In this article, I want to talk about Uber and the other “Silicon Valley unicorns” like them. One of the things that I see so much in the startup and small business community is a constant comparison to startups to their own business. This is perhaps one of the most key and essential conversations that I have with potential clients. Not only do I believe that this is unwise but I believe that this kind of thinking can have far-reaching damage to your business.
Below are three key things that you need to know about these kinds of businesses and why it’s extremely dangerous to compare yourself to them. If you can take these points to heart, you can save yourself a ton of grief and potential financial loss.
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#1 They aren’t “real” businesses
Now you may be thinking, where do I get off in saying that “a company like Uber isn’t in a real business?” I don’t say this from my own vantage point but what economists, investors and others have said about Uber.
Let me start here, what do I mean by a company like Uber not being a real business? What I mean is that they are not profitable and have no clear path to profitability. Uber lost $8.5 billion in 2019. This is an astronomical and unsustainable level of financial loss.
#2 They don’t have a real market
This point plays off of the first point. Why do these companies lose so much money? It’s either because they don’t have a clear market with customers willing to pay for the products or services that they offer, or that they do and the expectation from the consumer is that the price is out of line from where the start up would have to charge to be profitable.
Let’s start with the lack of the clear market example, a good example of a startup that did not have a clear market was WeWork. If you’re not as familiar with WeWork, it’s a very interesting case study of making assumptions and outrageous speculation off of where the real estate market would go. If you’re not familiar, here is a great article that you can go check out.
The thing about WeWork was this, they assumed that they could take high price big city commercial real estate and sublease it to freelancers and businesses looking for temporary office space within these cities. Many investors questioned WeWork on whether they would have potential renters that could pay the right price to offset the huge liability that WeWork was putting themselves into with these leases. And these investors, were basing their data on other companies that had the exact same business model as WeWork. One example is Regus. What WeWork was (and still is) providing to the market was no different or any more innovative than other businesses in the market. Conducting the right form of market research would have easily shown this.
Now let’s go back to that point about a business charging something that is out of line with what the actual cost is. Uber is guilty of this mistake. Think about this, what is the difference between Uber and a local taxi company? There’s two major differences: One is the mobile app and the ability to virtually hail an Uber versus the traditional cab approach, but the other is cost. Many of the Ubers critics have criticized the company for artificially lowering the price to snuff out competition from traditional taxi cab companies. Uber has also gotten themselves into some trouble in certain markets like New York City and other big cities around the world for not going through the “taxi cab medallion” programs and not treating their drivers like actual employees. Many of Uber‘s critics point to the fact that they are not on the same playing field as a traditional taxi cab company. If Uber was required to pay the same employment fees, insurance and benefits of traditional taxi cab companies AND if taxi cab companies had an app service similar to Uber… there wouldn’t be much of a difference.
#3 they have investments that will never come to future businesses… including yours
Even if startups like Uber are a real business and have real markets, they are playing with money that likely future startups will likely ever see. How can a company like Uber that has never made a profit and lost $8.5 billion in 2019 buy another company for $2.65 billion? It’s because they have immense sums of investment dollars and money and from their recent IPO. This kind of money makes them do things that small businesses and smaller startups likely will never see. There’s been a growing level of cautiousness that is starting to sink into the venture capital market.
Because of this, it is unlikely that we will see companies receiving such large sums of investments. Even if investments continue to flow, investors are becoming a little more skeptical and are looking into companies further before proceeding. I would argue that what happened to WeWork with their failed IPO is a response to companies like Uber’s filing where they lost $1 billion after their first quarter post IPO.
Basing your own business on companies like Uber with any one of these points is unwise. You need to base your business on sound market research, and focus on creating a cost effective and scalable customer acquisition strategy. Unsure where to start? Let’s set up a consultation!