A Moat Worth a Damn
Warren Buffet once said, “the most important thing is to find a business with a wide moat, protecting an economic castle.” [shortened]
That was 1995 but the nature of competition hasn’t changed. While profitability and fundamentals are suddenly hot topics, I still don’t see much about moats or building a defensible business with competitive advantages.
Here’s an example of a business that theoretically could have been profitable but never had a moat: Bird is now roadkill.
In spring 2018, Bird became the fastest company ever to reach a $1 billion valuation. The second line in that article reads, “Bird, one of many scooter companies sweeping the US…”
I remember when this news dropped — I lol’d and said, “if I could short sell a private company, I’d short them in a second.” (Incidentally, that wouldn’t have worked out very well: the public listing and stock collapse didn’t happen for four long years).
Here’s a quick timeline:
a. September 2017: Bird starts it up. CEO Travis VanderZanden had been a VP of Growth at Uber.
b. May 2018: A unicorn is born. Let’s skip past the dull $15 mil from Oct. ’21 and $100 in March ’22. A mere 2–3 months later Sequoia Capital, the O.G. V.C., led a $150 million Series C.
c. October 2018: Uber Jumps in. Surprising no one besides Bird leadership, the 800-pound gorilla did crash the party. Still, more Series C investors raise Bird’s value to $2 billion.
d. October 2019: Another keg arrives. Somehow the party rages on. Sequoia comes back, collectively injecting $275 million more at a $2.5 billion valuation.
e. April 2020: Layoffs via Zoom. Two weeks after Bird employees began working from home due to COVID, 406 of them, 30% of the workforce, were fired on a joint 2-minute Zoom call.
f. May 2021: Born to fly (via SPAC). Bird files to go public via Special Purpose Acquisition Company at an implied value of $2.3 billion. The pandemic only knocked them down one rung on the fantasyland ladder.
g. November 2021: Falling with style? Promptly after shareholders approved the SPAC merger, the stock dove like a hawk. It lost more than 40% of its value in three weeks.
h. June 2022: The dollar store. The NYSE likes to keep up appearances. They warn that Bird may be delisted from the exchange if it doesn’t regain and sustain a $1 stock price within six months.
i. November 2022: Cash flew the coop. Bird reported Q3 earnings and warned that it’s running out of cash. They also admitted to overstating revenue for the last 2 ½ years… oops.
What’s next? Bird continues to employ several hundred people and burns through cash as fast as their little electric motors can go (-$17.39m net change in cash at last earnings call). Rough estimate: they get delisted and declare bankruptcy within two months. Bird’s current market cap of $77m is equivalent to their private market valuation at the time of their Series A, one month into business.
I’m sometimes guilty of schadenfreude and for Bird (the company) this is one of those instances. For the hundreds of people who are likely to lose their jobs in the coming months, they don’t deserve this.
Moats for Competitive Advantage
What went wrong? Let’s break this down by different types of moats: network effects, costs, economies of scale, distribution, intellectual property, and switching costs/loyalty.
It started with a pitch: “Uber for scooters,” undoubtedly. Maybe there was some gloss about saving the world through micromobility and the greening of cities. Apparently no one asked, “what happens if Uber launches Uber for scooters?” Not only are there no network effects for scooters (like the driver network of Uber), but an incumbent like Uber can introduce their existing network of riders.
Next, let’s look at the math, the unit economics of a single scooter:
This is a shitty margin, even without taking into account the cost of running a tech company. I can imagine a sadly misinformed “eureka” moment when someone claimed Bird was a reseller of electricity, marking up the energy to go a mile by 12,000%. (The top row cost and revenue per mile are not actually relevant). My estimates on the revenue side are generous. Bird has reported rides per day and it is, in fact, fewer than two. The average ride is also likely to be just a few miles, tops — a straight shot across San Francisco from Oracle Park to Land’s End is less than seven miles.
The nature of a hardware-rental business also limits economies of scale. Did Bird and its board both vastly overestimate demand and vastly underestimate new entrants? A monopoly was never a possibility; margins would always face downward pressure.
This brings us to distribution. The dockless format means scooters will tend to disperse over a wide area, necessitating costly pickup/relocation. Had anyone crunched these numbers and thought about both economics and moats, they might have considered working with municipalities to build charging docks on city curbs, as bike sharing services have done. Bird could have incentivized return trips from outer to inner areas at 60+% discounts (and still made some incremental profit) or could have disincentivized leaving a scooter undocked with a surcharge at the end of the day.
Instead they played by the Uber rules for disruption. Bird dropped 1,000 scooters on the sidewalks of Santa Monica before the CEO reached out to the Santa Monica mayor (via LinkedIn).
The last options for competitive advantage are also a bust. There’s no intellectual property or opportunity for patents. It’s a QR code — copycats popped up overnight. A beat up scooter doesn’t evoke much brand loyalty either. Despite their macho wordmark, the kerning is wider than the moat. Far from raising switching costs, Bird’s business model actually encourages the most passionate users to ditch their product. If it costs you $8/day to ride a scooter to and from work, why not buy one for yourself? You start saving money after two months.
TechCrunch called it in their analysis of the SPAC filing, “Historically — and based on what we’re seeing in this fantastical filing — Bird proved to be a simply awful business.” [my emphasis]
Following the Money
Bird managed to raise $883 million for this simply awful business. In some weird way it’s [good] that they helped create this market and this mode of transportation, but someone would have done so anyway.
Don Valentine, founder of Sequoia Capital and considered the grandfather of venture capital, said “we’re never interested in creating markets — it’s too expensive.”
So why did Sequoia fall for Bird? I’m honestly baffled by this one. Despite the inanity of it, they still may have made money off it. The firms that set up the SPAC likely received the usual 20% of the outstanding shares — worth a non-zero amount whenever they were at liberty to ditch them. Early investors who were able to bail in the private market certainly did well. Travis reportedly cashed out $44m at the Series C round.
People talk about startups “losing money” but the startup usually starts with zero and plays with other people’s money. The money changes hands, it doesn’t disappear in a puff of smoke. Factories got paid, employees got paid, early shareholders got paid. It was SPAC investors who didn’t redeem and retail investors who got left holding the bag (not even a bag of stolen goods, just an empty bag). But honestly, no one needed a degree in economics to figure this one out, the back of an envelope and a pencil would have done the trick.
Here’s the lesson of the story: build a wall, put turrets on top, dig a trench, fill it with water… or just don’t bother building the castle at all.
