Uber is Going to 0, and Benchmark Knows It!
“Moving first is a tactic, not a goal….It’s much better to be a last mover.” — Peter Thiel
On the surface this seems contrarian. When is being last better than being first?
Steve Jobs understood this. Apple didn’t make the 1st MP3 player or the 1st smartphone. Yet in consumer tech, Apple is synonymous with both.
That was no accident. This is Thiel’s theory in practice. Wealth accrues not to the first but to the monopoly, the company that captures the market, makes consumers forget all others and rides the waves as long as profits pour.
They are the last. There is no successor coming. That is where the money is made and that is where startups and businesses should strive to be.
Move slow and be boring?
Not at all. That isn’t what Thiel’s talking about, that is horrible advice. Just look at the Windows phone or Kodak’s digital camera.
This isn’t about perfectionism either. Lean startup principles still apply. You want to move fast and probably will break things. But don’t sacrifice the “it” factor it takes to win.
The iPhone killed the Blackberry because it was 10x better. It wasn’t about rushing a competitor to market, it was about building the perfect enough product to crush the competition and with a innovative moat that got stronger and stronger over time — ie the App Store.
Steve Jobs succeeded where RIM failed because of his team. They convinced him a 3rd party app store would outperform Apple’s dev team. They were right.
Today, even against Android, Apple’s App Store keeps people coming back.
The flywheel moat
Apple’s first mover advantage, not in the smartphone space but in the 3rd party app store succeeded beyond their wildest imaginations. Developers raced to build apps and businesses around the iPhone and the customer experience got better and better. And with more users came more devs and more apps and a never ending cycle of value creation — the vast majority of which accrued in Apple’s oversea bank accounts.
This example illustrates what ALL startups should shoot for — an increasingly defensible business model.
The reason — competitive pressures and customer acquisition costs. Businesses without this defensibility almost always struggle with profit and unit economics. Look at Instacart or Uber, on the surface both great businesses. Dig deeper and you reveal weak foundations.
Let me explain.
Uber’s a bit like a house of cards
No, that isn’t a reference to their management, Kalanick, or the Benchmark lawsuit. It goes deeper.
Ride sharing is a local business. And with local businesses like this, the local network effects are incredibly strong. Uber spends a bunch to enter a city, onboards drivers, and pays to acquire customers. As more riders and drivers start using the system, it becomes more and more efficient and the unit economics start to make sense.
This is the reason Uber, Didi, Grab, Lyft and dozens of other ride sharing services raise so much money. It is a land grab and VCs are racing to control their fiefdoms.
But there is a big problem. Drivers and riders have NO LOYALTY. The reason I use Uber or Lyft or any one of a dozen services is a result of price, availability, and marketing. A better offer from ANY competitor and I’m gone.
The same is true of drivers. Most Uber and Lyft drivers use two phones and drive for both. Whichever company gets them more business is king (of the day).
Suddenly Uber’s moat doesn’t look quite so deep. It gets even worse.
Every city Uber enters they spend big bucks. But any other ride hailing app can do the same. How does Uber win? They enter cities sooner and outspend the competition. They buy riders and drivers.
But anyone else can do that too. China challenged Uber and won, forcing them to leave with their tail between their legs (although the ownership stake in Didi will be huge).
We are seeing this more and more. Startups are popping up in cities and countries around the world and competing with Uber. They are raising massive rounds and locally outspending the almighty Uber.
And that is where the problem lies. Uber CANNOT outspend everyone. Like Germany in WW2, eventually Allies overrun any army.
This all means Uber has close to ZERO defensibility internationally. They will always be on the defensive. By definition this means Uber cannot be the last ride sharing company. And without a monopoly, they cannot create pricing power. Instead transportation as a service becomes a race to the bottom, constantly fighting to keep or acquire new users.
Uber’s moat is really more like a puddle.
Airbnb is like Uber on steroids
Whereas Uber is likely a doomed company, perpetually sucking up money to stave off competition, Airbnb is incredible.
Airbnb’s moat means unless decentralization destroys the internet as we know it, Airbnb will be a massively profitable business. Think about it.
How often do you travel? A couple times a year. Maybe a few dozens if you are busy. What is the one difference between Uber and Airbnb?
The network effect. Whereas Uber riders almost always use the app in their home city, Airbnb is all about exploring. Their network is international and thus nearly untouchable.
A thought experiment. Let’s says BnBAir, a competitor to Airbnb decides to raise a round and start pushing into SF, or Austin, or NYC. When would you use said service? Only when you were in that city right? The problem — you don’t only travel to one, two, three cities etc… You don’t want a separate app for every city you visit. Imagine how painful that would be. The customer experience would be horrible.
That means the ONLY way BnBAir could acquire customers would be Facebook ads targeting travellers to said city. And they would need to spend a fortune to acquire them, all while onboarding accommodation.
And realistically why would an apartment owner list on BnBAir? Odds are they want customers and are they are on Airbnb as well. That means they now need to list on 2 platforms, while Airbnb drives 99.9% of the customers. Eventually they get bored, drop off and just do Airbnb. They don’t tell their friends/fellow apartment owners because it was a waste of time. Even if they got a few bookings, it wasn’t worth it, so no network effects.
From the user perspective it is the same deal. Why tell a friend about an awesome travel site if it isn’t applicable to them, if it only works for one or two cities.
Don’t forget Airbnb in this example. They certainly have not been standing still. Their international network effects mean they acquire new users and renters every day. And every new user strengthens the network.
Because their platform is at least 10x better than the competition, they cannot be touched. And the competition can never steal users because 10x-ing Airbnb is impossible and continuously getting harder.
Because Airbnb owns the network internationally, they are a de facto monopoly. Sure couchsurfing and certain niche platforms exist but Airbnb’s core is nearly infinitely defensible. That means they can raise prices, increase profits and users have no choice but to stick around.
And worse case scenario a competitor raises $10B, 20B, 100B to play hardball. Airbnb can still decrease prices, cut margins and keep churning away.
Eventually, like Uber the competitor runs out of cash and goes belly up. Game over.
Want proof? Look at Benchmark
Benchmark Capital is one of the premier venture capital firms. So why are they suing sweetheart Uber/Travis Kalanick?
Benchmark invested $12M in Uber. That is now worth ~$7B. That means Benchmark’s 20% carry is worth approximately $1.397B.
That is gamechanging money. That is throw away your reputation and make it rain money, at least it seems to be for Benchmark.
But it is also indicative of something else. Benchmark sees these same challenges. Make no mistake about it. Uber has its fair share of enemies from its meteoric rise. But I’ll bet Benchmark is worried about it going to zero.
Uber’s infinite pocketbook is starting to run dry. As of August 23rd, 2017, Uber’s burn rate was about $2B/yr. Uber is a forest fire that is running out of fuel. Without significant funding (or better yet, pricing power), Uber will burn itself to the ground.
Imagine a running back racing towards the sideline, trying to beat the defense and turn the corner. If Uber turns the corner it will be like a hundred million touchdowns.
Unfortunately in a world of increasingly many and increasingly powerful competitors, there are no touchdowns.
Benchmark sees the light, either unload the stock or IPO so they can cash out. They cannot let this $1.4B airliner payday crash.
Does driverless save Uber?
No. Uber’s business model is predicated on drivers owning the cars. In a world of autonomous, where will vehicle ownership lie. Odds are fleets: either private or publicly owned.
So what happens for Uber’s driverless cars? Well Uber can either buy a bunch or lease them.
Either way their costs go way up. Don’t forget auto-insurance, probably driverless insurance and fleet maintenance costs.
And while autonomous vehicles increase efficiencies and reduce empty times, what happens at night? Uber’s demand graph clearly shows flaws with their plans. What % of the time will cars go unused? Certainly not 0%.
That means massive capital expenditures. Suddenly Uber’s driverless cars aren’t quite so sexy, or profitable. What happened to the world’s largest taxi company that didn’t own a single car.
Plus there is the other problem, competition. Google is better when it comes to autonomous vehicles. And there are a crop of startups and corporates lining up to compete. Then there is Tesla, I would never count Elon out of a fight.
The question is, can Uber overcome this? Is there a scenario in which Uber ultimately wins?
Think outside the box
I argued in a recent post about Google’s ability to be the operating system of autonomous vehicles. Could a chrome like platform be built for driverless cars, capturing customer attention and creating value?
What if Uber owned a company like Netflix or Hulu? They could sell content and entertainment on rides.
Uber needs an upsell, Uber needs a way to increase LTV and margins without added spend. And most importantly they need a way to keep customers and drivers. Upsells via content or affiliate marketing channels could be that system.
Some Uber drivers already do this on their own, and earn additional money from advertising and marketing messages. Uber could do the same with their drivers and eventually autonomous vehicles, adding value to both riders and drivers. The extra income would allow Uber to cut rates (or commissions) (if necessary) to keep riders and drivers on the platform while keeping out competition.
This is a poorly thought out theory. There are certainly holes in the logic but Uber needs to think outside the box or the company is in trouble.
What do you think? Is Uber screwed? Would you rather run Uber or Airbnb? Can Dara save Uber from itself and its business model?
These questions are not considered enough by the tech community. Uber is arguably the greatest hit in history of VC (at least of pre-IPOs).
The bigger they are, the harder they fall… and the bigger their appetite. I’m bearish on Uber and incredibly bullish on Airbnb.