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On-Demand Startups Are Hemorrhaging Tens of Billions a Year

• solotronics 8y ago
  man there goes my idea of uber for toaster strudels
  • ben509 8y ago
    Don't give up on the dream. Toaster Struberlder could be the next big thing!
    • solotronics 8y ago
      You have given me hope! I will incorporate the latest hotness app tech stack, blockchain proof-of-strudel, drone delivery, and baking on-demand. Ycombinator here I come!
      • camdenlock 8y ago
        "Blockchain proof-of-strudel" is a fantastic little phrase. Well done. I'd use the :joy: emoji if HN would let me.
        • imtringued 8y ago
          If necessary we can strudeliver it to you!
• thorwasdfasdf 8y ago
  i would've appreciated a bit more breakdown on where all the spending was going. i mean, the user acquisition cost, will eventually go away for the most part once they reach a certain size. After that it's all about operations. the question is how do the scalability of providing service fundamentals look like, long term cost vs revenue.
  • ghaff 8y ago
    In the case of Uber/Lyft while I'm generally expensing it when I rarely use them and don't care about price much, I expect a lot of people who use them day-to-day would drop them in a heartbeat if they could use cheaper options. I'm not sure I understand why "rideshare" should be cheaper than cabs. I think it's mostly better than cabs which is why I use them. But that's maybe not the majority view.
  • vijaybhargava 8y ago
    User acquisition cost doesn't fully go away, just becomes user engagement cost. Uber does a ton of promotions to keep customers tied in. Amazon Prime user enagement cost is all of the video streaming business and a bunch of other benefits just focused on delivering value to Prime.
• Johnny555 8y ago
  Where does the money go for Lyft/Uber? The software platform can't be that expensive amortized across a million+ drivers. It's not like the drivers are overpaid (and in many cases, they are barely (or not even) paid enough to cover costs) What else do they spend it on? Marketing? Bribing...err... lobbying politicians for favorable treatment?
  • nemothekid 8y ago
    Engineers, Rider Incentives (aka marketing), Driver Incentives (aka marketing)
  • duado 8y ago
    They spend it on artificially low prices, often charging the riders even less than they pay the drivers in markets where they are new and growing. The idea is that they will get a sticky network of riders and drivers and then raise prices later. It certainly worked on me.
  • staybythebay 8y ago
    The article hints at it. “all these companies are deliberately spending profligately now to build their brands and win over dense populations of customers, so that in the future they can be more efficiently served. This is the exact playbook that once worked for Amazon.com” I can’t count how many free Uber/Grubhub promo codes I’ve seen. How much they subsidize their orders, etc.
    • dragonwriter 8y ago
      It's also the the exact model that's failed for countless companies you've never heard of, because they failed. Amazon was (at least for a long time, maybe this has been forgotten) been noted for being unusually, perhaps uniquely, successfully at both the customer side and investor side when it came to executing on this.
      • Johnny555 8y ago
        Though I wonder how successful they'd have been if they didn't discover a goldmine (AWS) that helps fund the retail side. It'd be a lot harder to compete against entrenched retailers like Walmart if they didn't have the money from the AWS side (not to mention essentially unlimited compute power to handle shopping traffic spikes).
• b_tterc_p 8y ago
  I asked in the recent thread how Meituan could possibly be affording to subsidize restaurant meals to be significantly below cost at restaurant as that didn’t make any sense. Turns out according to this article that it’s simply that. It doesn’t make sense. They lost $17 Billion in 2018 for a shallow moat around an ugly castle. The next recession is going to hit hard, and I’m guessing a lot of the gig economy jobs will get a lot worse if not disappear.
  • toomuchtodo 8y ago
    > a shallow moat around an ugly castle. I hope this ends up in Matt Levine’s Money Stuff segment as part of his Unicorn Enchanted Forest series.
  • koolba 8y ago
    > The next recession is going to hit hard, and I’m guessing a lot of the gig economy jobs will get a lot worse if not disappear. It'll be a double whammy hit. As the unsustainable businesses collapse and prices rise back to reality, it'll cause an even larger drop in net sales due to consumer's reluctance to pay the full cost of their poke bowls. Combine that with a bunch of gig economy workers having their only income source dry up and you've got a financial mess at a large scale.
    • onlyrealcuzzo 8y ago
      Most of the cost of the poke bowl is fixed, not marginal. The full cost of the poke bowl is a function mostly of rent and wages (which are largely a function of interest rates and rents). If a recession hits, wages and rents will fall, and with them the cost of the poke bowl as well. The marginal cost of poke bowl is like $3 of fish and $0.10 of rice and veggies.
  • dawhizkid 8y ago
    Why would “gig economy jobs” get worse? If anything, during a recession, more people will want(need?) to become gig workers. Uber/Lyft are generally supply constrained today. If there’s a surge of supply because people need money they won’t have to pay new driver incentives, which is one the areas that cause them to bleed cash today. Demand side will fall a little, but people will still need cheap ways to get to/from places, maybe especially if their car gets repossessed.
• loganfrederick 8y ago
  As both a startup programmer and having worked in the financial industry, it's really hard to know how companies like these will be viewed by history. The technologist argument is: we are enduring losses, even large ones, in the short term so that we can bring inevitable future tools forward in time (i.e. "Of course everyone can get anything delivered on-demand in the future, so why not now!?") The value-based investor argument: This is a gross subsidy to "tech" companies that is distorting/subsidizing markets and creating huge opportunity costs where all these billions could have been invested in better, even more fundamental technologies. There is a third argument which is what's really giving these companies legs: they do genuinely have a lot of users who love the services. Who wouldn't want a VC-subsidized meal brought to your door?
  • ForHackernews 8y ago
    > they do genuinely have a lot of users who love the services. Turns out selling $10 bills for $5 is extremely popular. MoviePass did in fact get people go to the movies.
    • dman 8y ago
      The counter example is Amazon with Prime.
      • JMTQp8lwXL 8y ago
        Probably contrarian, but I refuse to sign up for Prime out of principle. The quicker and easier I make it to buy things, the more money I'm going to spend, which is orthogonal to my savings/investment goals. I'm not going to pay extra to have the privilege of making spending my money any easier.
        • dman 8y ago
          I am with you on that, I am "this close" to cancelling Prime. Dont order on it anymore, strangely enough only reason I have it around is that I use the free photo storage as a second backup for photos (After Google photos)
• supernova87a 8y ago
  My summary of where all the money goes: -- Every on-demand service struggles with the problem of peaky demand, variation of >50% in peak to average traffic / demand -- Peaky demand is inherent in our consumer / passenger / people behavior, not going to change any time soon -- think of the daily hours typical for commuting, eating, etc. -- These services make their money / entire value prop on serving peaky demand quickly, but you need labor willing to match those times, otherwise people are sitting around underutilized -- Until you have automated cars / labor, you have a really hard time recruiting people who are happy only to be paid part-time -- Drivers / labor have to be paid pretty much on a full time basis to keep people working for you (whether overtly or implicitly through promotions, marketing, sign up bonuses), otherwise they sign up with hopes of steady income, and then quit. ("I love being able to set my own hours", etc is the exception, not the imaginary bulk of people working for a living) As long as these conditions prevail, this is where those companies' cash is hemorrhaging to.
  • doctorpangloss 8y ago
    The trends in future of work, particularly remote / non-office work, would favor people being more economical and de-peaking usage. Working at home saves you daycare. It takes a commuter off the road and off public transport. It lets people eat lunch at 11am or 2pm. It lets you build houses instead of empty office buildings. It lets you spend a lot more time with your partner. It keeps you cleaner and healthier. It makes you care about your local community a lot more. Peaky demand will still exist for longer cycles, like school enrollment, housing, vacations, entertainment. It will settle down a lot for our office day. This is the condition where subsidizes can decrease and the way our time is squeezed will change favorably for everyone.
    • moorhosj 8y ago
      Lots of claims in this comment I'd love to see backed up. ==Working at home saves you daycare.== Is this true? Most people I know who work remotely don't have enough free time to also watch their kid, they are doing their job. It does save the 1-2 hour round trip of commuting each day. ==It lets people eat lunch at 11am or 2pm.== Can't most people in an office environment already do this? I do. ==It keeps you cleaner and healthier.== How does it do this? I see very few overweight people on my daily train commute. I figured that the walking involved in commuting plays a role in health, but maybe the stress of commuting is a net negative. On the flip side, my wife works from home and although she likes it, the lack of human interaction frequently has a negative impact on her. ==It makes you care about your local community a lot more.== In what ways?
• bigend 8y ago
  So the startups are modern robinhoods?
• novaRom 8y ago
  It was a similar bubble 20 years ago. Not a good time to be IPO investor.
• lordnacho 8y ago
  It's a strange age to be living in. On the same day I've visited people in a WeWork, been driven around in an Uber, and had food delivered by Deliveroo. All of them blowing a huge load of money for the privilege. If they don't make back this money, it will represent a huge waste of resources. It's private money behind, but I still wonder whether this a reasonable way for the economy to run. For one, it means the little guy can't compete. Only people with deep pockets. And they might not be the most competent. For the investors it means selling a dream of profits, but not profitable businesses. You make more out of convincing someone your OD empire will succeed than making it do so. I wonder what would happen if there was a rule that you could only resell equity in a business whose financials had improved recently.
  • skybrian 8y ago
    If the "waste" is subsidizing services you actually want, is it really waste? It's more of a transfer from investors to landlords and drivers, who certainly wouldn't be as happy with less money.
    • est31 8y ago
      And some of the investors are landlords, so part of the transfer goes from landlord-investor to landlord-investor. Your landlord doesn't even have to directly be an investor at the precise company you are working at, already the silent agreement of all landlord-investors to use SV is enough.
    • xsmasher 8y ago
      Are the drivers getting paid more than they are worth, or are you getting a service for less than it should cost? Either is possible; or other options - like Uber is making money per ride in some regions and losing in others.
    • AlexandrB 8y ago
      I think it's more interesting to look at it as a corruption of traditional supply/demand signalling in a market economy. By heavily subsidizing a service, investors are able to put their finger on the scale and choose winners despite what consumers would actually choose if competition was more fair. Previously, this kind of behaviour was considered "dumping" and anti-competitive. Yet, currently it's considered OK because startups (read VCs) are doing it instead of large monopolies. It's interesting to see how this might relate to wealth inequality as well. If investors had less money and consumers had more, would they choose a less-subsidized Uber over traditional cab services as readily?
• ohples 8y ago
  Imagine if we could of used some of that money to educate children, provide healthcare, and other things.
  • dragonwriter 8y ago
    Since much of that is subsidizing wages, which are the most highly taxed form of income, we are using some of that money to do those things, more than if the business were operating with costs in line (much less profitable) with revenue.
  • XorNot 8y ago
    Vote a better government in.
• lgomezma 8y ago
  Like Warren Buffet says "Only when the tide goes out do you discover who's been swimming naked". Most of these companies didn't exist when the last recession happened. Let's see how many will exist after the next one.
• digitaltrees 8y ago
  Maybe we should just recognize that Facebook / software business models don’t work for operating, boots on the ground services. Network effects don’t work with negative unit economics.
• draw_down 8y ago
  I would care about the profits and business plan of a company if I were an employee, or an investor. But as a consumer, it's not clear to me why that should matter. If I want a ride somewhere and Lyft will do it for $8 or whatever, and that price sounds good to me, I'm not sure there's much left to consider. We like to rag on businesses with (what we consider to be) bad business models around here, but as far as I'm concerned that's between the leadership, the board, and their investors.
• rossdavidh 8y ago
  In addition to the many excellent points raised by other commenters, I would like to add: Amazon is raking in a ton of money from Lyft, and probably many other on-demand startups. When they (all? mostly?) go bust, a lot of VC-fueled business to Amazon will disappear, perhaps rather abruptly. Not that I think Amazon will go away or anything, but there may be a step function in their profitability whenever the bust in money-burning startups comes.
• _bxg1 8y ago
  I don't see how this can be anything but a bubble unless fully-autonomous cars come around, which it's seeming more and more likely that they're further off than expected, if they're possible at all. From what I've read the economics simply don't work otherwise.
• dandare 8y ago
  This is sort of a wealth redistribution. From oil funds, hedge funds and private investors to the middle and upper-middle class. Hope it won't end up with a bailout.
• lkrubner 8y ago
  I've been working with Avis Rental Car. The CEO recently went to see the CEO of Uber. The vibe was that of a pauper begging from a King, which is odd because Avis is profitable and Uber is losing insane amounts of money. You'd think it would be the other way around, but everything nowadays is dominated by future expectations.
  • lkrubner 8y ago
    Why would this be downvoted?