Deliveroo, Uber and The Possible Death of Venture Capital Backed Companies
Following the collapse of Deliveroo in Australia, it feels like the age of venture capital funding our lifestyle and convenience is ending. One type of business I strive to find are businesses that do small but essential services (or products) that improve the lives or businesses of their customers. When I say essential it can range from supplying computer chips (as you read this just think how many are in your house), machine tooling, food supply or even how their customers feel. If a business is a small but essential part of a big process with a high barrier to entry to enables the business to not only almost impossible to compete with but also enables the business to produce oversized profits. You might not think a LV handbag is essential (ladies feel free to disagree here) and in the spirit of full disclosure, I know less about women's fashion than how to perform heart surgery, but what I can't deny is that LV evokes great feelings in their customers. Why? Because it provides their customers with a sense of high value, looking great, boosting self-esteem and letting others know you are a woman of the means to afford great taste/luxurious items. There are stories of women in Hong Kong with lifetime earnings below $50,000 spending $5,000 of that on a LV bag. It gives their customers an identity, which I'll argue is essential. The male version is arguably a Rolex watch. Due to the internal mechanism a Rolex will keep time less accurately than most cheaper watches (let alone smart watches) but the brand is synonymous with success and luxury. The funny part with Rolex though is that the ultra rich are typically found wearing much more understated watches (and much more expensive) by brands you are unlikely to have heard of like Patek Phillipe, Jacob and Co, Vacheron Constantin etc. Take Harley Davidson, the motorbikes they make are okay but other manufacturers make faster, comfier and more fuel efficient bikes (plus in my opinion more fun to ride). They have a long history of mechanical unreliability, are expensive compared to other brands and yet if I ask you to picture someone riding a motorbike you almost instinctively picture someone riding a Harley. However, Harley customers will tattoo the logo on themselves, wear Harley shirts and even non bikers will own their clothing. Think about the last time you saw someone with a Suzuki or Kawasaki tattoo yet it is seemingly common to see owners of Harley's with the logo tattooed on them.
This, for want of a better word, essentialness (in providing an identity to customers) provides an amazing moat around these businesses and allows for higher margins. These are just one type of such businesses. I figured these companies were more fun to talk about then a chemical company that improves crop yields or a company that produces freeze dried yoghurt bacteria or a company I've been recently looking into that does sex sorting of cattle breeding lines... On the other hand most of these venture capital backed businesses that do the opposite. They aren't really special other than providing convenience or lowish prices, are reasonably easy to compete with and often despite immense effort I can't find a reason that makes them truly special The Rideshare and Last Mile delivery industries are the perfect examples. Uber initially was a fun, convenient and cheap way to get around. Why order a stinky cab that may take an hour to arrive when you could have a clean (often with snacks...bonus) car, driven by a friendly everyday person that arrived in minutes and at a lower price? Plus for the drivers, it was an easy way to make a few extra dollars while being paid more than a taxi driver does without having to pay out a few hundred thousand for a taxi license. The premise was simple, Uber was going to spend and burn as much money as required to grab truly global scale before competition arrived and become ubiquitous with getting a Lyft (misspelt as Lyft is a competitor in the space). They succeeded partially, as they certainly got global scale but they did this by burning money by subsidising rides. Lucky Softbank and other major investors had plenty of cash they were willing to spend. Think about it, one of the quickest ways to grow is business is by selling the product or service at less than the cost to produce. If I wanted to build a $1billion business in revenue rapidly, I could sell $20 notes for $10 each. I'd have huge revenue, huge losses and no way on earth in the future I could increase prices to where I'm making money. You aren't (I hope) stupid enough to pay me $50 for that $20 note. Now the rideshare landscape is packed with competition, prices at times (always when you want one) can be astronomical and most of the drivers seem to be ex taxi drivers and the fun has worn off. How often do you see drivers with stickers for 2 or more rideshares on their car? The drivers simply go to where the most money can be made. Although, I've had my fair share of drivers that I doubt could walk and chew gum at the same time... I know personally when I need a lift somewhere I scan the 5 different apps on my phone and just go with the cheapest. Side note, but I'd happily pay a few dollars a month that instantly compares all the various ride share apps and tells me the fare and arrival time... So there's nothing special about it. Now as we are seeing interest rates rise, investors are shockingly finally wanting to see profits from these companies.. Not just ever increasing revenue and losses. To put this into perspective since 2014 the total losses that Uber has incurred are $24,500,000,000 or roughly the combined value of Qantas, Lendlease and Xero. A whopping 24 and a half billion dollars. Last mile delivery is even worse. I seen companies with valuations that exceed $100,000,000 on the premise of "if you need milk now, we will deliver it asap" or whatever service. Let us just think about this, the business needs to have warehouse to store these goods (including perishables), in enough locations to make it convenient (I'm not waiting 90 minutes for milk to arrive for my morning coffee), with enough drivers to make it convenient and yet at a price that isn't excessive while certainly having higher cost of goods than a Coles, Woolworths or Aldi. This is going to require gigantic size to have a hope of being profitable and permanently rely on user laziness (or forgetting to buy milk/laundry powder etc when they do their regular grocery shopping). Supermarkets are essential businesses but their margins aren't great. There is too much competition. They rely on volume (I.e. I drink roughly 6 litres of milk a week) and squeezing suppliers to offer low prices. In fact they even do delivery now and I bet that there is a more convenient supermarket than the nearest warehouse of one of these new found apps. So why don't they do near instant and 24-7 delivery of goods, capitalising on their size, location and ability to squeeze suppliers? Simple, there is sweet bugger all money to be made from it and mountains to lose. We have lived through a past decade of cheap and cheaper money, aggressive venture capital, routine revaluation of these assets by initial funders at future capital raises and what must be the worst investment thesis I've heard "yeah it's losing money now but Amazon lost money for years and look at it". These businesses are not the next Amazon, most are closer in nature to Pets.com or any of the multitude of early internet boom companies that died when the rush to fund them and their losses died. However, I could be wrong. It happens. Maybe some of these companies will end up being huge, essential, highly profitable and tough to compete with companies. I doubt it though.