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Comment by warp_factor | Hacker News Reader

Uber and Lyft IPOs look to me like they are legal ponzy schemes.

Both companies lose a crazy amount of money, they have close to zero moat, customers have no loyalty and will go to another rideshare service if it is one dollar cheaper. The fundamentals don't make any sense, but still we read everywhere that Lyft and Uber at those prices make sense.

The VCs and founders decided to get out while the market is up (and while they still can) and they will sell their shares to the "dumb" public that will buy into another overhyped tech stocks without really understanding the fundamentals. The employees cannot sell before 6 months, they are locked out.

After a couple weeks the market will probably realize this stock is overvalued and it will start to go down, but at that point all the big fishes will be out already and who will hold those toxic assets? individual investors and employees that cannot yet sell.

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Partly, it's just that everything is priced relative to the current market, which atm is cash rich and opportunity poor.

Uber and Lyft are an optimistic bet. They can't generate profits right now but (Uber especially) they might find a way. Self driving cars are otw. They could be in position for that. Regulation is otw. This could give them a moat.

..also efficiency, I suppose. A lot of recent "marketplace" successes (YouTube rev-share, app stores, steam, iTunes...) are built on thick margins. Uber and Lyft take 20-25%. Uber & Lyft's main job is software and software scales. There's no inherent reason preventing them from operating within a profit producing budget, especially if growth-at-all-costs ends. It'd be hard to justify the share price though.

Remember that FB went public well before the ad business turned into the money machine it became.

Not saying it's a good investment. I suspect it's not, but there aren't many good investments around. etc.

I don't get the self-driving car move for Uber, et al. Instead of letting drivers use their own cars or making money on loans they will all of a sudden have to buy tens of thousands of cars, maintain them and replace them every 5ish years (unless they get yet another exemption from taxi regulation commissions).

Aside:

> but there aren't many good investments around. etc.

Like, can we talk about this just a sec? I feel this too, that there just isn't a lot of room left in the economy. But, it just feels like that is crazy, right?

There is all this money, more than ever before. There is all this technology, and it's the best that has ever been out there. There is all this education and learning, we're better at teaching people than we've ever been. And there are all these people, nearly eight billion of us. Things, objectively, have never been better!

So, how can we be running out of good investments? It just feels like I'm nutz here. One one hand, we have all this potential energy, but on the other, there is just no where for the kinetic energy to go. Humans aren't just boulders on hill sides, we don't tend to sit still, we get moving on our own.

Why do I feel like I'm missing something big?

> So, how can we be running out of good investments? It just feels like I'm nutz here. One one hand, we have all this potential energy, but on the other, there is just no where for the kinetic energy to go. Humans aren't just boulders on hill sides, we don't tend to sit still, we get moving on our own.

There's a lot of factors but the big ones I've noticed are healthcare costs/risks and overall income inequality drastically reducing the pool of potential entrepreneurs. It's less a problem for software engineers but it's a significant limiting factor for any venture that's applying software to specific industries (think transportation, agriculture, manufacturing, etc) when founders can't get their heads above water long enough to consider a startup.

Zoning laws are also slowing growth in many cities so a lot of money that would normally be chasing low risk returns in real estate has to move up the ladder. The number of things to invest into without relying on a bubble just can't keep up with the amount of money coming in from fiscal policy and foreign investors.

The US IT industry (as a lay person) is the only one where a startup can feasibly grow quickly enough to justify the investment.

Construction in the US is minimal. The initial costs of any industry with production, manufacturing are immense. Healthcare is one area where there is space for clear improvement, but being a rigid to change as it is, healthcare startups really struggle to penetrate the industry.

You may invest in the service / food industry, but it doesn't seem to be as hyper-scaling friendly as it used to be. I do not foresee any trend since Starbucks that has been able to take a country by storm. You can invest in smaller restaurants, but that is more of a small business investment than anything resembling stock, so good luck making it a liquid asset, even if successful.

Also, a lot of investments are mislabeled (often purposely) as tech startups but are actually some thing else. Uber, Lyft, Airbnb, Coursera, Udacity, Instacart, Juul, WeWork, and the like are to me, products from a different industry all the together. The tech aspect of their business does not influence their success as much as it may seem.

Why would anybody want to invest money into a stock that has never been profitable and has no future indication of ever reaching profit? It really just sounds like speculation based on nothing. This reminds me of the bitcoin market.

I fully agree on Lyft and Uber and I think the public is getting duped on this IPO. Its worth pointing out though, that people said the same thing about Amazon's IPO.

To be fair Amazon is profitable, but their stock is extremely inflated by over speculation. The idea is still the same. Dump cash into the stock and hope others do the same driving up the price of the stock in the hopes that you can drop it before the bubble pops.

> but their stock is extremely inflated by over speculation

By that indicator?

Amazon wasn't profitable for over a decade after their IPO.

Amazon isn't profitable by design. Lyft and Uber aren't profitable because of economics.

what does that statement even mean? Pick one {Lyft, Uber} and cross out the other one because it goes bankrupt. Now there's way less overhead per ride because you don't have to aggressively market, and your only costs are infra, insurance, and driver filtering, increase your fares by a bit (because less competition) and drop your take from the drivers to make them happy. Do you not then see this as a money printing machine?

The situation is basically this:

(1) Uber and Lyft have worse unit economics than a taxi company because taxi companies leverage some little bits of scale by pooling fleet ownership costs and insurance.

(2) Uber and Lyft are currently pricing rides at about 66% of what it costs to provide.

(3) There's no loyalty.

(4) There's no indication that people are willing to pay what it costs to provide their service, doubly so if its actually more expensive than a taxi due to efficiencies stated in [1].

(5) Self-driving cars are a ruse in this context; many companies are developing them at the same time and when one gets them, shortly after, the other will too. And so will all the car companies itching to get into ridesharing (I'm looking at you, Tesla).

To my knowledge, while Amazon wasn't turning a profit in the early days, re-investing in growth, they weren't selling you $20 bills for $12 in the hopes someday "drones" would allow them to turn a profit.

Amazon made over $10b in profit in 2018.

They have been famous for pushing growth over turning a profit. Thy could have scaled back their growth and probably shown profits much earlier.

We have absolutely no idea what would have happened to Amazon if they prioritized profit over growth in the early years. There's no guarantee they'd be a successful company now in that alternative future. Undercutting the competition on prices to increase sales volume in the early years was key to their success.

100%. Wittingly or unwittingly, it was the right call for them, and pulled a ton of air out of the room for competitors.

> This reminds me of the bitcoin market.

This is way more like the status quo of private equity. A bunch of people throwing money at negative cashflow businesses. I wonder if this period of time in history will be looked at as ridiculous.

Another poster in this chain made a good point, however - due to very low taxes, people have a lot of cash and there is just finite opportunity currently.

I think the key is to establish an unassailable logistics network. Once enough drivers, passengers, and other users (delivery, etc.) use either service, it becomes a pretty big moat.

If my driver is closer, and I have scale to keep them busy, you'll have no way to compete without dumping in those same millions.

It's how Amazon worked.

How is this a moat? Most drivers and passengers already use both services and switch between them based on price. They have no loyalty and they don't need their friends and family to move with them to another service, they just move. I could see at some point there will be an Orbits like service that finds you the cheapest rate among multiple services.

Having a significant leader advantage and on a market that takes time & a lot of money to develop is one of the more classic “moats” in the infrastructure game. Anyone can lay tons of fiber cable, anyone can build railroads, how are those moats? For the same reason, including the legislation you can nudge along the way to even more establish an unmovable position

Are you being sarcastic? No one can just throw down Rail or cable, that's what doomed Google fiber and Cali HSR and many other projects. There is no moat with Lyft because any user could easily switch to another ride hailing app.

Yeah I was being sarcastic. My point is that theres a limited technical challenges on the scale of feasibility ("anyone _can_ build...). The big challenges are on the cost/return side of things. Google Fiber faced tremendous pressure for if it was responsible spending or not, which they ultimately decided it was not. So there's good skepticism here about why the valuation would be that high, but I think its a stretch to say they don't have a moat and they're doomed / you cant build a successful company that way. AT&T / Verizon seem very comparable (they don't have a technology moat, they have a first-mover advantage which has been stable for a long time).

Yes, let's talk about the unassailable infrastructure that Lyft and Uber have built. It would help for you to name such things that they have built, since they have not built fiber or railroads. Is it the software? Because it seems there are dozens of locale-specific services that work the same way. As near as I can tell, the only thing they have right now is brand recognition. That is a moat, but hardly unassailable if someone brings more pricing transparency to the entire market.

>Yes, let's talk about the unassailable infrastructure that Lyft and Uber have built

It's a two sided market that takes a significant investment to create. Yes, Google can add G-Car to maps, but where are the drivers coming from? They're not going to switch unless they can expect more income than from Lyft/Uber. Google can't provide that without investing a lot of money in incentives.

The best analog to Lyft/Uber is Mastercard/Visa. It's theoretically easy to enter the market, but in practice it's going to be very difficult to develop your own two sided marketplace going against the incumbent competitors.

Mastercard/Visa is a veritable fortress compared to Lyft/Uber. The plethora of locale-specific competitors proves that. When you go to Austin, you won't find some local credit card network that no one has ever heard of.

Amusingly, Google already is the Orbitz for Lyft/Uber. Google Maps shows the prices of both services when you get directions to a destination and click the dedicated Rideshare route button (up there with the Driving, Public Transit, Walking, and Bicycling buttons). Any competitor wanting to get its foot in the door would only need to pay Google enough money to get itself listed there (which is to say, Google can enter this market for free whenever it wants to). Not to mention the sort of squeeze Google could put on Lyft/Uber via their Maps API costs if it wanted to slyly push those two into unprofitablity.

> Any competitor wanting to get its foot in the door would only need to pay Google enough money to get itself listed there (which is to say, Google can enter this market for free whenever it wants to). N

That assumes that the feature in Maps not only exists but is widely used by consumers in preference to individual service apps; my impression is that that is not really the case.

My impression is the opposite, so in the absence of harder evidence we're at an impasse. But even if Google Maps isn't widely used, Google could trivially spend the cash to market the feature if it wished to, or hell, just pop up an alert upon opening the Lyft or Uber app on Android that says "Did you know that you can compare ride-sharing prices across all services in your area via Google Maps? Click here to try it!" (in the same way that visiting any Google property on a non-Google browser pesters the user into downloading Chrome). Google already owns the platform, Google already owns the maps data, Google already owns the users.

That’s a compelling reason to use non-Google apps. Don’t they have enough hooks in my data already? I still think you might be right ultimately since most people prioritize price and convenience over their long term best interests.

> Any competitor wanting to get its foot in the door would only need to pay Google enough money

Or indeed Google develops a competitor themselves if Uber and Lyft gain 9-digit valuations. It could do that in less than a year and for a few hundred millions at most. Taking a page out of Apple's book of vertical integration and squashing popular services with in-house offerings.

I agree I don't understand how a company seemingly built on backwards business fundamentals can be valued so highly, but I disagree it will be only a couple of weeks before the market adjusts the price accordingly. I think it will take much longer than that, probably closer to a couple of years of a slow downward trend with lots of volatile spikes.

I would expect the same, at least for Lyft.

Uber is a bit of a different beast. It's valuated much higher, and it banked a lot of that valuation (in my perception at least) on the perspective of getting self-developed fully automated driving capability to the market and thus having an edge (and an actual moat) to be used to finally reach profitability by eliminating the costly drivers.

Thus I would expect its valuation to stay high for a while, but drop sharply as soon as the "fully automated driving is right around the corner" bubble pops for real.

Typically the VCs and founders are locked up along with the employees aside from a small percentage of shares the biggest shareholders sell at IPO. Is that different here?

I'd purchase up front and ride the initial wave until the collapse if I thought it would last more than a day or two.

I think we'll see facebook similar treatment, comes out to immediately drop

>individual investors and employees that cannot yet sell.

Don't forget government pension programs that are some of the most mismanaged portfolios around.

I was kind of hoping the ipo would tank cause I can't help feeling this is going to end badly for the retail investors who once again end up holding the shit sack. A successful ipo just goes to show that the fat cat capitalists have once again managed to game the system

> like they are legal ponzy schemes

1. Could you please not call something a ponzi scheme, just because it looks scammy? This seems to be a trend that has caught on during the crypto-bubble (where admittedly there where a lot of ponzi schemes), but not every scam is a ponzi scheme.

2. Whoever trades on the stock market knows the risks.

Whether the pre-IPO VC funding cycle is a ponzi scheme is another topic...

I would argue that any investment scam in which money from new investors gives liquidity to old investors, resembles a ponzi scheme.

Which would be true for any IPO?

Only the ones that never make anywhere near to a profit.

I would qualify that as a situation that repeats itself.

If money from new investors is repeatedly used to pay old investors, it resembles a ponzi scheme.

only if the IPO price is completely unrelated to the fundamentals, like it is for Lyft currently.

If it is unrelated to the fundamentals, you are in full speculation territory and the only goal buying the stock is to sell it eventually to a bigger fool that will pay more for it.

The last big downturn was a decade ago. Any traders age 18-28 have never seen a big drop and likely don't comprehend the extent of the risks IMO.

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