Why Uber Won
news.greylock.com
news.greylock.com
Does winning mean beating its competitors? In San Francisco, at least, this doesn't seem clear at all. Most people I meet -- both drivers and passengers -- prefer Lyft to Uber because they claim it has better technology, a better brand image, better treatment of employees (correction: drivers), and fewer instances of creepy and offensive behavior from its top management.
Does winning mean expanding faster than its competitors? This rests on the VC assertion that Uber is playing in a winner-take-all space. The fact that they can't starve out the competition on their home turf challenges this assertion. Unless they can put up artificial barriers once they enter new markets, they might just be clearing the way for their competition.
Or does winning mean transforming from a VC-fueled startup to a self-reliant profitable company? Once again, no facts in the article, but they did recently claim they'll be profitable in the U.S. in Q2 2016 (although losing $1B/year in China) [1]. But unless they can differentiate in terms of price or service (which, my experience, they've failed at), this isn't necessarily a sustained win.
I have to say that I am surprised that uber didn't use the driver lawsuits to lock up their network. If the drivers were employees then they could have prevented them from driving for other services.
This. I feel like this doesn't come up often enough in discussions about whether drivers should be considered employees or not. A lot of people seem to think that making drivers employees would be better for the drivers and have no effect on passengers. But as soon as drivers become employees it's game over for Lyft or any future competitor, and Uber's monopoly will let them push driver comp as low as possible. As long as Uber and other companies have to work to attract drivers and passengers they'll take a lower cut for themselves.
Knowing Uber, they'd probably push down employee wages and then run into minimum wage issues...
But there are things like health insurance which Uber would have to provide (and in the contractor case, are instead subsidised through Obamacare provisions) that I think would end up with take home being less...
Obamacare mandates access to insurance (from a dwindling group of participating insurers), it is not a direct subsidy.
In fact, Obamacare has raised insurance rates for most people, as insurers cancelled most plans because they "were not compatible" with Obamacare, and re-enrolled members at higher rates than before.
Health insurance might be more of a problem, but this is really only a US issue.
I am wondering if a franchise model (say like McDonald's) might get you to a model where you have the benefits of employees, but without all the associated issues.
From the perspective of managing their drivers, they're not to worried about other folks taking "their" drivers as ultimately they're going to have FAR more work for drivers to do than companies merely in the cab business. As a driver you're going to rely on Uber because the quantity of the work will be so much higher on their network.
That's the long game for them and I suspect that's how they see things right now.
* note: I'm 100% speculating here, I have no real special insight into what they're up to.
You want to quit? Go nuts, we have 50 people who will work for less ASAP, and we think we can onboard them easily.
We're also developing technology that will let us have robo drivers (or robo sales staff). So we won't really miss you, even if you compete with us.
They certainly seem to be playing a winner-take-all game, by heavily subsidising rides when they first launch in a new city.
But it seems questionable to conclude that taxi services really are a winner-take-all market. Many Uber drivers I see have multiple phones, running multiple taxi apps at the same time. And most people I know have at least two apps in their phone. I usually check three (Uber, an European one, and a local one in my city) before making an order.
There are some network effects to taxi services - customers want a car fast, and drivers want to find fares fast. But there are no switching costs for either side, so these network effects can be distributed over more than one platform.
I am baffled how they operate here in Taiwan. Uber has been declared illegal here. Drivers and passenger are issued fines when caught. Uber fully compensates them. Now the laws are more strict; if a driver is caught 3 times, his license is revoked. Yet there are still 5 cars within 5 minutes of me at any time of day.
I don't understand how that works at all. It does not seem to be a good way to get into the good graces of a country. I wonder how many places Uber operates illegally and pays fines, and how analysts use this to calculate the future value of the company. Do they assume Uber will one day be made legal in all these places? That would boost the valuation but I'm not sure it's accurate.
I also think it's too early to call the game. They're doing well but again, with a commodity service, it doesn't take much to fall behind. I see the logical end game here as more of a marketplace where I can request a ride and anyone can bid for for the job.
Another benefit is every incremental passenger increases the utilization of the current assets, spreading fixed asset costs around to more rides.
I agree with your disagreement. In particular because the network effect means that it's hard to go from facebook to somewhere else because the services are useless if your friends are not on it. Both drivers and customers of uber already use competing services.
This is true for every service, only the value of individual contribution differs: huge for facebook, pretty big for "real life" businesses (uber, airbnb), quite minor for "online only" (non-multiplayer videogames).
It would be very hard for another ride sharing company to get involved now because there would be no incentive to use yet another app unless the company subsidizes rides or something to entice both users and drivers.
A small competitor can piggyback off their network at low cost and be hard to dislodge. It is difficult to extract monopoly profits with an open network.
We often use "network effects" to refer to word of mouth growth and user lock-in, but I think Uber's advantage is still a network effect - just a different one.
FTA: > If the cost of customer acquisition (CAC) is greater than the lifetime value (LTV), a startup can grow itself to death.
Oh, you mean like Salesforce? No, wait, they had an IPO and they still only rarely show a profit. And they hold their LTV very close to their chest, so we still have no idea if CAC is lower or higher than LTV.
> When investors talk about growth, we’re talking about sustainable growth.
No, you're not, because you continually fund companies that do the opposite. Salesforce, Webvan, Pets.com from the first boom. Instacart, Uber, Lyft, WeWork, HubSpot from the latest.
> The period of cheap capital and billion dollar checks has ended.
Same thing we heard in 2001 and 2007.
> In this capital constrained market, buying scale is no longer going to be a credible lever for the next generation of startups. ... Companies can no longer look to money as a performance enhancing drug for scale-up.
Until it is again. It wasn't OK to "buy scale" in 2001 or 2007, but it was in 1997-1999 and 2012-2014. And now in 2016, it's fallen out of fashion again.
Either we're going to have a raging depression, or the bubble will inflate again. Hypothetically, both of those scenarios could actually happen--a depression followed by bubble inflation yet again.
This is why I suggest that founders tune out the idiocy and focus on building a sustainable business. You probably won't build an Uber as quickly as Uber did. But you'll be hugely protected against the inevitable downfall, and won't find yourself cash-strapped and forced to switch gears quickly (notice Uber now singing the "we plan to be profitable in most U.S. cities this year" tune.) And, more importantly, you'll have built a life for yourself, your employees, and their families that are depending on you.
This is a very common argument. It's also wrong.
Salesforce earned $6.7B of revenue in 2015^. It spent $3.2B of that revenue on sales and marketing, in other words getting new customers. It made $100M total profit.
If Salesforce stopped caring about acquiring new customers, it could cut sales and marketing spend by 90%, down to $300M. It would then have $3B of profits.
Financials (see page 7): http://s1.q4cdn.com/454432842/files/doc_financials/2016/Q4/C...
^ Technically between Feb 1, 2015 and Jan 31, 2016, and labeled in the report as Fiscal Year 2016.
It's sort of like saying, "If we stop investing in R&D and machine maintenance, our factory will be much more profitable." In an accounting sense, yes, sort of. But in reality, no, because you're eating your seed corn.
I grant that Salesforce is still in a "let's buy market share" mode, so we shouldn't expect to see a profit. So they could be just growing happily. But they also could be in a highly competitive market without much competitive advantage. Or it could be that they are using marketing spending to boost revenues well beyond what's sustainable. From the numbers, we can't tell. Which, I believe, was ericabiz's point.
I don't know if they are, but just because the numbers look good does not mean much.
things like profitability and sustainability are for suckers, plebe small businesses that they won't look at until they smell an opportunity. otherwise, you might as well be the taco joint they eat lunch at. they'll say great things about you and even use your products, but they wouldn't give you more than an hour of their time.
they have the best jobs on the planet, that's for sure. i'm not saying they don't do work, they certainly do, it's just extremely favorable for them, because they have all the money. so what are you gonna say, chump? nothing.
watch out for their lawyers, too. it's hard to tell which of the two are more full of shit.
I love it when I read an article, generally agree with it, feel like i'm wiser now, and then read the comments and someone like you shows me I automatically agreed with the author without thinking about it too much.
Gotta work on my critical thinking. Any recommendations on what to read?
This sort of awareness takes time to build, much like building muscle at the gym.
For the first article you read every day, take 1 minute and pay attention to how it made you feel. Are your biases and beliefs affirmed or challenged? Can you argue the other side of it fairly? Are there ways the author could be fooling himself or fooling you?
If you try that for a while, my guess is that you'll notice particular biases and develop reactions to them. E.g., lately I've been working on in-group bias. I'm more likely to agree with authors I perceive as "us", and more likely to disagree with authors I perceive as "them".
:)
Not only does it have a lot of excellent business advice, but he's also a pretty hilarious writer.
More recently, I enjoyed Dan Lyons' skewering of Silicon Valley culture with "Disrupted" (which just came out and has been getting a lot of press.) I didn't agree with everything he said, but it was a great read nonetheless.
An interesting analogy is steroid usage among men in fitness. I guess that is why the author used it.
Maybe using insane amounts of capital isn't a black/white issue and more dependent on your market/business type. Obviously, you are right about everything else just being cyclical.
Also, that is very illuminating about Salesforce.
Probably not them but other companies with less capital have achieved better long term results.
I think we should have a serious discussion about "startup dumping" and business inequality. I don't know how to solve the unfair competition pushed by companies who can spend a lot of money acquiring customers without a profit but it is important to increase the success rate of startups with less capital.
The Yankees are infamous for using money as a tool, buying up as much talent as they could.
In recent years, the Dodgers have outspent everybody, but in an absolutely different way. 25% of the Dodgers payroll goes to players not playing for the Dodgers. Often, it's going to players playing against the Dodgers. Many commentators have described this in similar terms. They use their deep pockets a s a weapon. Instead of giving their players huge salaries, they on multiple occasions have found teams struggling with expensive contracts for underperforming players. They negotiate to take the player (and the bad contract) and then require some talented youngsters to be thrown in on the deal. They then trade away the underperforming player to another team, subsidizing the contract substantially, and keep the talented prospects. While some of these trades didn't pan out well, it was a pretty unique way to use deep pockets as a weapon.
It's funny you choose baseball as the sporting example, as it's without a salary cap.
If you look at hockey and basketball, this has been a strategy for a long time because teams have to remain below the salary cap. As such, bad contracts are traded around all the time to make room for payroll. Stars sometimes change teams for essentially nothing but cap space.
I guess it interesting that a baseball team is doing it in a world where there are no spending caps.
When a team like the Marlins has a payroll of $80M and the Dodgers are at $300M, there's a much more predatory effect at play.
Why would I wait 5-10 minutes for an Uber/Lyft when I could, in the same amount of time, be closer to my destination by just hailing a regular taxi?
Surely I'm not the only person experiencing this. I want to love Uber/Lyft, but so far my experience has just been one of hassle and inconvenience. I was motivated to try them out because of free credits, and I'm trying to use up my free rides before they expire, but it's just been too painful so far!
Generally speaking, the vast majority of people in the DC area do not live where it's easy to grab a cab. The only places it's easy to hail a cab are in Downtown DC, which is where are the tourist attractions are, but not much you'd want to do on a daily basis as a resident.
1) Driver and I agree on a best route via mapping software, no more getting lost, miscommunications or malicious route designed to get more money out of me.
2) Payments are clear and fast. No more getting pressured and hounded for cash when I only cary my card.
3) It's always a clean nice car. No more duct tape over check engine lights.
4) I know if there is ever an issue I know it's going to get taken care of instantly by Ubers excellent staff. No more terrible customer service.
Circa June 2013 near Washington Square.
Another advantage to me is the fact that my destination is programmed in - I've had to deal with a lot of yellow cab drivers who have absolutely no idea where they are going or the location I am talking about.
It was riddled with terms like "arb", clearly written for self-satisfaction. If my life was wrapped around the VC universe, I probably would not care to read this article, and yet for anyone who isn't so familiar, you need to interrupt the reading several times if you want to understand what he is talking about.
The conclusion of the article, hinted at the beginning, seems to run abrupt without fully explaining itself.
It sounds to me like this investor would like to see a return to investments in profitable companies rather than aggressive investments in growth, because it was more fun for him when he had fewer competitors willing to throw money around. Is there any evidence that this trend is actually reversing as opposed to just being wishful thinking?
So, the answer to the question "why Uber won" is: by spending lavishly.
Huge cash inflections into companies isn't helping user experience. In most cases, the game theory behind the huge cashouts causes user suffering. It's time to think differently.
Coupled with Uber's more aggressive practices.
That's a very astute observation.
Anyone have any ideas of other markets(or potential markets) where such an approach could be translated?
But the missing piece of the puzzle, which this article filled in was that it was never really about the app. It was about using money cleverly to get this thing going.
Now Uber has first mover advantage. But I can see many potential problems for them. They have advantage in name recognition and momentum but I can't see much else advantage.
The tech should be easy to replicate. So I think what will matter in the future is who manages to figure out the best way to use autonomous vehicles.
In this regard I'd rather place my bets on Tesla. If they as they hinted get into doing Uber like stuff in the future with autonomous cars, they have a clear advantage as they got advantages in more fields than Uber which can enhance this particular business.
By controlling the cars, they are pulling in more data than anybody else on autonomous driving at the moment. They are already beating the master data collector Google, collecting more data then they do in a year on autonomous driving.
So yes, companies in less valuable markets are going to have a tough time getting funding as VCs pull back. But it does not follow that if you found an equally valuable market somewhere else you would not have access to funds to make it big. There's still a lot of money out there looking for good investments. I don't see a complete downturn as predetermined without some other externality at play.
[1] http://blogs.wsj.com/economics/2016/03/28/the-entire-online-...
1) I can't see estimated time but lots of cars around. I then book and it estimates > 12min wait time. If I cancel, it charges me $2 anyway because reasons. 2) a number of drivers cancel after 10 min of waiting - this happened 3x in a row a few weeks ago so I finally got a car after 40 min. ...
Friends with similar experiences...
A quick google didn't do it for me :(
The looseness comes from the fact that traditionally an arbitrage opportunity really is theoretically nearly zero-risk while I think the author is using it here in cases where it's a bit more complex. But the analogy at least works in highlighting the aspect of these opportunities being temporary in their existence, like the joke about an economics professor and student seeing a twenty dollar bill on the ground and the professor ignoring it, quipping "If that was a real twenty dollar bill, someone else would already have picked it up off the ground"
If in practice this turns out to be different, then this is a failure of capitalism, and somebody ought to do something about it.
Sidecar was actually first out of the gate with a ridesharing product but Lyft wasn't far behind and soon clearly dominated the space with their ingenious pink mustaches. Sidecar suffered from a classic first mover's disadvantage in that they were overly concerned with regulatory risk which made them too timid. Sidecar's opinion was that the mustache overstepped the bounds between employer/independant contractor and that the CPUC would slap down Lyft and put them out of business (similarly, the bid model that Sidecar used was driven by similar concerns despite the noticeably poorer user experience).
I've never seen a product achieve such ferocious product/market fit as Lyft did. During its first year, it was extremely common for there to be hours at a time when drivers were immediately snatched up as soon as they ended their last ride and passengers would wait for half an hour at a time, eagle eyed staring at the screen to snatch up a car. The level of inconvenience that people were prepared to put up with just to use Lyft's product spoke to just how much of a radical upgrade in user experience ridesharing provided and a hint as to the explosive growth that was to come.
Lyft was in the enviable position that they held a near monopoly in this space for almost 18 months as Uber tried to reconfigure itself and I remember hearing Travis speak about how the cheaper Uber would be Uber and being skeptical that he could ever overcome such a huge first mover advantage.
In the face of all of this, Lyft could have made the "standard" startup decision of prioritizing growth above all else and taking whatever compromises were necessary to service that growth. Instead, Lyft took an alternate path in which they placed driver quality as a longer term priority. I remember during even the most insane supply/demand mismatches, Lyft was still rejecting some 50%+ of driver applicants for not being "Lyft material".
I think against almost any other competitor, Lyft could have made the same choices that it made and come out ahead but Uber's raw ability to execute is something that, regardless of what you think of their ethics or culture, has to be admired. Uber is one of those extraordinary companies that prizes execution ability culturally in the same way that Apple prizes design. Lyft should have rolled out into other cities faster, Lyft should have gone international, Lyft should have dropped its prices more aggressively and taken the hit on driver quality. All of those are recoverable errors unless you're facing up against someone like Uber who rolled out an aggressive expansion plan and then relentlessly executed against it with the wheels barely falling off.
This is all easy to see with the benefit of hindsight but I remember living through that time, with friends at all 3 companies and watching them grope towards an uncertain future while doing the best they could.