people, most of whom will walk away with nothing, rapidly slow down their expansion plans, sell off their $60mm private jet, and officially make a deal to sell the company to SoftBank. But don’t worry, Neumann gets to walk away with close to $2b so it wasn’t a COMPLETE failure. ?
There are still more questions than answers, but how a tech-enabled real estate company burning close to $2 billion dollars a year got over a 25x revenue multiple (with bankers pitching it at double that) remains one of the biggest.
The article reminded me of something I wrote back in early 2016 during my days working in the on-demand economy that I thought I’d share.
For context, at the time I wrote the blog, it felt like every week another marketplace, sharing, or on-demand “Uber-for-X” company was raising tens of millions of dollars at some ridiculous valuation.
It had me thinking…can companies with unproven business models and awful, sometimes negative margins last on investor funding forever?
The jury is still out, but if this tweet can serve as a glimpse into the future, we might be close to getting our answer.
“If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, ride a Lime scooter to a friends’ place and get dinner through Postmates, you’ve interacted with eight companies that will collectively lose nearly $14 billion this year.” – Derek Thompson
Sheesh!
Here’s what I wrote in 2016…(I’m skipping the first two paragraphs to get right to the part about Uber, but if you want to read the full article click here).
Can we really crown Uber king already?
With increased financial pressure from student loans, rocketing rent prices, and practically 0% savings rates, it’s hardly a surprise that millennials aren’t buying homes – we don’t have any money!
No wonder services like Uber and Lyft have been so successful marketing to young people – why own a car when you can have one at your fingertips without the hassle of parking, upkeep, and gas?
Once Uber became everyone’s private driver, they set off a domino effect that Uberized virtually every industry. We’re spoiled with the ability to cheaply order anything from food to groceries to laundry services at the push of a button.
We, the customers, have reaped the rewards of these services for some time now and it’s been a hell of a free (discounted) ride.
But when is the other shoe going to drop? Most of the companies copying the Uber model are paying $1 to make .80c – how long can that last?
Fueled by incomprehensible amounts of funding at valuations even SaaS companies are jealous of, they redistribute lots of that funding to customers by way of heavy discounts, oftentimes pushing their profit margins into the negatives.
Basic math here – if you have a negative margin, the more you make, the more you lose.
Even simpler, if you have to pay $10 to get a new customer and you only ever earn $8 from that customer, you’re losing $2 for every new customer you get.
I’m more of a Michael Scott “talk to me like a 1st grader” type of guy, but Google ‘unit economics’ and ‘economies of scale’ to get a more sophisticated explanation of that concept if you’re still confused.
Bottom line, unless there is a way to make up that loss in the future, you’re going to lose money forever. Users don’t necessarily equate to dollars.
In essence, these companies are donating more and more money to the general public by way of subsidies. And, while I personally appreciate that, if I were an investor, I’d be wary. A lot of these companies will never be able to turn a profit, especially in a competitive market.
Like two gas stations across the street from one another, if Lyft lowers their price, they force Uber’s hand, eventually eliminating all profits in an effort to squash each other. It’s Econ 101 – just ask Netflix and Blockbuster back in the 2000s. Or look at all the food delivery companies.
Now, if they decide to raise prices or keep pricing competitive and mutually beneficial, it opens the door for some OTHER ‘soon-to-be-Unicorn’ to raise a bunch of money, undercut their prices, steal market share and force them to respond (see Juno, Via, Fasten, etc.), which means both Uber/Lyft now have to go lower to squash the newcomers. Are you dizzy yet?
Despite all of this, we haven’t even touched the subject of the actual people driving these services (pun intended). Uber will struggle financially, but they’ll sell a ‘growth and disruption’ story to continue to raise piles of money at nose bleed valuations. And if the drivers continue to be unhappy with their slice of the pie, they’ll try to unionize, sue, strike, or eventually quit when they realize they aren’t making $35/hr like the ads say – after expenses, it’s probably less than half that.
So, for Uber to turn a profit, only a few options remain. Slow spending and raise prices (which in a competitive/commodity market, as we mentioned before, is tough to do) – OR – automate the people away. While autonomous cars give Uber the 80% margin back, they create a slew of other issues.
Who knows, maybe Uber ends up being the operating system for an autonomous GM car fleet or something, but it’ll be a long time before we see the driverless dream come to fruition.
So, to you other Uber-for-X’s out there – unless you have really deep pockets to achieve massive scale, or simply survive long enough for someone to buy you, providing a cheap luxury good at already thin margins is going to be tough.
In the last few weeks, we’ve seen price increases and driver pay cuts from some of the darling Unicorn companies such as Instacart and DoorDash. Why? I’d bet they’re feeling pressure to start turning a profit.
NOTE: Unless your name is Amazon, it’s going to be hard to operate at a loss forever. SECOND NOTE: In general, try not to compare yourself to Amazon.
There is still no app to tell the future, but if these recent price hikes are any indication of what’s to come, I’d say it’s time to start saving your pennies.
Could be a year or could be 5, but when investors inevitably start fearing the end of the bull market that’s been chugging along for 6ish years they’ll start paying more attention to profits again. And when Uber and the rest of the merry band of Unicorns are forced to hit the IPO market and give everyone a glance under the proverbial kimono – I’d caution jumping in – you’re likely the greater fool at that point.
But you tell me – is it too early to crown Uber king?
….annnnnnd scene…
Today, in 2019, the cracks in the foundation are there – Uber lost a couple billion LAST QUARTER!
For perspective, I’m pretty sure I read somewhere that the most Amazon has ever lost in a year was about $1b. Don’t @ me.
Regardless, unlike the dozen or so food delivery companies that will likely either go out of business or consolidate, Uber has sort of a ‘too-big-to-fail’ feel to it, doesn’t it? Kind of reminds me of WeWork, but Uber managed to clear up their CEO mess and cut their valuation in half a year before ‘successfully’ going public (they are since down ~40% from their IPO price), not in the months leading up to it.
No one ever doubted Uber’s ambition. And despite the fact that UberWorks, UberEats, UberRush, UberFreight, UberHelicopter, their autonomous car division, or even UberMoney are largely huge cash vacuums (for now), they’re sitting on a war chest and, like WeWork, have some very big backers who won’t want to see them lose.
At the end of the day, the Uber service is so hugely valuable and the brand is so big I don’t think it’s going anywhere for a while. Maybe we’ll see a merger or an acquisition, maybe they’ll cut costs and turn a profit, or maybe they continue funding their global domination plans with the public’s money and some of these projects will start making money after all, who knows.
All I do know is, despite how much money I give them every month, I wouldn’t hold my breath if you’re hoping to see that $120b valuation anytime soon.