FreightWaves is providing a forum – Market Voices – for a number of market experts.
Disclaimer: The author is not an investor in Uber, or any of its competitors. Steve Case’s Rise of the Rest® is an investor in FreightWaves.
On May 9 – just one day before Uber’s initial public offering (IPO), The New York Times published Why You Should Root for the Uber I.P.O. to Fail, an op-ed by Mihir A. Desai – a professor at Harvard Business School and Harvard Law School. He is also the author of How Finance Works.
I couldn’t disagree more. We should all be rooting for startups like Uber to succeed. Our future depends on it.
This article is not an exhaustive examination of Uber’s business model, corporate governance or how it treats its employees and drivers. That is beyond the scope of this article given that Mr. Desai does not critique Uber on those issues specifically.
What is the case for rooting against Uber?
In his article, Mr. Desai argues that Uber’s pre-IPO investors have thrown an unprecedented amount of capital at Uber – $24.7 billion over 23 funding rounds, to be exact, according to Crunchbase. That capital helped Uber sustain more than $10 billion in operating losses in the three years preceding its IPO. Mr. Desai urges us to pray for a comeuppance for those investors. Here’s a summary of his reasons:
● First, the era of bloated venture capital funds, like Softbank, distorts the allocation of capital, talent and entrepreneurial energy toward unviable business models.
● Second, the success of a company like Uber can lead young people and investors astray. Young people can view their jobs as lottery tickets. Investors of all kinds can be seduced into imitating these giant venture funds.
● Finally, the venture capital world will become even more “clubby.” Startups will compete on funding rather than on the merits of their products.
He makes a seductively compelling case, and I understand his complaints. That being said, his argument fails because it takes a rather narrow view of the issue. Let me explain.
We are entering a new era
In his book, The Third Wave: An Entrepreneur’s Vision of The Future, Steve Case, former CEO and chairman of AOL, makes the argument that we are entering a Third Wave of the internet. Briefly:
● The First Wave extended from 1985 to about 1999. This was the era during which technologists and entrepreneurs laid the foundation for the online world. It was driven by people, products, platforms, partnerships, policy and perseverance.
● The Second Wave extended from 2000 to about 2015. This was the era of the mobile revolution and the app economy, characterized by search, social networking and ecommerce. This era was driven by people, products and platforms.
● The Third Wave extends from 2016. This is the era of ubiquitous connectivity and pervasive computing, enabling entrepreneurs to use digital technologies to transform real-world sectors of the global economy. This is the era during which software – made up of bits, and physical products – made up of atoms, intersect and collide. This era is driven by people, products, platforms, partnerships, policy and perseverance.
Though Uber was founded in 2009, and Lyft’s predecessor company, Zimride, was founded in 2007, it is not difficult to see that they fit squarely in The Third Wave. Together with other startups that were also founded before 2016 you may not know yet, they represent the canaries in the coal mine of Third Wave Startups.
So, what’s the problem?
The problem is that, with only a few exceptions, in general, Third Wave startups have not been very popular with venture capitalists. Indeed, this is the impetus behind Steve Case’s Rise of the Rest® initiative. Third Wave startups are unlikely to be founded by entrepreneurs who grew up or live in San Francisco, New York or Boston.
Third Wave startups are likely to be building innovations to reinvent supply chains in industries like manufacturing, agriculture, energy, transportation, healthcare, fashion and apparel, consumer packaged goods, real estate – huge, global industries in which the opportunity to exploit the latest advances in software technology to increase efficiencies in the conventional economy has not yet been fully realized, if at all.
Some of the reasons Third Wave startups have been unpopular with venture capitalists are:
● First, generally speaking, they require significantly more capital than the Second Wave, or even First Wave startups.
● Second, initially, it can appear that they are operating non-viable business models and that they may require more time to mature and experience a liquidity event than venture capitalists can stomach – in fact it can often seem as if they will never become profitable businesses.
● Third, at the outset it can seem as if such startups will never be able to overcome entrenched norms in legacy industries, overcome existing anti-competitive barriers, or work in partnership with regulators and industry incumbents to achieve mutually beneficial outcomes.
The long-term success of Uber, Lyft and other startups like them can help start to change that narrative.
Every Third Wave innovation is about refashioning supply chains
A supply chain is a network of interdependent organizations that cooperate and collaborate with one another to manage the movement of goods, services and information between producers and consumers. The world as we know it would not exist without supply chains. Every Third Wave startup reflects an effort to rethink and reinvent the way the world’s supply chains function and operate. These innovations are critical if we are to have any hope of reversing climate change and creating a more sustainable future for our planet.
I am not suggesting that Uber is without blame or blemish. I am not suggesting that it is the very best example of a Third Wave startup. It is not yet clear that Uber or Lyft, or any of their competitors, is good for the environment – I rarely use Uber or Lyft, preferring mass transit whenever I have the choice. I do not seek to dissuade, Mr. Desai and others like him who would critique venture capitalists in general, and Uber’s investors in particular. However, while we critique Uber and its investors, let’s also demand that regulators and government fix the problems that are best fixed through policy as Third Wave Startups grow, mature and implement new business models. Merely praying for Uber’s comeuppance doesn’t fix the very real shortcomings of regulatory authorities.
There is much to critique about Uber. Others have done so ably elsewhere. However, many of the issues that Uber, Lyft and some of their early Third Wave counterparts are facing may be emblematic of the same sorts of issues and obstacles that successive generations of Third Wave startups will face. Reinventing the way the world produces, transports and consumes the goods and services that characterize life as we know it is a difficult and complex task that will take time and require many trade-offs and compromises.
Third Wave startups are the startups that excite me most. I believe that supply chain innovation is the foundation for all other sustainable innovation, and that supply chain innovation functions as a powerful economic multiplier. We should celebrate the era in which venture capitalists become more willing to fund startups taking on problems in unsexy but important industries – industries in which entrenched interests profit from inefficiencies that harm consumers and damage our environment. We should encourage, celebrate and champion entrepreneurs of the Third Wave, even while we hold them accountable for their personal shortcomings. We should all be rooting for startups like Uber to succeed.
Hubert Horan
This piece is based on staggering, willful ignorance of Uber’s actual economics. This piece attacks an article that provided hard evidence showing that Uber represented a case where capital markets were not allocating capital to more efficient, more productive uses. It rejects all traditional capitalist criteria for criticizing Uber (nine years of growing, multi-billion dollar losses, a complete lack of sustainable competitive efficiency advantages, a growth strategy without any powerful underlying scale/network economies, etc) without any attempt to explain why this evidence is horribly flawed, and without any attempt to explain how Uber could somehow reverse these huge losses and produce its service for less money than its customers were willing to pay.
It’s not just that this piece is based entirely on a bunch of vacuous jargon about waves and supply chains, but the author fails to see that there’s no evidence that Uber is actually a “Third Wave” company and that it hasn’t transformed a “real-world industry” by “reinventing supply chains” The actual digital component of Uber’s business model is tiny, and hasn’t done anything to transform the productivity of taxi operations or food delivery or freight brokerage. Uber changed nothing in the supply chain except that drivers are contacted via a smartphone app instead of a traditional telephone. The author does not understand that a “smartphone app” is not a “platform”—smartphone apps have supplanted traditional telephone contacts in every consumer industry (e.g. airlines, pizza delivery) but don’t have any meaningful impact on costs or competitiveness. The author does not understand that Uber’s only source of cost savings has been its ability to suppress (already dismal) driver wages to minimum wage levels. The author’s gratuitous (and purely ideological) assertions about taxi regulations are similarly detached from economic reality. None of the problems that prevented investors from profitably producing cheap, sparking clean cabs at the instant that people wanted them were caused by regulatory distortions. Uber has operated free of those regulations for nine years and clearly can’t provide anything profitably.
The problem is not just that venture capitalists have massively misallocated billions in capital without generating any economic welfare benefits for the rest of society. The problem isn’t that that Uber fanboys continue to defend the company in the face of overwhelming economic evidence that it is a massive failure. The problem is that there are still delusional utopianists like the author willing to attack VC investors who aren’t enthusiastically willing to burn another $20 billion because “our future depends on it.”
Jon
James hit the nail FIRMLY on the head. When it comes to both brokerage and asset based trucking, the key is the “service” part of the job which means making sure things go smoothly when things DON’T go smoothly – which is most of the time. Anyone building a “digital brokerage needs to work IN brokerage for at least 10 years to actually understand this complex yet nuanced business. There are at least 100 things during a load that CAN go wrong…90% of which will never be automated in the next 30 or 40 years (if ever).
If you don’t believe me – go to work at a brokerage or a carrier for a few years before you “think” you have a better mouse trap.
James
I agree with the above view. The author’s views are ones that are expressed as a technology based venture capitalist, not someone who has been in the industry dealing with issues each and every day.
Any broker can tell you that this job will never be automated until the trucks are fully automated; and even then there will still likely be a question of which carrier for when (think of an LTL or Straight Truck portal). The hard part of the job isn’t matching capacity with the load, it’s making sure that the load delivers. Dealing with drivers when loads are rejected, pallets are broken, trucks break down and drivers don’t show up or are late to appointments are something that a computer will never be able to smooth over. I know many transportation managers who have tried and hated Uber freight because an all digital brokerage cannot solve problems in real time like a human can.
In the end, you get what you pay for.
Jon
There is nothing wrong with ANY third wave company. BUT, the issue I have is that they storm into a market and charge less than the incumbents by using the millions (or billions) in raised capital to try to put those incumbents out of business by charging less than cost. That’s their model. ANY company can generate significant revenues by charging less than cost. Just look at Uber Freight. They logged around $400m in total sales in 2018 but LOST $354m.
ANY idiot broker can generate $400m in sales if they were allowed to lose $354m getting there. In the meantime, smaller brokers and 3PL’s struggle because their shipper customers keep asking for price reductions to “match” Uber Freight, Convoy, and the other money losing brokers.
That’s the issue I have with Uber, Lyft, We Work, Convoy, Transfix, Next Trucking….the list goes on. Losing money is NOT a business model. It’s a suicide mission with other peoples money.