I agree that GrubHub, Doordash, and to some extent Uber seem bloated when considering the sum total of the markets they play in. That doesn't mean these business models aren't sustainable, though. Some companies allocate resources to a few areas that turn into profit centers, some don't. The ones that don't will be sold off or parted out. And the cycle will continue. I'd wager that one of these companies will survive and turn out to be a profitable, healthy business in the next few years. The rest will probably be sold off or slowly downsized.
More broadly, to your criticism of SV's investment strategy, resource allocation is a hard problem. If you want to direct large sums of capital at certain business verticals, do you want to grow slowly and steadily over a 20+ year period only to find that the economics don't work, or do you want to fail fast with some extra waste in the middle? Failing fast has some upside to it, though I understand why I consistently hear this criticism on this site. It feels like the last decade has seen the pendulum swing towards fast money and back a little. I don't think were as far off from a healthy middle ground as some might argue.
Maybe we'll eventually learn that artificially forcing business models to run at accelerated rates creates self-fulfilling prophecies of "fail fast."
The point is that from the perspective of investors, the survival of an individual startup is an irrelevant metric. What they're interested in is the profitability of the whole portfolio.
And so far, a 90% failure rate with <5% wild success is a profitable formula. As long as that remains true, they have no reason to change it.
The big profitable tech companies today didn’t raise billions in VC money.
Whether the numbers crept into the billions when the company was private or public is irrelevant. The point is that for a company to reach scale, they need billions in funding from somewhere.
Somebody has to take the risk, and all investors want returns for that risk. Public market growth investors want rapidly growing companies just as VC investors do.
The early companies like Apple and Microsoft were started with a few million not even a billion in today’s dollars. As I said earlier, Microsoft didn’t even need the later rounds of funding and wanted to bring expertise on board.
The only one of the current top tech companies that weren’t GAAP profitable at IPO is Amazon and even it used its own operating cash to fund growth.
> do you want to grow slowly and steadily over a 20+ year period only to find that the economics don't work, or do you want to fail fast with some extra waste in the middle
Seems highly dubious because you can take a perfectly fine business model and create an unattainable, doomed-to-fail situation out of it by subjecting it to unrealistic expectations, as we have seen in dozens of examples from the current bubble. Stress testing is not useful if it sets artificial pressures that destroys the business.
1. There are plenty of companies on the path to IPO that didn't take 1B+ in VC money 2. The "sharing" platforms are expensive investments because there are so many players fighting for market share.
We're talking about a strategy of fast growth vs slow and steady. All the companies we've mentioned so far invested in fast growth early on, whether from VC or reinvestment.
Amazon is the outlier when it comes to the lack of GAAP profitability for years, but even it was cash flow positive.
Every year, VC in the US _as a whole_ invests roughly 100B [2]. If you cut out non-growth and non-tech sectors I'd guess that number total goes to around 40B, and roughly 100B (very rough number) globally.
So yeah, some money gets "wasted" but it creates huge market capitalizations that are around two full orders of magnitude larger than a single years investment, and growing strong year over year.
[1] https://www.investopedia.com/terms/f/faang-stocks.asp [2] https://www.prnewswire.com/news-releases/us-venture-capital-...
Amazon - operates on thin to non existent profits for years but use much of its own money to grow through operating cash.
Apple - definitely didn’t raise billions in the 70s and was profitable at IPO.
Netflix - I don’t know much about Netflix.
Google - grew fast but it also had a profitable business.
Microsoft - famously, MS didn’t even need the VC money it got early on. It took the money because it wanted the expertise of the investors.
Besides discovery and virality, there is also the issue of falling transaction costs. When Google, Facebook and Amazon were founded, you had to maintain your own datacenters and infrastructure. That alone produced a massive barrier to entry that made competition less fierce. Since the advent of AWS and other cloud computing platforms, transactions costs for tech companies have dropped dramatically so you can't rely on infrastructure prowess as a competitive advantage for many tech verticals.
You simply can't compare companies that were born and matured in different markets with different dynamics to those founded in the past 10-15 years. It's apples and oranges.
Were Linkedin, Instagram, Beats by Dre, WhatsApp, Tableau, Skype, GitHub, MuleSoft all failures because they were acquired for billions, making lucrative paydays for their founders and investors?
Beats by Dre raised less than $1 billion in funding.
https://www.crunchbase.com/organization/beats-by-dr-dre
WhatsApp raised less than $70 million.
https://www.crunchbase.com/organization/whatsapp#section-ove...
From looking at Crunchbase, Instagram didn’t raise any outside funding.
None of the companies you listed raised anywhere near what Uber, Lyft and AirBnb raised.
https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...
[1] https://techcrunch.com/2020/04/09/starship-technologies-is-s...
I tend to agree, and also because I don't think food delivery can be easily decoupled from the preparation (for ready-to-eat orders). I mean, restaurants have done it profitably for ages, but whenever one of these SV companies tries it, I hear all kinds of stories about how, unless everything goes right, the whole process becomes tedious an frustrating.
Like, the order's wrong, and it has to restart through Uber's whole system. And the runners can't look inside to verify the order because (legitimate) health regulations. And it just ends with an unsatisfied customer who has some credit on the app.
But I do think there is a way to SV-ize food delivery, like if they could get economies of scale to work for food delivery. Imagine this:
A restaurant knows at least one customer needs their dish to start prep at 5:30pm. The website indicates they're starting one then anyway, so you get a discount for ordering the same food to start at the same time.
Meals can be batched easily -- it costs them much less than N times to scale up the order to N servings or customers.
Ditto for (in urban areas) delivering to the same building or block. If they only have to stop once, they can offer a discount to anyone ordering the same thing in the same building.
This is exactly the kind of thing where it pays to be a broad platform that everyone's on, and has kinds of monopoly profits, and provides legit consumer value.
(Disclaimer: I registered a domain name suitable for this kind of service but haven't otherwise advanced it.)
I was an Uber/Lyft driver, and I tried delivery a couple times way back before covid-19. One pickup was 5 identical, unlabeled containers, two of which were special orders. Having worked in restaurants before, there was no way in hell I wasn't going to visually check them (also I don't recall this being prohibited before). Turns out, one was wrong-- so the other 4 got cold while that one was re-made and I sat for 20 minutes. All told, it took me 45 minutes to bring mostly cold food to an unhappy person and I made about $4. Not. Sustainable.
It sounds like you have some good ideas and are thinking in the right direction, though. Streamlining your whole operation to minimize the possibility of errors and reduce wait times is one of the most important things to focus on in my book. Give people fewer choices.
A) Silicon Valley-style hyper growth
or
B) Slow and steady growth
Choice B is not actually an option if you want to change human behavior and actually benefit from economies of scale. This is because of the nature of competition and the power of habit. If it takes you 20 years to go national, then competitors will have cemented themselves in each region you try to operate.
And because humans are creatures of habit, it will be ridiculously expensive to get them to change their behavior even if you offer a comparatively better service.
But there's little or no economies of scale in the delivery business. A citywide delivery service would be equally efficient whether operated by a local company or a multinational. The local company may even have an advantage in terms of knowing their customers better. The only economy of scale I see is access to cheap VC capital.
Was it overall a living wage as a sole source of income? No, not at all. There was usually only a small window every day when people actually wanted delivery. Was it good money for the number of hours worked? Sixteen year-old me sure thought so!
Gross profit matters far more than profit margin. Also the best way to be profitable is to increase sales relative to fixed costs, rather than trying to squeeze every dime out of limited sales.
If these businesses would grow more sustainably (i.e. slower), they wouldn't need such large sums of money to operate. They wouldn't over hire at sales / marketing / engineering / design / operations/ literally every role. In turn, they would be forced to set rates that can cover their actual costs while being a good business deal for restaurants, as they'd have to be around long enough for the delivery company to have any real growth.
There should be economies of scale wrt. a centralized delivery platform that services all kinds of restaurants. The fact that, say, Dominos has been offering delivery for _decades_ means that it's absolutely possible to have a sustainable national food delivery business on $8 medium pizza deals and $4 delivery charges. The tech delivery companies are just plain greedy: I surmise it's their quest for "f u" money that kills their business model right off the bat.