Unicorn Bubbles, Clutter, Too The Value Of Time
July 17, 2017
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In recent years, Silicon Valley has witnessed something of a applied scientific discipline bubble Mark II, although this fourth dimension the excesses receive got been concentrated inward the private VC start-up funding market, rather than the populace markets (large-cap FANG tech valuations are high, but I exercise non believe them to move bubblish equally yet). The poster children receive got been the so-called 'Unicorns' - private VC-funded start-ups sporting valuations inward excess of US$1bn, which are long on hopes/dreams/aspirations in addition to rapid user growth, but brusk on profits (in fact large in addition to growing losses are the norm).
Many of these Unicorns are marketing a release of cool novel O2O services, in addition to are growing active users in addition to (sometimes) revenues real rapidly. The narrative is that everyone else - including incumbent players inward side past times side old-world industries - receive got been likewise dumb to recognize the chance to provide such services on new-technology platforms, in addition to that alone tech-savvy 20-somethings receive got been smart plenty to figure out both the work concern chance in addition to how to convey such products & services to market. Mobile apps forthwith hateful every manufacture is ripe for 'disruption'.
As I run across it, the work amongst many of these work concern models is equally follows: It is slow to come upward up amongst an thought for a cool novel production or service; the difficult scrap is supplying the production or service economically - i.e. persuading customers to willingly constituent amongst an amount of cash greater than the economical cost of providing such a service. It is slow to grow users in addition to top-line if you're prepared to sell products or services at prices good below cost, but this does non hateful yous receive got a feasible work concern model (see my satirical postal service on Dollar-discount). Elon Musk - someone I greatly admire - is sometimes justifiably criticized for this. It's slow to move an innovator/disruptor if yous are non constrained past times the ask to build a turn a profit or generate a satisfactory render on working capital missive of the alphabet (to Musk's credit, he has been quite explicit virtually his goals/motivations beingness non-economic inward nature).
An unfortunate truth: Most consumers undervalue their time
All bubbles are built on fallacies, in addition to inward my opinion, i of the of import fallacies behind many Unicorn work concern models is the implicit presumption that consumers are willing to pass coin to salve fourth dimension (i.e. many of the cool novel online services are designed to salve customers' time), whereas inward reality, most people house a real depression economical value on their time.
There is alone a little minority of the basis - the most privileged in addition to prosperous minority - that has to a greater extent than coin than time, in addition to who is thence willing to central coin for time. For the vast bulk of people, coin is scarcer than fourth dimension in addition to thence they are to a greater extent than willing to exercise exactly the contrary - central fourth dimension for money. This was i of the center reasons Webvan failed (a dot.com era companionship attempting to provided delivered groceries over the web): the work was that yous needed to pay people to pick, pack, in addition to deliver groceries, which is expensive, whereas at conventional supermarkets, consumers exercise that themselves for free, in addition to when consumers cost compare, they seldom include the cost of their fourth dimension inward the cost comparing calculus.
Privileged Silicon Valley VCs in addition to tech-entrepreneurs hailing from Ivy League universities tend to forget that reality. They are wealthy in addition to successful in addition to thence are willing to central coin for time, in addition to assume that most of the balance of the basis is similar that equally well, but they are out of carry on amongst the realities faced past times most of the world. Consequently, inward many cases they are likely radically over-estimating the size of the addressable marketplace seat for such services.
Not all of the cool novel services Unicorns are promoting are focused on saving customers time, but many of them are.
Clutter - i of the to a greater extent than egregious examples
A non bad representative of this is a start-up called Clutter, which is trying to 'disrupt' the self-storage industry, past times having representatives come upward to people's houses/apartments, photograph in addition to box their stuff, shuffle it to a remote storage location, in addition to and then allow people to select individually-photographed items online when needed, which volition in addition to then move promptly delivered. The companionship exactly completed a US$64m tertiary funding-round, Pb past times Sequoia.
http://www.nibletz.com/funding/clutter-64m
At human face upward value, this is a cool service - from a customer's betoken of catch - setting aside cost for the moment - it is clearly a vastly superior service to the conventional choice (who wants to pass a Sat afternoon driving out to their storage locker?) At the same cost equally convention self-storage, who wouldn't prefer the novel service? But inward my view, it is improbable inward the extreme that that such a service could move provided at fifty-fifty a remotely equivalent cost.
The cost of paying large fleets of delivery personnel to pick up, box, transport, in addition to driblet off people's stuff volition move punitively high, and because most people house a depression value on their time, real few people volition move prepared to pay someone possibly $30 an hr to exercise it for them, when they tin exercise it themselves for 'free'. Consequently, economically priced, the size of the addressable marketplace seat volition move real little in addition to niche, at best.
Pricing below cost in addition to making it upward on volume
One agency to expand the size of the addressable marketplace seat inward low-cal of the inward a higher house unfortunate truth, inward club to maintain user/top-line increment rapid (essential for the maintenance of premium valuations - Unicorns valuations tin tolerate large loses but not a deceleration inward user adoption), is to radically underprice your services. By doing so, i tin in addition to then correspond or vanquish the prices charged past times old-world competitors, piece also providing a superior service in addition to added convenience. If yous are a consumer, why would yous non receive got a companionship upward on such an offer? But would yous even so move prepared to utilisation the service if prices were significantly higher? In many cases, likely not.
This, I believe, is why yous run across many of these fast growing Unicorns sporting mushrooming losses. If yous receive got a feasible production that is priced economically, losses should non grow exponentially amongst volumes in addition to revenue; losses should speedily stabilize in addition to and then start to decline. If losses exercise grow exponentially, in addition to then it is real likely the production is non beingness priced economically. This is a major work amongst Uber (who is losing US$2-3bn pa at present, on a work concern that should move performance equally a unproblematic in addition to scalable tech platform amongst relatively depression costs; losses be because inward many regions it is growing users past times subsidizing/underpricing its services).
Unicorns volition endeavor to fighting that these losses are but the temporary cost of driving scale in addition to user adoption, but I rest skeptical inward most cases. Switching costs are non high for many of these services, in addition to if yous modify the cost materially, inward most cases yous volition rapidly modify consumer behaviour. To the extent the inward a higher house is happening, the increment many of these Unicorns are reporting is thence inward fact ponzi inward nature, in addition to requires that working capital missive of the alphabet providers tip inward to a greater extent than in addition to to a greater extent than coin over time. The valuations of these companies should move inward free-fall, non ever-rising.
Traditional self-storage players receive got said that they receive got long considered introducing a service analogous to what Clutter is offering, but speedily concluded it was a non-starter because the cost of providing such a service profitably was good inward a higher house what most consumers would move willing to pay, in addition to hence the service was uneconomic. That is sensible in addition to rational.
Furthermore, if novel applied scientific discipline does emerge that makes providing such services to a greater extent than economically viable, it would likely move relatively slow for the incumbents to curlicue out the service at that betoken (this reminds me of Fiat Chrysler's CEO Sergio Marchionne's comment that if in addition to when it became economically feasible to create in addition to sell a mass-market electrical vehicle a la Tesla's Model 3, he would receive got i on the marketplace seat within 12 months). Indeed, it is arguable existing self-storage players would move the best placed to exploit the opportunity, given their existing brands, facilities, cash flows, in addition to client relationships/data, etc. And yet it is the upstarts amongst ballooning losses that are attracting most investor interest.
Funding markets to close?
The work many of these cash-burning upstarts volition human face upward inward the futurity is that, because they are burning through cash at such a rapid clip, their continued existence depends on the willingness in addition to powerfulness of financiers to move along to tip always greater amounts of coin into them to replenish their constantly depleting coffers. That tin (and has) gone on a while, but history shows that financial/funding markets are fickle, in addition to at some point, working capital missive of the alphabet markets are likely to modify in addition to or so such loss-making enterprises. If this happens, many of these companies volition speedily human face upward imminent bankruptcy, in addition to the resultant volition likely move a lot of dead Unicorns.
There is some evidence nosotros may move approaching or receive got fifty-fifty started to accomplish that point, although Softbank's US$100bn tech-start-up fund may maintain the music playing a petty longer (although I hold back most investors inward the fund volition realize pregnant losses). 'Down rounds' are becoming to a greater extent than mutual (funding rounds done at a valuation below prior funding rounds - something considered sacrilege inward the Valley in addition to hence done alone out of absolute necessity). The IPO of Snap mightiness test to receive got been a high-point (after coming to marketplace seat at US$17 in addition to peaking at US$26, it has already retreated to US$15), in addition to the choice of an increasing release of Unicorns to IPO may reverberate tech insiders' cognition that the private VC funding infinite is already starting to curlicue over.
Notable inward detail is Blue Apron's late-June IPO at US$10, amongst the stock having already fallen close 30% to US$7 (Blue Apron - a recipe in addition to ingredient delivery companionship for dwelling cookers - is some other non bad representative of a companionship amongst a cool but underpriced service whose work concern model relies on customers placing a high value on their time). VC investors similar to decry the brusk term nature of stockmarket investors (something that is real oftentimes a myth inward my catch - the marketplace seat has taken an unrelenting long term catch on stocks similar Amazon when the economic science of the work concern in addition to the long term outlook receive got remained favorable), whereas inward reality it simply harder to fool populace auction markets than private controlled ones.
What's a populace marketplace seat investor to do?
From a public-market investor's standpoint, aside from shorting or avoiding hyped but uneconomic in addition to cash-burning startups (which should move shorted amongst extreme assist given the propensity of markets to move irrational from fourth dimension to time), opportunities mightiness derive from i of 2 places. The get-go is 'exaggerated demise' valuations of old-world companies, who are increasingly seen equally universally ripe for disrutpion (again, shades of dot.com era thinking here). In many cases, incumbent companies are genuinely the best placed to leverage novel applied scientific discipline to provide novel in addition to improved services atop their existing platform, piece also improving efficiency. Rather than beingness disrupted, many may halt upward ultimately benefitting from novel technologies.
Commercial banks are i representative of this (an manufacture that has long been a beneficiary of improving technology). People receive got feared peer-to-peer lending in addition to online banking volition disrupt conventional banks, but I intend it is quite likely that traditional banks volition genuinely utilisation applied scientific discipline to provide enhanced services in addition to lower operating costs, through automation in addition to branch closures.
The other mightiness move opportunities inward existing well-established in addition to highly-profitable tech incumbents (e.g. Google, Facebook, Amazon, Alibaba, Netflix, etc - banking concern annotation that the inward a higher house analysis does not relate to tech companies that are highly profitable platform/networked businesses). While these stocks are currently expensive, they are real robust in addition to cash-generating businesses, in addition to they volition move good positioned to pick-off inexpensive acquisitions amidst whatever Unicorn-carnage, farther strengthening their production suites in addition to competitive advantages. While it seems improbable at present, it is possible that in that location volition move a downwards bike inward full general public-market tech valuations & sentiment if the private-market tech infinite blows up. That would move a proficient chance to purchase the tech companies of rigid in addition to robust tech businesses in addition to ameliorate entry points.
LT3000
Many of these Unicorns are marketing a release of cool novel O2O services, in addition to are growing active users in addition to (sometimes) revenues real rapidly. The narrative is that everyone else - including incumbent players inward side past times side old-world industries - receive got been likewise dumb to recognize the chance to provide such services on new-technology platforms, in addition to that alone tech-savvy 20-somethings receive got been smart plenty to figure out both the work concern chance in addition to how to convey such products & services to market. Mobile apps forthwith hateful every manufacture is ripe for 'disruption'.
As I run across it, the work amongst many of these work concern models is equally follows: It is slow to come upward up amongst an thought for a cool novel production or service; the difficult scrap is supplying the production or service economically - i.e. persuading customers to willingly constituent amongst an amount of cash greater than the economical cost of providing such a service. It is slow to grow users in addition to top-line if you're prepared to sell products or services at prices good below cost, but this does non hateful yous receive got a feasible work concern model (see my satirical postal service on Dollar-discount). Elon Musk - someone I greatly admire - is sometimes justifiably criticized for this. It's slow to move an innovator/disruptor if yous are non constrained past times the ask to build a turn a profit or generate a satisfactory render on working capital missive of the alphabet (to Musk's credit, he has been quite explicit virtually his goals/motivations beingness non-economic inward nature).
An unfortunate truth: Most consumers undervalue their time
There is alone a little minority of the basis - the most privileged in addition to prosperous minority - that has to a greater extent than coin than time, in addition to who is thence willing to central coin for time. For the vast bulk of people, coin is scarcer than fourth dimension in addition to thence they are to a greater extent than willing to exercise exactly the contrary - central fourth dimension for money. This was i of the center reasons Webvan failed (a dot.com era companionship attempting to provided delivered groceries over the web): the work was that yous needed to pay people to pick, pack, in addition to deliver groceries, which is expensive, whereas at conventional supermarkets, consumers exercise that themselves for free, in addition to when consumers cost compare, they seldom include the cost of their fourth dimension inward the cost comparing calculus.
Privileged Silicon Valley VCs in addition to tech-entrepreneurs hailing from Ivy League universities tend to forget that reality. They are wealthy in addition to successful in addition to thence are willing to central coin for time, in addition to assume that most of the balance of the basis is similar that equally well, but they are out of carry on amongst the realities faced past times most of the world. Consequently, inward many cases they are likely radically over-estimating the size of the addressable marketplace seat for such services.
Not all of the cool novel services Unicorns are promoting are focused on saving customers time, but many of them are.
Clutter - i of the to a greater extent than egregious examples
A non bad representative of this is a start-up called Clutter, which is trying to 'disrupt' the self-storage industry, past times having representatives come upward to people's houses/apartments, photograph in addition to box their stuff, shuffle it to a remote storage location, in addition to and then allow people to select individually-photographed items online when needed, which volition in addition to then move promptly delivered. The companionship exactly completed a US$64m tertiary funding-round, Pb past times Sequoia.
http://www.nibletz.com/funding/clutter-64m
At human face upward value, this is a cool service - from a customer's betoken of catch - setting aside cost for the moment - it is clearly a vastly superior service to the conventional choice (who wants to pass a Sat afternoon driving out to their storage locker?) At the same cost equally convention self-storage, who wouldn't prefer the novel service? But inward my view, it is improbable inward the extreme that that such a service could move provided at fifty-fifty a remotely equivalent cost.
The cost of paying large fleets of delivery personnel to pick up, box, transport, in addition to driblet off people's stuff volition move punitively high, and because most people house a depression value on their time, real few people volition move prepared to pay someone possibly $30 an hr to exercise it for them, when they tin exercise it themselves for 'free'. Consequently, economically priced, the size of the addressable marketplace seat volition move real little in addition to niche, at best.
Pricing below cost in addition to making it upward on volume
One agency to expand the size of the addressable marketplace seat inward low-cal of the inward a higher house unfortunate truth, inward club to maintain user/top-line increment rapid (essential for the maintenance of premium valuations - Unicorns valuations tin tolerate large loses but not a deceleration inward user adoption), is to radically underprice your services. By doing so, i tin in addition to then correspond or vanquish the prices charged past times old-world competitors, piece also providing a superior service in addition to added convenience. If yous are a consumer, why would yous non receive got a companionship upward on such an offer? But would yous even so move prepared to utilisation the service if prices were significantly higher? In many cases, likely not.
This, I believe, is why yous run across many of these fast growing Unicorns sporting mushrooming losses. If yous receive got a feasible production that is priced economically, losses should non grow exponentially amongst volumes in addition to revenue; losses should speedily stabilize in addition to and then start to decline. If losses exercise grow exponentially, in addition to then it is real likely the production is non beingness priced economically. This is a major work amongst Uber (who is losing US$2-3bn pa at present, on a work concern that should move performance equally a unproblematic in addition to scalable tech platform amongst relatively depression costs; losses be because inward many regions it is growing users past times subsidizing/underpricing its services).
Unicorns volition endeavor to fighting that these losses are but the temporary cost of driving scale in addition to user adoption, but I rest skeptical inward most cases. Switching costs are non high for many of these services, in addition to if yous modify the cost materially, inward most cases yous volition rapidly modify consumer behaviour. To the extent the inward a higher house is happening, the increment many of these Unicorns are reporting is thence inward fact ponzi inward nature, in addition to requires that working capital missive of the alphabet providers tip inward to a greater extent than in addition to to a greater extent than coin over time. The valuations of these companies should move inward free-fall, non ever-rising.
Traditional self-storage players receive got said that they receive got long considered introducing a service analogous to what Clutter is offering, but speedily concluded it was a non-starter because the cost of providing such a service profitably was good inward a higher house what most consumers would move willing to pay, in addition to hence the service was uneconomic. That is sensible in addition to rational.
Furthermore, if novel applied scientific discipline does emerge that makes providing such services to a greater extent than economically viable, it would likely move relatively slow for the incumbents to curlicue out the service at that betoken (this reminds me of Fiat Chrysler's CEO Sergio Marchionne's comment that if in addition to when it became economically feasible to create in addition to sell a mass-market electrical vehicle a la Tesla's Model 3, he would receive got i on the marketplace seat within 12 months). Indeed, it is arguable existing self-storage players would move the best placed to exploit the opportunity, given their existing brands, facilities, cash flows, in addition to client relationships/data, etc. And yet it is the upstarts amongst ballooning losses that are attracting most investor interest.
Funding markets to close?
The work many of these cash-burning upstarts volition human face upward inward the futurity is that, because they are burning through cash at such a rapid clip, their continued existence depends on the willingness in addition to powerfulness of financiers to move along to tip always greater amounts of coin into them to replenish their constantly depleting coffers. That tin (and has) gone on a while, but history shows that financial/funding markets are fickle, in addition to at some point, working capital missive of the alphabet markets are likely to modify in addition to or so such loss-making enterprises. If this happens, many of these companies volition speedily human face upward imminent bankruptcy, in addition to the resultant volition likely move a lot of dead Unicorns.
There is some evidence nosotros may move approaching or receive got fifty-fifty started to accomplish that point, although Softbank's US$100bn tech-start-up fund may maintain the music playing a petty longer (although I hold back most investors inward the fund volition realize pregnant losses). 'Down rounds' are becoming to a greater extent than mutual (funding rounds done at a valuation below prior funding rounds - something considered sacrilege inward the Valley in addition to hence done alone out of absolute necessity). The IPO of Snap mightiness test to receive got been a high-point (after coming to marketplace seat at US$17 in addition to peaking at US$26, it has already retreated to US$15), in addition to the choice of an increasing release of Unicorns to IPO may reverberate tech insiders' cognition that the private VC funding infinite is already starting to curlicue over.
Notable inward detail is Blue Apron's late-June IPO at US$10, amongst the stock having already fallen close 30% to US$7 (Blue Apron - a recipe in addition to ingredient delivery companionship for dwelling cookers - is some other non bad representative of a companionship amongst a cool but underpriced service whose work concern model relies on customers placing a high value on their time). VC investors similar to decry the brusk term nature of stockmarket investors (something that is real oftentimes a myth inward my catch - the marketplace seat has taken an unrelenting long term catch on stocks similar Amazon when the economic science of the work concern in addition to the long term outlook receive got remained favorable), whereas inward reality it simply harder to fool populace auction markets than private controlled ones.
What's a populace marketplace seat investor to do?
From a public-market investor's standpoint, aside from shorting or avoiding hyped but uneconomic in addition to cash-burning startups (which should move shorted amongst extreme assist given the propensity of markets to move irrational from fourth dimension to time), opportunities mightiness derive from i of 2 places. The get-go is 'exaggerated demise' valuations of old-world companies, who are increasingly seen equally universally ripe for disrutpion (again, shades of dot.com era thinking here). In many cases, incumbent companies are genuinely the best placed to leverage novel applied scientific discipline to provide novel in addition to improved services atop their existing platform, piece also improving efficiency. Rather than beingness disrupted, many may halt upward ultimately benefitting from novel technologies.
Commercial banks are i representative of this (an manufacture that has long been a beneficiary of improving technology). People receive got feared peer-to-peer lending in addition to online banking volition disrupt conventional banks, but I intend it is quite likely that traditional banks volition genuinely utilisation applied scientific discipline to provide enhanced services in addition to lower operating costs, through automation in addition to branch closures.
The other mightiness move opportunities inward existing well-established in addition to highly-profitable tech incumbents (e.g. Google, Facebook, Amazon, Alibaba, Netflix, etc - banking concern annotation that the inward a higher house analysis does not relate to tech companies that are highly profitable platform/networked businesses). While these stocks are currently expensive, they are real robust in addition to cash-generating businesses, in addition to they volition move good positioned to pick-off inexpensive acquisitions amidst whatever Unicorn-carnage, farther strengthening their production suites in addition to competitive advantages. While it seems improbable at present, it is possible that in that location volition move a downwards bike inward full general public-market tech valuations & sentiment if the private-market tech infinite blows up. That would move a proficient chance to purchase the tech companies of rigid in addition to robust tech businesses in addition to ameliorate entry points.
LT3000