Arcade City investor update, 9/8

Want a look behind the curtain? Here’s an excerpt from our latest update emailed last week to all Arcade City investors.

— We are on track to generating revenue by the end of this month. Our initial revenue stream is from taking ~10% of payments made through the app. In-app payments are turned on for a given city after they go online or ‘unlock’ — read our SoC post for more on why we’ve structured it that way. For the next month, cities should go online or ‘unlock’ about once per week starting with Austin next week. Month two, probably 3–5 cities should be unlocked per week. By the end of the year, we should have active ridesharing networks in 100+ cities around the world, with ride revenue payments covering all our monthly expenses, and with enough left over for flexibility in expenditures on further growth.

— We continue to be absolutely drowning in inbound interest from drivers and riders. Part of the reason we are doing a limited area-by-area release (starting with cities that hit certain milestones in our ‘global game’) is so we keep growth at a manageable level. We learned in our early app release from Feb to April the perils of ‘overheating’ and exceeding what our current infrastructure could sustain.

— We made some minor pivots in our business model over the past few months. We initially intended to play the “transportation network company” game, only rolling out ridesharing services in areas where we first registered as a TNC or the international equivalent. We realized that approach would severely limit our growth potential and would have us competing on terms set by Uber.

Instead we drew inspiration from the business model of OpenBazaar, another Bitcoin company maintaining a decentralized marketplace and also attracting institutional investor support to its corporate entity OB1. OB1 maintains the technical platform and monetizes its ecosystem by providing various services to the vendors and users. That approach lets the OpenBazaar team combine the benefits of a decentralized network with an investment-based corporation with an eye toward generating profits and return on investment. Yet OpenBazaar has a userbase comprised primarily of existing users of Bitcoin — not yet “mainstream”.

By comparison, Arcade City integrates blockchain tech right now — beginning with Bitcoin wallet and login integration with Airbitz — and will increasingly integrate in the future (check SoC post for details) and yet our userbase is comprised almost entirely of non-technical users who haven’t even heard of Bitcoin. That represents a powerful opportunity for Bitcoin adoption, and also shows the strength of this organizational model in attracting even standard rideshare drivers and riders.

— We do anticipate pushback on the legal/compliance front from at least some municipalities, states or countries, particularly jurisdictions with existing “transportation network company” regulations. Though we’re confident our arguments about why we’re not a TNC will be sufficiently defensible, that won’t entirely mitigate the idea of “To a bureaucracy with a hammer, everything looks like a nail.” However, we are confident we have a winning strategy, borrowing partly from Uber’s playbook on how to win over a city’s people and use that leverage to make authorities back down. We’ve already seen that approach be successful here in Austin, where we’ve been able to get the local authorities to completely ignore us and our drivers, with no negative attention from the city in the past six weeks.

Still, we will be preparing legal solutions as well. We expect to have no trouble doing that, particularly because what we’re taking on is so interesting to many nonprofit legal professionals. For example, one large free-market legal foundation with a successful track record of challenging sharing economy regulations and enforcement actions has offered us pro-bono help with any litigation needs. We will keep you updated on any major developments on the legal front.

— We have had significant inbound interest from even institutional investors over the past few months, but we have intentionally taken only angel funds to this point. We intentionally postponed the more intensive conversations with institutional investors for two reasons:

1) Setting up Austin and keeping the app development on track has required my full attention, and there hasn’t been time to produce multi-page financial projections or otherwise participate in the intensive conversations that would precede a (possible) VC investment on the timetable we’d need.

2) We feel we owe it to our business and to you our early investors to ensure that we enter any future funding rounds with the strongest possible negotiating hand. We know that our bargaining position will be far stronger when we have many thousands of daily rides generating revenue in multiple cities in multiple countries around the world. We want to not need more capital for basic operations, only for growth.

— We cut back on our initial intended expenditures on app development. We initially hired a Toronto-based development shop that we decided not to continue with. The ridesharing functionality in our current app is very similar to what we launched back in February, described further in the SoC post, with additional features like Bitcoin integration via Airbitz and support for driver ‘pods’ like we’ve seen emerge in Austin. I personally have done the lion’s share of work on the new app, with some help from our initial app developer and a few new devs here in Austin who want to come onboard fulltime as soon as we can afford to hire them.

— We have “leaned” our operation, slashing the advertising and personnel expenses that were needed to establish our presence in Austin, and cutting back on app dev expenses by relying more on our early app code and doing more of the technical work with a smaller internal team. Now our ridesharing network in Austin essentially governs itself with no capital expenditures, a model we are about to scale out to other cities.

— Our immediate external priority is guiding a city — Austin — through the city “unlocking” process. Based on a meeting with our Austin leaders last night, I can confidently project that Austin will be unlocked by early next week, showing a powerful example of what a large peer-to-peer Arcade City network looks like when empowered with the tools of our app.

— Our immediate internal priority is keeping our lights on while hiring technical help who can deliver rapidly on deliverables so I can extricate myself from the app development process. Right now most of the tech is falling on me to do, and while I can continue managing it “good enough” as long as I have to, our growth will be limited while all of this rests on my shoulders.

We could muddle through until our in-app revenue picks up over the next month or two. But there is a real opportunity here to see where this highly energized and impatient-to-start global network will take us, once we remove the internal bottlenecks to our global growth.