Fundraising should add fuel to a fire, not be a false indicator of success
Price-dumping | Fund-raising | Uber | Yik Yak…My Take

I’m tired of reading the news every morning hearing about which Uber executive has recently been asked to step down. The faults that have plagued that organization have been widely discussed and there is enough content to provide you with a thorough understanding of PR nightmares. I do believe that the Board of Directors at Uber is smart enough to get out of this rut, albeit with potential painful financial losses in the short run (down-round?). I want to discuss something different that seems to have been ignored, Uber’s primary problem with business operations, particularly their fascination with price dumping.
I believe the Uber debacle started the day we started glorifying investment rounds over revenue and profits. Start-up capital has never been so widely accessible, and the number of investors and risk tolerance per investor has never been higher. Large investments that boost valuations for a firm are something to be celebrated, no doubt about that; it is not an easy task to lure the smartest/richest minds into backing an idea; however, this should not be the goal of young start-ups. The desire to be the next Unicorn (valuation over $1B) is hyped up so much that the crucial understanding of what makes a business succeed is forgotten.
Last Sunday I had to call a taxi for my sister so that she could get a ride to the airport. I fired up my Lyft app and saw that the ride would cost $17.34. I then opened up the Uber app to do a price check. Uber was asking for $9.65 (showing “promo applied”; I haven’t done anything to receive a promo, this was just provided to me when I opened the app.) Upon first seeing the price of the Lyft ride, I was satisfied. Getting a taxi in Atlanta to drive you to the airport is quite a hassle and $17.34 for a 25 minute ride to the airport is reasonable. Public transportation via MARTA (subway) would cost $2.50, however subway stops are few and far between. The consumer here is offered a fair deal: the convenience of an on-demand, clean, private car, with a (presumably) courteous driver who comes to your doorstep to pick you up and then ferry you to the airport at 5:45am in the morning for under $20 is reasonable. To put this in perspective, a “regular taxi” charges a $30 flat-fee between the airport and downtown Atlanta. Enter Uber: by undercutting Lyft by ~50%, they have put themselves in a price bucket where the price is unbelievable. Who in the right mind would not take the Uber price? We quickly booked an Uber and were on our way. Uber wins, in the short run.
As consumers, we take the path of least resistance. In this case, that path of least resistance was the lowest price (service, quality and time were all equal). Uber wins. However, unbelievable prices by the their nature are not meant to last long (then they wouldn’t be unbelievable anymore, they would be the standard). I don’t expect that low price every time I open the Uber app, but I will keep taking that price as long as it is being offered to me. From Uber’s perspective, they seem to be winning: growing market share; they clearly have the funds to bankroll these losses (primarily from large investments).
This ~50% gap in price isn’t just in Atlanta on the way to the airport. I have personally experienced it in many major American cities and have verified with peers that they too have seen these types of deep price cuts, globally. There is a lot of research into this, with Uber themselves making broad claims of their lower prices (X % cheaper than taxi’s in XYZ city).
Uber’s price dump war against Lyft (in addition to the taxi market and other on-demand ride hailing apps) is trying to shift an entire market’s perception of price equilibrium. In today's economy, it is unreasonable to expect that a ride to the airport should cost under $10 (in a private car, ride sharing, i.e. UberPool is a different story), when public transport is pegged at $2.50 (example: Atlanta). With the current state of the automotive industry, this practice of trying to change our perspective of what something should cost, will fail. The pricing just doesn’t work out for a gasoline car with a human driver (who isn’t even an employee of the company). Providing deep price cuts without financial support from Uber is impossible for these drivers (Uber pays the drivers a certain fare, and charges the rider a lower fare, the difference in fares is bankrolled by Uber). There is a case to be made that the entire pricing on the taxi industry will change dramatically when electric cars, and eventually autonomous cars take over the market (fuel costs cut dramatically, no human labor costs — I’m excited for this future).
There have been plenty of times that the price for an Uber and Lyft are the same, and guess what, I pick Lyft, every single time. Why? It isn’t because of my frustration with Uber’s HR and PR practices as a company (of which there are many). It’s because Lyft has understood the importance of adding value within their ecosystem without the need to price dump their competitors. Lyft’s recent partnership with Delta is a prime example of this (earn Delta SkyMiles based on spend with Lyft). Lyft has their consumers’ interest in mind. It’s not just about price, it almost never exclusively is. It’s how you view your users, how you treat them, and what benefits you bring to the table. Uber has had so many opportunities to provide value-adds, but every time, they step over their own feet. With the launch of Uber Eats, they had a great opportunity to drive value within their own ecosystem, driving their consumers to products within their portfolio, without having to use price dumping as their only way to beat their competition. A quick example of this could be getting Uber Eats credits every time you tip an Uber driver (tipping on Uber has been released). To be fair to Uber, they have partnered with Amex and are trying to build value-adds for their users. However, this is not their core strategy, price-dumping and bleeding their competitors dry is.
Ensure that your primary product or service is generating revenue, add true value to your consumers by keeping them inside your ecosystem and incentivize them without the need to price dump. Sacrifice insane global “growth” for sustained revenue generation (maybe even break even or heck, the crazy idea of being profitable!). Invest in growth when the time is right. Taking on more capital to take a bad idea (price dumping) and scale it globally is idiotic. When a stable core product is expanding, it then makes sense to take short-term losses in other product offerings to grow the product portfolio. Build a business, not a fad. Build a company, not a farce. For example, Amazon has used the “loss model” in a variety of its businesses and in turn has set up a vast and deep product portfolio (their 2016 shipping losses topped $7B). However their losses have always been a way to support core businesses and overall has added positive value to their entire product portfolio. Uber has been stuck in a nasty game that they decided to start themselves. By depending so heavily on price dumping as the sole variable tied to user acquisition, the need to keep raising rounds of funding at excessive valuations (to protect earlier round investors) has put them in a deep rut.
There is nothing wrong in being a pre-revenue startup; it is a necessity in many cases. Bootstrapping only applies to select products/services and business models. With the rise of the startup ecosystem, consumers have been programmed to expect tremendous value from free products. It is easy to scare consumers away without first showing them the value you can add to their lives. However, there comes a point when a startup must mature and be held accountable for their actions in the market when they show no signs of revenue generation (and no pathway to profitability). A common thought was that investors would hold them accountable to this. Based on the large number of failures we have seen recently involving pre-revenue startups losing their user base once they try to monetize, these investors seem to have lost this accountability privilege.
Take Yik Yak for example: they raised over $70MM in funding without the slightest shred of evidence that they could monetize their user base. In a world where investors demand a 10x minimum return (and they should), Yik Yak would have to be valued over +$1B to provide that level of return. After months of trying to figure out how to monetize, Yik Yak was forced to take steps that angered their already faltering users (bomb threats, bullying allegations and dissent from high-schools/colleges). An anonymous messaging startup with huge user growth is exciting, but has a lot of barriers towards revenue generation. I am a lifelong optimist, and I believe that there is an alternate universe in which Yik Yak succeeds as a lasting company. In that universe, they are forced to innovate towards revenue generation and profitability, not by raising a huge sum of money and then figuring out what to do, but by listening to their users, starting small and scaling revenue.
Can we blame the mid-20 something co-founders of Yik Yak? No, founders have confirmation bias that will lead them to believe that they can overcome against any and all odds (and this is what makes starting a company so intoxicating). We have to look towards the investors and ask them what they were thinking. Everyone wants to get in early, and yes, capital is required at different stages, but let’s be mindful and remember that certain apparent advantages (huge cash inflows from investors) may not be advantages at all. Advantages such as cash will delude you, seduce you and if the core model is not preserved, crush you.
Three main points that I’d love to discuss in the comment section below and hear your viewpoints:
1) We need to stop glorifying startups based on their valuations and rounds of funding. Why is it sexy to raise large sums of cash with no revenue model, but not as sexy to have stable revenue generation, albeit at a smaller scale? Let’s come up with another definition to compete against “Unicorn”, or get rid of this toxic definition all together.
2) Price dumping is adding short-term value; this practice is unsustainable. Instead, drive value into the product ecosystem by listening to customers and creating new value-adds that lead to portfolio wide revenue generation.
3) Consumers will take the path of least resistance (ex: lower prices), but eventually a firm whose main growth strategy is price dumping, will bleed out and be forced to make drastic changes to their platform (changes that they might not survive). When the path of least resistance changes, a competitor who adds true ecosystem value will be favored.
