Dotcom Deja Vu
I remember going for drinks with colleagues after work and talking with a bartender who sketched out on a napkin for me the startup he was planning to launch and take public. But he wasn’t looking to launch the next “Airbnb of x” or “Uber of y” — for this was back in March 2000.
This is the opening line of the first chapter in my upcoming book “UBERNOMICS: The Next Generation of Business Strategy”. And just like the e-commerce model didn’t translate for most of the dotcom startups, I am becoming increasingly skeptical the marketplace model will translate for most startups. But just like it is rare today to come across a company that doesn’t sell its goods or services online, I predict a decade from now, it will be rare to come across a company that has not incorporated the form of collaborative commerce I call Ubernomics into its business model.
In my April 5th article “Capital Hacking — Time to Look Beyond VCs”, I recommended startups look to bring on strategic investors — which could provide them with access to not only the financial capital they need to survive — but more importantly, to the supplier capital, customer capital, or structural capital they need in order to thrive. Only days later, the on-demand valet company, Luxe, which was launched in June 2013 “to change how we park forever”, announced it had raised $50 million and brought Hertz on board as a strategic investor. As John Tague, the CEO of Hertz, stated “Our investment will support Luxe’s ability to scale its successful service to other major urban centers, while offering our customers enhanced convenience and value with regard to their urban parking needs.” This illustrates how collaboration between a startup and an established company can provide the startup with valuable customer capital while enabling the established company to enhance its customer value proposition.
The only other space attracting capital these days is the highly competitive Closet Sharing Economy. Although Threadflip shut down in January, three of its competitors have raised funds this quarter. Last week, Tradesy raised a $30 million Series C round, following closely behind the capital raised last month by TheRealReal ($40 million Series E round) and Poshmark ($25 million Series D round). It will be interesting to watch this space develop as this new form of online exchange of second-hand apparel is especially appealing to cost-conscious and socially-conscious Millennial females. I’m thinking retailers might be wise to follow the lead of Hertz and embrace Ubernomics.
Given we are halfway through the second quarter, it is a bit concerning when you consider we have only seen capital inflows of $145 million to four companies compared to $2.1 billion to fourteen companies in the second quarter of last year. Of even greater concern is the accelerating number of shutdowns as 3 startups closed their doors in the month of April alone, bringing the total to 6 companies since I published my in-depth research report last September on the top 75 companies in the sharing and on-demand economy. And I expect the number of shutdowns to only accelerate from here given I count there are 20 companies that have not raised any capital since the end of 2014.
On April 14th, Shuddle, launched in late 2013 as the “Uber for families” shut down. Shuddle’s founder, Nick Allen, was also Co-Founder of ridesharing company Sidecar was acquired by GM in January after it shuttered its operations (it tried unsuccessfully to pivot into Goods Delivery last summer). The next day, Kitchensurfing, which raised $20mm since its launch in March 2012, shut down after unsuccessfully pivoting last year to an on-demand chef model (it started out as a Trades Services platform to empower chefs to cook crafted meals at peoples’ homes). And less than two weeks later, Kitchit, which raised $8 million since its launch in October 2011, shut down. Although I am not privy to the operating and financial metrics for Kitchensurfing and Kitchit, they likely faced challenges in terms of liquidity from operating a physical marketplace as well as demand compatibility as not everyone is comfortable with inviting a stranger to cook in their home. And when they decided to switch last year to the on-demand chef model, I am guessing they experienced a lot of attrition on the supply-side as chefs didn’t like being treated like a commodity service provider.
When I shared my update on Kitchit on LinkedIn, one of the members of my newly launched UBERNOMICS Strategy Group, Vikram Moorjani, a Senior Product Manager for Verizon Wireless in San Francisco, offered the following suggestion:
What would be interesting if the likes of ‘Whole Foods’ or ‘Safeway’ delivers weekly meal preps based on recipes provided online instead of these grocery startups. A chain offering creates an additional revenue opportunity for the chains to extend their wares to an existing customer base who might be interested in meals based on recipes that they select online. The chains can even collaborate with the ‘Instacarts’ for the last mile. Again, food is so hard — look at Chipotle, these startups remind me of the .com era!
That’s an interesting idea to explore as Whole Foods Market is already a strategic investor in Goods Delivery company Instacart — but if they could add a weekly meal prep service to its delivery offering that could greatly enhance its customer value proposition and perhaps expand its total addressable market. For the reality is that traditional companies like Whole Foods Market have a significant competitive advantage to a lot of startups as it can leverage its existing structural capital and customer capital. And as I proposed in my article recently published in CFO Magazine titled “Unlocking Hidden Value via Ubernomics”, there are many exciting new white spaces for companies to enter to unlock hidden value through Ubernomics.
Speaking of new white spaces, at the beginning of April, Accor S.A., a Paris-based hotel operator with 3,700 hotels and a market cap of $10.7 billion, acquired onefinestay for $170 million. Onefinestay is a London-based Personal Asset Sharing company for fine homes with the mission of “handmade hospitality”. Interestingly, Hyatt, which launched Airbnb for independent boutique hotels two months ago, participated as a strategic investor in onefinestay’s last round of financing last June.
Although people like to classify the online lenders as part of the sharing economy, I don’t, as unlike spare rooms in someone’s house or an under-utilized car, financial capital is a commodity. And as we know from economics, the price of a commodity goes to the lowest common denominator, which means that online lending will become a race to the bottom. And two weeks ago, this thesis started to play out. On May 3rd, Prosper cut 28% of its staff while the stock price of On Deck Capital fell by over a third as it missed earnings and guided to slower loan origination growth. Then on May 9th, Lending Club’s stock price plummeted over a third following news that its Founder & CEO, Renaud Laplanche, and three senior managers resigned over an internal review regarding $22 million of near-prime loans sold to Jefferies.
When I shared this update on LinkedIn, I commented how this reminded me of the cockroach theory (i.e. when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed…). And true to form, this morning it was revealed Lending Club has received a grand jury subpoena from the U.S. Department of Justice. As Lending Club is the biggest online lender, this tarnishes the brand equity of online lending startups, raises their legal and regulatory risk profiles, and potentially increases their supplier and customer acquisition costs. For not only are the oceans turning bloody red with competition for online lending startups, but now we are starting to see cracks in their fragile foundations… It will be interesting to watch this space — but my bet is with the incumbents, as not only do they have the lowest cost of capital — but they also have the advantage of existing structural and customer capital.
And on a final note, Medallion Financial Corp just quietly changed its stock symbol from $TAXI to $MFIN. This reminds me of the article I wrote back in December 2014 titled “Taxi Medallion Prices Plummet: The Dominoes Are Starting to Fall”. And since then, the price of New York City taxi medallions have continued to tumble as they are now listed for sale on NYCITYCAB.com for as low as $400,000 to $500,000.