
On-Demand Startups Are Hemorrhaging Tens of Billions a Year - howard941
https://www.bloomberg.com/news/articles/2019-04-01/on-demand-startups-are-hemorrhaging-tens-of-billions-a-year
======
lordnacho
It's a strange age to be living in. On the same day I've visited people in a
WeWork, been driven around in an Uber, and had food delivered by Deliveroo.

All of them blowing a huge load of money for the privilege.

If they don't make back this money, it will represent a huge waste of
resources.

It's private money behind, but I still wonder whether this a reasonable way
for the economy to run.

For one, it means the little guy can't compete. Only people with deep pockets.
And they might not be the most competent.

For the investors it means selling a dream of profits, but not profitable
businesses. You make more out of convincing someone your OD empire will
succeed than making it do so.

I wonder what would happen if there was a rule that you could only resell
equity in a business whose financials had improved recently.

~~~
patmcc
>>If they don't make back this money, it will represent a huge waste of
resources.

Hardly; it'll just be a transfer from VCs with too much money to everyone else
in the economy. We could probably use more of that.

~~~
soVeryTired
> Hardly; it'll just be a transfer from VCs with too much money to everyone
> else in the economy. We could probably use more of that.

The VCs are gambling with someone else's money though. They raise money from
institutional investors: pension funds and insurance companies. Ultimately the
little guy will pay via government bailouts, pension reductions, and higher
insurance premiums.

~~~
Ericson2314
I get they raise others' money, but which pension funds are being into this
high risk stuff?

~~~
bspn
Almost all of them. They manage their portfolios like most other large fund
managers albeit with a slight preference towards lower risk assets to ensure
their short/medium term pension obligations are met, but they will almost
always have an alternative investment bucket which VC will be a part of.
They're also not interested in doing direct investments, so they'll diversify
their early stage risk by investing in a couple of the more successful,
established VC funds who spread the bets for them.

------
b_tterc_p
I asked in the recent thread how Meituan could possibly be affording to
subsidize restaurant meals to be significantly below cost at restaurant as
that didn’t make any sense. Turns out according to this article that it’s
simply that. It doesn’t make sense. They lost $17 Billion in 2018 for a
shallow moat around an ugly castle.

The next recession is going to hit hard, and I’m guessing a lot of the gig
economy jobs will get a lot worse if not disappear.

~~~
dawhizkid
Why would “gig economy jobs” get worse?

If anything, during a recession, more people will want(need?) to become gig
workers. Uber/Lyft are generally supply constrained today. If there’s a surge
of supply because people need money they won’t have to pay new driver
incentives, which is one the areas that cause them to bleed cash today. Demand
side will fall a little, but people will still need cheap ways to get to/from
places, maybe especially if their car gets repossessed.

~~~
tomnipotent
This isn't about supply & demand, it's about profitability and if these
companies are viable long-term. There can be no gig economy jobs if there are
no gig economy businesses.

~~~
dawhizkid
Uber and Lyft can be profitable today. They are in their most mature markets
like SF and NYC. If they need to get to profitability they scale back and cut
certain cities. That’s it.

~~~
tomnipotent
Which would mean eliminating upwards of 90% of their workforce. Thus not
sustainable, and the jobs disappear.

~~~
dawhizkid
You’re conflating profitability, growth, sustainability etc. you’re also
conflating what is bad for Uber vs what is bad for drivers

It is sustainable to do that if by sustainable you mean have a profitable long
term business that is cash flow positive

It would likely massively hurt share prices because you’re trading growth for
profitability

~~~
tomnipotent
I'm not conflating anything, you're just mixing subjects. You said that gig
jobs would get better or there would be more, and I countered that was not the
case since a business cannot sustain that number of people if it's not
profitable.

~~~
dawhizkid
I don’t think you understand how Uber/Lyft think about their drivers. They
aren’t employees. In fact, drivers _are_ their customers. There’s no
“sustaining” drivers because they aren’t paying their drivers anything...they
are just making a commission off of the driver’s own earnings. Uber and Lyft
can’t and won’t “fire” drivers since, again, they aren’t employees.

The best way to think of drivers is that they are customers who are licensing
Uber/Lyft software for lead generation for their own business. In a recession
a seller of lead generation software (Uber/Lyft) is not going to turn
customers (drivers) away. It just might not be profitable for you as a
customer of lead generation software to buy it if there aren’t leads, but I
don’t think anyone knows what will really happen to rideshare demand if the
economy tanks. I think it will go down, but it might not go down as much as
one might think.

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Johnny555
Where does the money go for Lyft/Uber? The software platform can't be that
expensive amortized across a million+ drivers.

It's not like the drivers are overpaid (and in many cases, they are barely (or
not even) paid enough to cover costs)

What else do they spend it on? Marketing? Bribing...err... lobbying
politicians for favorable treatment?

~~~
mlinsey
From what I've seen at other on-demand co's, the three most likely culprits
are:

1- User acquisition costs (discounts, marketing, etc - for _both_ sides of the
platform). this gets more expensive in the face of competition, and there's
some hope that if you can "win" the market then eventually these costs will be
reduced sharply.

2- Money as a band-aid for reliability/support issues. Frequently, an Uber
driver refuses to take me on a long trip (SF to Mountain View, for example),
makes me get out of the car, then marks me as a no-show or that _I_ canceled
the ride. Fortunately, my rider score is high enough that I just fill out the
form describing what happened, and Uber (usually almost instantly) refunds the
fee and sometimes also gives me a make-up $5 credit to apologize. With food
delivery options, a non-trivial fraction of the time, the wrong order arrives,
and similarly any complaint to support usually results in an immediate refund
+ credit. Without an easy, scalable way for the support team to audit what
really happened on the ground, chances are they are not penalizing the driver
/ restaurant for these incidents unless there is a clear pattern in the data
with a particular provider. So this is just loss for the platform. With very
small margins it takes a surprisingly low percentage of such cases to really
eat away your unit model.

3- Subsidizing low-utilization markets. Markets with a much higher density of
supply/demand will be more efficient and profitable; newer markets will often
need subsidies to get over the cold start problem (eg when uber launches a new
city, you're gonna need to pay some drivers to sit idling on the road, or else
someone opening the app won't see a driver; you might also discount rides even
more heavily to get past this phase quicker). Compared to the other two
factors, this is probably the best-case scenario for why a company might be
bleeding money, and why you sometimes hear people say "Uber is profitable in
XYZ cities", but it's hard to say from the outside if this is actually what's
happening or if there's something more fundamentally wrong.

~~~
jammygit
$5 to apologise for somebody trying to steal from you and leaving you without
a ride? That's not a great deal imo

~~~
mlinsey
Eh, while I was pretty upset in the moment, I could get a ride eventually, and
it wasn't enough to make me stop using Uber/Lyft, since in the specific
scenario where this would always happen (late on Friday/Saturday nights after
going out in SF headed back to MTV), I had very few options besides Uber
anyway with Caltrain service stopped and no designated driver lined up. And
looking at it from the drivers' perspective, you're asking them to miss out on
one of the most valuable times of the week by taking them out of the city,
often taking them much further from their home (often East Bay or even
Sacramento, where drivers sometimes come all the way to SF for the weekend
evening rush specifically).

Add into it how easily this could be abused on the passenger side if there was
an even bigger incentive, and quick $5 from the app and finding another driver
(there were always enough drivers so that even if half of them would pull this
trick, I'd find one eventually) wasn't too bad. Much worse would be having to
do something more like talking to a rep on the phone or having to go through a
lengthy appeals process.

------
supernova87a
My summary of where all the money goes:

\-- Every on-demand service struggles with the problem of peaky demand,
variation of >50% in peak to average traffic / demand

\-- Peaky demand is inherent in our consumer / passenger / people behavior,
not going to change any time soon -- think of the daily hours typical for
commuting, eating, etc.

\-- These services make their money / entire value prop on serving peaky
demand quickly, but you need labor willing to match those times, otherwise
people are sitting around underutilized

\-- Until you have automated cars / labor, you have a really hard time
recruiting people who are happy only to be paid part-time

\-- Drivers / labor have to be paid pretty much on a full time basis to keep
people working for you (whether overtly or implicitly through promotions,
marketing, sign up bonuses), otherwise they sign up with hopes of steady
income, and then quit. ("I love being able to set my own hours", etc is the
exception, not the imaginary bulk of people working for a living)

As long as these conditions prevail, this is where those companies' cash is
hemorrhaging to.

~~~
doctorpangloss
The trends in future of work, particularly remote / non-office work, would
favor people being more economical and de-peaking usage.

Working at home saves you daycare. It takes a commuter off the road and off
public transport. It lets people eat lunch at 11am or 2pm. It lets you build
houses instead of empty office buildings. It lets you spend a lot more time
with your partner. It keeps you cleaner and healthier. It makes you care about
your local community a lot more.

Peaky demand will still exist for longer cycles, like school enrollment,
housing, vacations, entertainment. It will settle down a lot for our office
day. This is the condition where subsidizes can decrease and the way our time
is squeezed will change favorably for everyone.

~~~
moorhosj
Lots of claims in this comment I'd love to see backed up.

==Working at home saves you daycare.==

Is this true? Most people I know who work remotely don't have enough free time
to also watch their kid, they are doing their job. It does save the 1-2 hour
round trip of commuting each day.

==It lets people eat lunch at 11am or 2pm.==

Can't most people in an office environment already do this? I do.

==It keeps you cleaner and healthier.==

How does it do this? I see very few overweight people on my daily train
commute. I figured that the walking involved in commuting plays a role in
health, but maybe the stress of commuting is a net negative. On the flip side,
my wife works from home and although she likes it, the lack of human
interaction frequently has a negative impact on her.

==It makes you care about your local community a lot more.==

In what ways?

~~~
aeorgnoieang
> maybe the stress of commuting is a net negative

Commuting is considered one of the _most_ negative parts of a person's day,
such that common advice is to seriously consider living closer to work at the
expense of other amenities.

~~~
moorhosj
==Commuting is considered one of the _most_ negative parts of a person's day==

I think depends on the method of commuting. I do a combination of walking and
train each day and it is one of the best parts of my day. I get exercise and
free time to read, watch videos, or just space-out. I think people who bike or
walk to work have a similarly positive perspective.

If I was driving on a gridlocked highway for 2 hours a day, I would hate it.

------
loganfrederick
As both a startup programmer and having worked in the financial industry, it's
really hard to know how companies like these will be viewed by history.

The technologist argument is: we are enduring losses, even large ones, in the
short term so that we can bring inevitable future tools forward in time (i.e.
"Of course everyone can get anything delivered on-demand in the future, so why
not now!?")

The value-based investor argument: This is a gross subsidy to "tech" companies
that is distorting/subsidizing markets and creating huge opportunity costs
where all these billions could have been invested in better, even more
fundamental technologies.

There is a third argument which is what's really giving these companies legs:
they do genuinely have a lot of users who love the services. Who wouldn't want
a VC-subsidized meal brought to your door?

~~~
ForHackernews
> they do genuinely have a lot of users who love the services.

Turns out selling $10 bills for $5 is extremely popular. MoviePass did in fact
get people go to the movies.

~~~
dman
The counter example is Amazon with Prime.

~~~
JMTQp8lwXL
Probably contrarian, but I refuse to sign up for Prime out of principle. The
quicker and easier I make it to buy things, the more money I'm going to spend,
which is orthogonal to my savings/investment goals. I'm not going to pay extra
to have the privilege of making spending my money any easier.

~~~
dman
I am with you on that, I am "this close" to cancelling Prime. Dont order on it
anymore, strangely enough only reason I have it around is that I use the free
photo storage as a second backup for photos (After Google photos)

------
lgomezma
Like Warren Buffet says "Only when the tide goes out do you discover who's
been swimming naked". Most of these companies didn't exist when the last
recession happened. Let's see how many will exist after the next one.

------
rossdavidh
In addition to the many excellent points raised by other commenters, I would
like to add: Amazon is raking in a ton of money from Lyft, and probably many
other on-demand startups. When they (all? mostly?) go bust, a lot of VC-fueled
business to Amazon will disappear, perhaps rather abruptly. Not that I think
Amazon will go away or anything, but there may be a step function in their
profitability whenever the bust in money-burning startups comes.

------
solotronics
man there goes my idea of uber for toaster strudels

~~~
ben509
Don't give up on the dream. Toaster Struberlder could be the next big thing!

~~~
solotronics
You have given me hope! I will incorporate the latest hotness app tech stack,
blockchain proof-of-strudel, drone delivery, and baking on-demand. Ycombinator
here I come!

~~~
camdenlock
"Blockchain proof-of-strudel" is a fantastic little phrase. Well done. I'd use
the :joy: emoji if HN would let me.

~~~
imtringued
If necessary we can strudeliver it to you!

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thorwasdfasdf
i would've appreciated a bit more breakdown on where all the spending was
going. i mean, the user acquisition cost, will eventually go away for the most
part once they reach a certain size. After that it's all about operations. the
question is how do the scalability of providing service fundamentals look
like, long term cost vs revenue.

~~~
ghaff
In the case of Uber/Lyft while I'm generally expensing it when I rarely use
them and don't care about price much, I expect a lot of people who use them
day-to-day would drop them in a heartbeat if they could use cheaper options.
I'm not sure I understand why "rideshare" should be cheaper than cabs. I think
it's mostly better than cabs which is why I use them. But that's maybe not the
majority view.

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ohples
Imagine if we could of used some of that money to educate children, provide
healthcare, and other things.

~~~
dragonwriter
Since much of that is subsidizing wages, which are the most highly taxed form
of income, we _are_ using some of that money to do those things, _more_ than
if the business were operating with costs in line (much less profitable) with
revenue.

------
digitaltrees
Maybe we should just recognize that Facebook / software business models don’t
work for operating, boots on the ground services. Network effects don’t work
with negative unit economics.

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_bxg1
I don't see how this can be anything but a bubble unless fully-autonomous cars
come around, which it's seeming more and more likely that they're further off
than expected, if they're possible at all. From what I've read the economics
simply don't work otherwise.

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dandare
This is sort of a wealth redistribution. From oil funds, hedge funds and
private investors to the middle and upper-middle class. Hope it won't end up
with a bailout.

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lkrubner
I've been working with Avis Rental Car. The CEO recently went to see the CEO
of Uber. The vibe was that of a pauper begging from a King, which is odd
because Avis is profitable and Uber is losing insane amounts of money. You'd
think it would be the other way around, but everything nowadays is dominated
by future expectations.

~~~
lkrubner
Why would this be downvoted?

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novaRom
It was a similar bubble 20 years ago. Not a good time to be IPO investor.

