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The question (with Uber in particular) is that if this business model really covers up a huge ponzi scheme.

Before the last decade (or even 5 years?) the amount of money some of these companies have been raising would have been unheard of and required an IPO.

But if you can keep finding ever bigger investors to give you ever more money...

It's a really weird reality, because typically the worst kind of place to start a company is one with huge barriers to entry that requires a ton of money to get started. Yet that seems to have done quite well recently.

Squashing minimum wage service providers seems to be merely a side effect... these companies can't really make money EVEN WHEN they ignore regulations and exploit their not-technically-employees.

I think that's a really interesting concept. People think Uber will reach a scale where either it can use automation to reduce costs or jack up prices. It may well be the other way around - as it matures regulations catch up and the loopholes it was using to keep costs down disappear and their costs slowly increase instead.

Places like NYC already show this in practice.

Can you elaborate? I don't have any context on this other than taking a Lyft in NYC once.

NYC introduced fees for ride sharing with destinations or pickups in Manhattan to reduce congestion. They also added fees to guarantee a reasonable minimum wage for the drivers of the ride sharing app.

The difference in price between a cab and a uber/lyft is relatively small. Convenience seems to be the primary driver for which people use (cabs in Manhattan frequently because of ubiquity, apps in other boroughs).

NYC also imposed a cap on the number of ride sharing vehicles that could be operated. Uber is suing to try to overturn it:

https://www.consumeraffairs.com/news/uber-suing-new-york-cit...

Or that terrible customer experiences which are currently "exceptions to the rule" end up becoming the norm at whatever they pay drivers/charge customers... there are only so many good drivers and customers/contractors burned by bad experiences will not come back to Uber's platform.

See how well Gojek and Grab are eating Uber's lunch across Asia. Better experience and lower costs.

Wouldn’t say Grab is a good experience. I find drivers less trained, cars more beat up (less QC).

Also drivers can be weird. On two occasions they were trying to sneakily take pics of my wife when she was alone. My wife’s Caucasian.

This is in Thailand by the way.

The only thing is good (for me) about grab is price. It’s unsustainably cheap, like Uber.

Where I live (in Norway) we are quite well accustomed to bad experiences with overpriceed taxis and bad customer services with existing taxi companies (in large operated with immigrant drivers). Uber would give so much more transparency and security for customers that I'm baffled that it has not been allowed yet

> It's a really weird reality, because typically the worst kind of place to start a company is one with huge barriers to entry that requires a ton of money to get started. Yet that seems to have done quite well recently.

That is the case if a normal person is starting a business. However, for venture capitalists, it is different.

The asset they have is a ton of money, so they are looking for businesses where that provides them an advantage. They WANT to fund a business that requires a ton of money and has lots of barriers to entry, because that is their strength.

> with huge barriers to entry that requires a ton of money to get started

Just a note that the proof of concept stage was very cheaply done. Travis hired someone to make an app and the "dispatch" system was just a single php page. He then tested it out with his friends.

That said, I agree that ultimately to get to the position they are today required a ton of cash - just the getting started was pretty cheap.

Actually we have the blow-by-blow of how it all played out on our podcast since Jason was employee #7 and built out the original node dispatch system.

http://techzinglive.com

I'm not sure exactly what show he started working on it, might need to go back to 95. Full show list here:

https://www.dropbox.com/sh/frnqzndys9j3vc1/P7jHgH0BQK

Hustle recognize hustle but which podcast episode is it dude? There are 300+ eps at that link.

Well it's A LOT of them.

Because we spoke about the Uber stuff as Jason lived it in real time ;)

A fun one was when Jason turned down the CTO position and of course we had no idea at the time what that really meant.

I guess in the latest episode 321 (Quick & Dirty) Jason does give an overview of the Uber story and how he got involved if you want a TL;DR version.

I just spent 10 minutes looking for it and couldnt find it.

Well as I said above it's not one episode it's a lot of them. But actually I just searched and this is the first time that Uber was mentioned in the show notes:

http://techzinglive.com/page/581/95-tz-discussion-lost-in-la

So looks like 95+

thanks!

You guys ever going to do another episode Justin? I still have Techzing in my podcast app list, hoping it will light up again with a new episode sometime.

Yep tomorrow :) But we did one 2 weeks ago too. Sounds like your feed has stopped checking.

What motivated Travis's decision to hire someone else rather than develop the initial version himself?

> how is this supposed to create wealth for anybody except the shareholders who got in early with cheap valuations?

Spoiler alert: It's not.

The primary goal of a VC-backup startup is a positive return to its VC backers. Everything else is a necessary evil to attain that primary goal.

Now for the million dollar question - how is this different to a ponzi scheme?

It isn't JUST a ponzi scheme, but to some degree it sure seems like it is in part a ponzi scheme. Public investors pay back VCs and the entreprenuer and then get shafted. Actually, let's work through the Wikipedia definition line by line.

> A Ponzi scheme ... is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.[2]

One distinction that could be made is that the entreprenuer isn't actually paying investors back himself. Rather the investors are finding new investors and re-selling their shares up the river.

> The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds.

In a very literal sense, when you invest in Uber's Series A and then sell your shares on an exchange after IPO, you are aware that your profits are coming from other investors. However, I think in a pretty meaningful sense people believe the value of the company has increased due to 'product sales or other means'.

It seems like a Ponzi-like startup is not illegal because it's not as deliberately deceptive nor is it schemed by a single party/person, but rather it's more the creation of the entire market and what is really causing the profits/payouts is more up-for-debate.

(I should have used the legal definition though, not Wiki.)

So it is different to a Ponzi scheme in that it has legal deniability, not in effect.

The dividends that are paid by the company are the ones that differentiate a public company shares from a ponzi scheme. In a Ponzi scheme, the earnings are from future investors money but there is no concept of dividends ... where one earns based on how the company is actually performing.

So... you're saying that the entire market is currently churning out legal ponzi schemes? Or is it that the entire market is itself currently a ponzi scheme?

Either way, I get the distinct impression that I've seen this movie before and I didn't like the ending.

They just finished explaining why it’s not really a Ponzi scheme yet you keep calling it one.

Did we read the same comment? Seems to me they just finished explaining all the ways it's similar to a ponzi scheme.

> It seems like a Ponzi-like startup is not illegal because it's not as deliberately deceptive nor is it schemed by a single party/person, but rather it's more the creation of the entire market and what is really causing the profits/payouts is more up-for-debate.

In a Ponzi scheme, you’re led to believe that profits are from sales, luring new investors to partake by lying.

Uber is losing money but there’s still hype around it because everyone wants to get in on the ground floor. At the end of the day, they’re going to be releasing truthful quarterly reports rather than fabricating numbers out of thin air.

The difference is pretty massive I would say.

Don't forget the other group of people who benefit: the users of the app.

How much of that benefit is purely short-term though? In a hypothetical world where Uber and Lyft's current pathway to profitability never pans out, what are the ramifications. The most obvious one is that their fares will increase by 25-50% depending on the market, pricing them well above the legacy taxi services that existed before the arrival of these VC-backed companies. The second most obvious ramification is that many of those legacy taxi services have been run entirely out of business in smaller markets. My home county of 1m+ people is now down to 1 shady taxi service with a handful of ancient, beat up Crown Vics (last produced in 2011) and they only hang on due to the incredibly low standards for taxi regulation in our region. If Uber and Lyft fail or become far less useful due to cost increases, there are significant barriers to entry for a new, clean, and professional taxi service to enter the market as they don't get to play by VC rules and have to start a highly capital intensive (for a small business) operation by conventional rules while only being able to attract a customer base entirely through conventional means of marketing, and all at a very small cost advantage versus the ride sharing giants.

I don't really understand the point you're making. Why do small taxi companies have any more right to exist than Uber/Lyft? Or what exactly are they better at than Uber/Lyft that would justify keeping them around?

Any driver who was formerly driving for a small taxi company could simply drive for Uber/Lyft. So what is the benefit of having management be local vs centralized?

Because they make money and they are being all corporatey in their big corporation buildings!

Local artisnal petite bourgeoisie businesses only available to middle class people living in downtown urban areas are the only moral form of capitalism! That and when you get tired of the city and decide to start a farm in rural Oregon.

>How much of that benefit is purely short-term though? In a hypothetical world where Uber and Lyft's current pathway to profitability never pans out, what are the ramifications. The most obvious one is that their fares will increase by 25-50% depending on the market, pricing them well above the legacy taxi services that existed before the arrival of these VC-backed companies.

For most U.S. cities that Uber/Lyft now service there really wasn't a taxi service before them. You could get one at the airport and possibly in certain other areas of the city like by major hotels. Everywhere else it was call a company and maybe they'll show up at some point.

if there is a demand I'd expect something to come up

Note that Uber/Lyft do something the taxi companies can not. They scale to meet demand. If 1000 drivers are needed between 6pm and 8pm then they'll likely get 1000 drivers. Taxi companies can't do this as they'd lose money on drivers and cars when all of them are not in use.

>fares will increase by 25-50% depending on the market, pricing them well above the legacy taxi services

Hahaha Right now they are 1/4 of taxi prices. Or at least last time I rode a taxi.

until the VC-subsidized pricing goes away and they're stuck paying more than they ever did for taxis.

This is really just about the dynamics of mobile hailing and logistics.

Of course it's cheaper than actually calling a Taxi dispatcher, verbally providing a pickup location, and paying cash.

But how much cheaper?

Uber, Lyft, Grab and others are in the business of figuring out those margins... and riders will pay rate increases as supply and demand equalizes.

You've nailed their single differentiating unique selling point.

Not really. Before Uber I’d say ~50% of the drivers I ordered never showed up. Missed tons of flights this way

> cheaper than actually calling a Taxi dispatcher

But we have apps for hailing Taxis...?

These do all the automated hailing, tracking the taxi for pickup (got my anxiety levels down quite a bit, I've had taxis not come for important trips), as well as payment and ratings (optional).

> payment and ratings

Underrated, never felt cheated out of a lyft or uber. I've even tipped.

You should be tipping nearly every single time you take Uber/Lyft/taxi.

Most 'small businesses' are not startups. Far from it.

They are shops, restaurants, contractors, accountants.

Even most 'big companies' are just small one's that grew into something. Starbucks, H&M, IKEA. They were never the kind of 'entrepreneurial' in the Valley/Startup sense.

It's why VC/Valley is so focused on tech because there are inherent multipliers.

Uber and WeWork are providing a value add. Both of them have upped the game in some way. Yes - the funding bubble distorts everything miserably but that doesn't take away from the fact that people want cheap and fast rides, and they want cool places to work.

The current VC-funded startup economy manages to combine the worst vices of central planning (capricious allocation of resources) with laissez-faire capitalism (impoverishment of those not at the top). It really is a terrible failure pattern.

One way to combat this as a small business is to be in it for the long haul, like pinboard

Thats an excellent question. The real answer lies in 2 things: (a) Fiat money, and thus (b) Artificially low interest rates.

As long as the money printers, keep printing, and also keep interest rates at 0%, then all sorts of market distortions will continually be produced as the dream of some return is better than the promise of none.

>The reality is that a VC-backed company can simply outprice any competitor

this assumes bad ideas get enough vc funding to do what uber is doing.

they dont.

Elizabeth Holmes would like to have a word

She got 1 VC investors if memory serves.

It looks like she raised from more than 10: https://www.crunchbase.com/organization/theranos#section-fun...