Are We In A Startup Bubble?
Uber and the Ride-Sharing Economy
So with Snapchat valued at $10B and WhatsApp at $19B, the buzz is around startups. Students are dropping out of school left and right to produce the next disruptive force in the millenial generation. Uber and Lyft dominated the ride-sharing atmosphere, completely changing the taxi industry. However with any successful company come the challenges of staying successful. Michael Porter would call this trying to sustain a competitive advantage. Ergo, doing some task better than your competition; faster, easier, any measurable metric that made the user experience better. The barrier to entry here is two-fold. Accessibility and user adoption.
A company trying to compete with Uber must compete on multiple levels. First, Uber has an established system of drivers who are familiar with the driver interface as well as a mobile application that is intuitive to use as well as just plain gorgeous. Competitors must have some type of intrinsic benefit that makes it better to use for both drivers and riders alike.
Uber and Lyft were first. The majority of the market share in most metropolitan areas belongs to the original taxicab industry and these two companies. The network effect implies that the larger the network of drivers, the more users there will be. The more users, the more drivers want to be a part of Ubers eco-system. A positive feedback loop ensues and thus dominant market share is formed.
Now to enter the market, a company needs both accessibility and sky-high user growth statistics. Sidecar is attempting to do just this. This startup is entering the ride-sharing world with guns ablazing. Recently raising a second $15 million, this company has been equipped with the capital to make a serious effort in dethroning the kings. Two major players were involved with this investment. Union Square Ventures and Richard Branson (found of Virgin Group). I believe this was a hedging effort in both cases.
Union Square Ventures put up approximately $10m of this most recent $15m into it AFTER investing $30m into startup Hailo, which they claim can’t possibly be a competitor (but really, it’s a direct competitor) so this $10m investment is a hedge against their bigger bet on Hailo. The ride-sharing industry is booming with babies trying to gain market share and without the ability to ride the wave on these two so-far successful companies (Uber more so) VC firms are trying to find the next big hit.
This explains why Branson, the founder of a conglomerate, is trying to diversify, and why a VC firm that’s already invested into another ride-sharing company is investing in a competitor. It’s all for the minute chance for the intense growth and upside people saw in Uber and Lyft. Not necessarily a bubble, as that would imply that people are paying above fundamental value for an asset. Sidecar will be able to generate enough revenue to justify the investment by some multiple of price over earnings. Not to say it’s not overvalued, but it’s hardly indicative of a bubble. I’ll be writing about Sidecars strategy in a later post.
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