Author Topic: This is your brain on venture capital  (Read 3324 times)

Spekulatius

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Re: This is your brain on venture capital
« Reply #10 on: May 19, 2020, 04:25:22 PM »

    • The prevailing thesis in VC in the past few years, led by Softbank, was the notion of Capital-as-a-Moat. The more money a company has, the faster they can aggressively grow and win and dominate their markets, thus VCs with the biggest checkbooks were in positions to fund and choose market winners. Ask Masa how that has been working out for him :)

    I think this (Capital and ability to spent) is pretty important and Masa was probably the main proponent of this. It’s a brain dead strategy similar to scorched earth in away and unlikely leads to great returns. I think it is important to recognize the startups that are using this and basically just avoid them.
    Life is too short for cheap beer and wine.


    concerto

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    Re: This is your brain on venture capital
    « Reply #11 on: May 19, 2020, 08:04:51 PM »
    To echo and perhaps expand on winjitsu's point:

    Quote
    To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.

    This is the key point, isn't it? A couple of questions:
    1) For most moat-y businesses, do they have to pay their customers to choose their business?
    2) For the ones which do, in fact, pay their customers (perhaps just initially) - what do those businesses look like?

    In my opinion, for (1) most moat-y businesses do not need to be acquired. You are offering something so special that competition is limited. Either you have some special process to offer sustainably lower costs (i.e. best commodity producer) or you are so differentiated that you are offering a special product (brands, etc.)

    Now, yes there are some businesses where you pay to acquire. The question then becomes, which are successful, and why? I would argue therefore the response to (2) is that you are building yourself into long-term customer processes, with high switching costs/specialized service, and a high natural relationship length. It becomes uneconomical to pay for customers if they can just hop to a competitor (low switching costs) in a month (low relationship length).

    My problem with the VC world (and perhaps I am wrong) is that they over-estimate their competitive advantages. I am sorry, but food delivery is not a competitive advantage. And access to capital is almost never a competitive advantage. Real competitive advantages come from high skilled activities at least in most cases.

    I think there is potential for significant competitive advantage in creating a network that makes delivery better, if it makes delivery better. Despite what some might argue, I am probably never going back to ordering a taxi because Uber/Lyft are so much more convenient that I would probably pay a premium to a taxi. Uber/Lyft made transportation a better experience IMO. They also made the driver experience better by making it a more flexible job, eliminating expensive medallions, etc.

    The open question for me perhaps is how are the food delivery services making the experience better than the status quo? Is calling up my favorite restaurant and going to pick it up that much different than having someone deliver it? I see the two-sided network effects very clearly with something like Uber, but food delivery not so much, especially if restaurants are eating the delivery cost. It is at best another form of advertising for them in that world.

    What makes Uber better than a taxi?  Uber is a taxi service with an app.  There is nothing more to it.  Uber is just the app-ification of a service that's been around forever.  The Uber business model wasn't related to network effects (even if they claimed that), it was about just subsidizing rides relentlessly to get to a scale that local laws didn't apply to them anymore.  In fact, if you read about Uber, everyone can see the network effects never existed.  Even small price increases (or smaller subsidies) causes Uber to lose market share.   

    I would argue Uber just took advantage of another Silicon Valley business model - ignoring regulations.  Like how if you throw a Coke can on the ground, you are littering.  If you have a scooter company where 10,000 scooters are thrown on the ground, you're a mobile transportation company.

    I think it's less about the direct comparison between Uber vs. taxi services, and more about Uber allowing a massive number of underutilized assets (personal cars) to be monetized. Network effects come into play here (although likely weaker than the VCs originally believed), as it's a marketplace and not a fleet manager. The economic sensibility of this (what Uber charges vs. driver salary + vehicle depreciation + variable costs + whatever else) is another story altogether. In my last gig, we used to joke that the best way to help Lyft (one of our portfolio companies) was to take more Ubers.

    Broeb22

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    Re: This is your brain on venture capital
    « Reply #12 on: May 20, 2020, 05:54:25 AM »
    To echo and perhaps expand on winjitsu's point:

    Quote
    To have a seriously durable competitive advantage in such a large market - a business model that is essentially a toll road for restaurant food delivery... think about how incredibly valuable that could be once the market has matured and cost of customer acquisition falls.

    This is the key point, isn't it? A couple of questions:
    1) For most moat-y businesses, do they have to pay their customers to choose their business?
    2) For the ones which do, in fact, pay their customers (perhaps just initially) - what do those businesses look like?

    In my opinion, for (1) most moat-y businesses do not need to be acquired. You are offering something so special that competition is limited. Either you have some special process to offer sustainably lower costs (i.e. best commodity producer) or you are so differentiated that you are offering a special product (brands, etc.)

    Now, yes there are some businesses where you pay to acquire. The question then becomes, which are successful, and why? I would argue therefore the response to (2) is that you are building yourself into long-term customer processes, with high switching costs/specialized service, and a high natural relationship length. It becomes uneconomical to pay for customers if they can just hop to a competitor (low switching costs) in a month (low relationship length).

    My problem with the VC world (and perhaps I am wrong) is that they over-estimate their competitive advantages. I am sorry, but food delivery is not a competitive advantage. And access to capital is almost never a competitive advantage. Real competitive advantages come from high skilled activities at least in most cases.

    I think there is potential for significant competitive advantage in creating a network that makes delivery better, if it makes delivery better. Despite what some might argue, I am probably never going back to ordering a taxi because Uber/Lyft are so much more convenient that I would probably pay a premium to a taxi. Uber/Lyft made transportation a better experience IMO. They also made the driver experience better by making it a more flexible job, eliminating expensive medallions, etc.

    The open question for me perhaps is how are the food delivery services making the experience better than the status quo? Is calling up my favorite restaurant and going to pick it up that much different than having someone deliver it? I see the two-sided network effects very clearly with something like Uber, but food delivery not so much, especially if restaurants are eating the delivery cost. It is at best another form of advertising for them in that world.

    What makes Uber better than a taxi?  Uber is a taxi service with an app.  There is nothing more to it.  Uber is just the app-ification of a service that's been around forever.  The Uber business model wasn't related to network effects (even if they claimed that), it was about just subsidizing rides relentlessly to get to a scale that local laws didn't apply to them anymore.  In fact, if you read about Uber, everyone can see the network effects never existed.  Even small price increases (or smaller subsidies) causes Uber to lose market share.   

    I would argue Uber just took advantage of another Silicon Valley business model - ignoring regulations.  Like how if you throw a Coke can on the ground, you are littering.  If you have a scooter company where 10,000 scooters are thrown on the ground, you're a mobile transportation company.

    I think appification grossly oversimplifies it. Facetime/iMessage is just a technological version of a letter (a form of communication), but would you ever want to return to a world where you could not see/communicate with your loved one anywhere in the world at a moment's notice? Certain Expense Reporting Apps are just apps, but they make it much easier to submit expenses, so usage of them becomes much better. Sometimes "just an app" makes things much, much better than their prior state. If the taxi world had figured out that an app that gave riders certainty of who was showing up and when, they would have retained a significant portion of their business.

    Saying that network effects don't exist in a business like Uber is a preposterous claim. The network effects may be more local in nature than a Facebook or Google, but they exist nonetheless. The same economics work for Uber that work for any route-based business like UPS, Stericycle (medical waste), uniform rental, trash services, or even cable TV/internet. If you're going to "pass" by many locations, it's vastly better to be picking up from or delivering to as many of those locations as possible.

    If an Uber driver has to drive 15 minutes every time they have to go get a new ride that takes 5 minutes to drop off, they will very quickly realize driving 75% of the time and getting paid 25% of the time is not a good model. While I would bet Uber drivers don't make an economic profit on their time and vehicle-related costs, they still can earn a decent living simply because of the density of demand that exists in an area. 

    And in regards to the regulations, there are different opinions on this, but Uber is not an "unregulated" system. Uber regularly boots drivers for poor ratings, so while they allow people who are not licenses taxi drivers to be on the platform, it is not a free-for-all without consequences. In the age of everyone reviewing everything, there can be consequences for drivers and riders in a much more efficient way than whatever process exists to deal with a poorly-behaved cabbie.

    https://www.insidesources.com/how-uber-exposed-decades-of-flawed-taxi-regulations/

    https://time.com/3592035/uber-taxi-history/

    bizaro86

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    Re: This is your brain on venture capital
    « Reply #13 on: May 20, 2020, 10:29:57 AM »
    Except it seems that most places drivers drive for both Uber and Lyft. So if Uber builds a network of drivers with density it doesnt seem like they have a way of keeping their competitors from using the same driver network to take share.

    Orange

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    Re: This is your brain on venture capital
    « Reply #14 on: May 22, 2020, 12:21:07 AM »
    When I used to deliver Chinese food for my family restaurant, I never would've thought that you can "corner the delivery" business.  This new economy is so exciting that it is turning the average American into pizza delivery guy and taxi drivers while Softbank rains dollar bills at the unicorns like a degenerate strip club goer.   

    It is a very bizarre world that we live in where you can convince people to scale up a very unprofitable job and convince VC that it has a huge TAM and they can afford to lose billions every year.   

    If we invert this, maybe we can buy companies with network effects already that are growing at 2% a year and trading at 6-7x P/FCF.  Instead of believing in the hype, just buy the finish product at a reasonable multiple. 

    I introduce to you Univar - A levered chemical distribution company that buys in bulk and sells by the gallon.  I don't think Amazon or other competitors are looking to sell corrosive chemicals anytime soon.  You need licenses, trucks, and lots of warehouses.  It has counter cyclical cashflow generation.  I think it is a much better business than distributing steel/aluminum or building materials such as lumber.  Route density is a real moat.  Look at UPS and FedEx.  The more packages/orders that you can deliver in a route, the lower the unit cost.  Sometimes, investing boils down to a couple key takeaways.

    It's a hell of a lot easier to reproduce licenses trucks and warehouses. It's really just a matter of deploying capital. Having a food delivery brand that's a household name... with millions of customers, thousands of restaurants, and a legion of contractor delivery people all coming together... you can't just throw money at that and make it happen. It is f*cking hard. That's what a real moat looks like my friend.

    I think you might want to step away from the chemicals and get some fresh air.
    « Last Edit: May 22, 2020, 12:24:26 AM by Orange »

    Orange

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    Re: This is your brain on venture capital
    « Reply #15 on: May 22, 2020, 12:49:14 AM »

    What makes Uber better than a taxi?  Uber is a taxi service with an app.  There is nothing more to it.  Uber is just the app-ification of a service that's been around forever.  The Uber business model wasn't related to network effects (even if they claimed that), it was about just subsidizing rides relentlessly to get to a scale that local laws didn't apply to them anymore.  In fact, if you read about Uber, everyone can see the network effects never existed.  Even small price increases (or smaller subsidies) causes Uber to lose market share.   

    I would argue Uber just took advantage of another Silicon Valley business model - ignoring regulations.  Like how if you throw a Coke can on the ground, you are littering.  If you have a scooter company where 10,000 scooters are thrown on the ground, you're a mobile transportation company.

    So many gems in this thread but this one takes the cake. Just a "taxi service with an app" You realize uber has like 2 or 3 thousand software devs working for them? Wicked smart silicon valley developers, many of which are working on developing self driving cars. "Just a taxi with an app" You realize they have 75 million paying users, and 3 million drivers. But their business model isn't about network effects? What the hell is wrong with you guys, lol. How about this, go hire some developers, make an app, get everyone in the world to know about it, have your brand name become better known than the service itself ("Uber" is a better known word with consumers than "rideshare"), then bring 75 million paying customers together with 3 million people providing them a service. How easy would that be to replicate?
    « Last Edit: May 22, 2020, 12:52:54 AM by Orange »

    JRM

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    Re: This is your brain on venture capital
    « Reply #16 on: May 22, 2020, 03:59:15 AM »

    What makes Uber better than a taxi?  Uber is a taxi service with an app.  There is nothing more to it.  Uber is just the app-ification of a service that's been around forever.  The Uber business model wasn't related to network effects (even if they claimed that), it was about just subsidizing rides relentlessly to get to a scale that local laws didn't apply to them anymore.  In fact, if you read about Uber, everyone can see the network effects never existed.  Even small price increases (or smaller subsidies) causes Uber to lose market share.   

    I would argue Uber just took advantage of another Silicon Valley business model - ignoring regulations.  Like how if you throw a Coke can on the ground, you are littering.  If you have a scooter company where 10,000 scooters are thrown on the ground, you're a mobile transportation company.

    So many gems in this thread but this one takes the cake. Just a "taxi service with an app" You realize uber has like 2 or 3 thousand software devs working for them? Wicked smart silicon valley developers, many of which are working on developing self driving cars. "Just a taxi with an app" You realize they have 75 million paying users, and 3 million drivers. But their business model isn't about network effects? What the hell is wrong with you guys, lol. How about this, go hire some developers, make an app, get everyone in the world to know about it, have your brand name become better known than the service itself ("Uber" is a better known word with consumers than "rideshare"), then bring 75 million paying customers together with 3 million people providing them a service. How easy would that be to replicate?

    I'm not sure why any sane person would want to try to replicate Uber's business.  What would you do?  Try to undercut an already unprofitable business model?  Uber doesn't make money.  Uber is not going to make a GAAP profit in the foreseeable future.  Apparently, their business model is to transfer VC and shareholder money directly to customers.  Also, I think transportation as a service has different value to people who live in urban environments vs rural areas.

    Broeb22

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    Re: This is your brain on venture capital
    « Reply #17 on: May 22, 2020, 08:43:21 AM »
    Except it seems that most places drivers drive for both Uber and Lyft. So if Uber builds a network of drivers with density it doesnt seem like they have a way of keeping their competitors from using the same driver network to take share.

    How many other rideshare competitors are there in the US? Or in some of the more competitive markets like NYC/SF? Not that many, and when you look at the third link below, the market shares follow exactly the power law distribution you would expect to see from a winner-take-most market structure that is the hallmark of an industry/business with network effects.

    These competitors exist, but if you're thinking long-term about this, those other companies likely can't compete with Uber, UNLESS Uber's costs are way too high and they are overcharging people to compensate for their bloated cost structure. Recent announcements from Uber that will cut over 20% of the workforce suggest that Dara is on top of this and won't allow Uber to get undercut by a more cost-conscious competitor. Disclosure: No Position.


    https://ride.guru/cities/new-york-new-york-united-states-of-america

    https://ride.guru/cities/san-francisco-california-united-states-of-america

    https://medium.com/edison-discovers/uber-reigns-supreme-in-nyc-takes-60-of-dollars-spent-on-rideshare-12fdfc13748c

    fareastwarriors

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    Re: This is your brain on venture capital
    « Reply #18 on: May 22, 2020, 09:25:51 AM »
    SoftBank’s second Vision Fund hangs in the balance after the first one posted a record $18 billion loss

    https://www.cnbc.com/2020/05/22/softbanks-vision-fund-ii-in-jeopardy.html

    Japanese tech giant SoftBank announced the $108 billion Vision Fund 2 last July.

    The idea is that it would compliment the first $100 billion Vision Fund, which was announced in 2017.

    Vision Fund 1 reported huge losses on Monday after SoftBank wrote down the valuations of companies like Uber and WeWork by billions.

    rb

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    Re: This is your brain on venture capital
    « Reply #19 on: May 22, 2020, 09:45:38 AM »
    What did you guys do to Orange that you've triggered him?

    Of course Uber is just a taxi with an app. I mean they also have their creepy trackers and stuff. But if they can't make money off of that at their current size when will they? Right now in most markets you have at least two players. In the US the majours are Uber and Lyft, in Europe you have Uber and Taxify. I'm on all of them and i just pick whichever one is cheaper. In the US it's really easy cause you get prices in a google search and you don't even have to go in the app.

    If one of these platforms would have some sort of advantage over the other there should be something that would tie you to the brand. But there isn't. In Europe I'd say that Uber does seam to have a better mapping than Taxify. They tend to be more accurate with arrival times and trip times. So if prices are the same I'll probably choose Uber over Taxify. But not if prices are over $1 apart.

    In the US I didn't notice a difference between Uber and Lyft. They're both good.