I’ve worked in consumer marketplaces the last few years. I think the points below are now pretty widely accepted within the industry but thought it may be interesting to others so I did a quick write-up below.
From about 2011 – 2018 there was rapid growth in marketplace businesses. Think food delivery (UberEats, Doordash, Postmates, Grubhub, etc), ride sharing (Uber, lyft), homes services (Thumbtack, taskrabbit) or grocery delivery (blue apron, instacart). More recently we’ve seen a surge in last mile transportation companies (Scoot, Lime, Skip, etc).
Many of these apps are now on our phone screens and play a central role in our lives.
The story with these companies went as follows: these are supply driven marketplaces, if you acquire supply then you’ll win the customer. For food delivery, this means hiring a huge sales team to go sell to restaurants. For home services, this means massive digital marketing spend. For ride sharing, this means massive out of home marketing spend coupled with subsidized driver wages. In 2017, it cost Uber as much as $650 per new driver it brought on the platform.
Venture capitalists were happy to bankroll this. The theory was that you could spend your way to a liquid marketplace. A liquid marketplace is one where you have enough supply on the platform for consumers to have options. Then so many consumers come to the platform because there are options that it causes more supply to come to the marketplace. This flywheel effect gets so strong that neither supply nor customers can leave the marketplace because they are both there. Investors thought that it would take $$$$ to reach liquidity but that once a marketplace reached liquidity it would be extremely hard to disrupt. At that point, the platform would have scale and could ramp down their customer and supply acquisition cost generating profit that would continue…. into infinity!
Fast-forward to 2017/2018, many of these consumer marketplace companies are no longer new startups. They’ve reached massive scale and have grown faster than any consumer companies we’ve seen in the history of the world. However, these companies are still burning cash and need more money. Historically, they would have gone public at this point.
But, would public markets be as patient as private investors? If you’re a Doordash, you’re still selling investors on the liquidity dream. You’re growing so fast! You just need to keep spending to reach liquidity for a few more years. This means that you would continue to be massively unprofitable up until that point.
Enter SoftBank Vision Fund.
The SoftBank Vision Fund is a $100B fund founded in 2017. Yeah that’s $100 BILLION. It was the largest private equity fund ever. About $45B came from the Saudis. Another $26B from SoftBank itself. The balance came from capital rich companies like Apple.
SoftBank had so much money that it effectively replaced the public markets for these large consumer marketplaces. It was happy to drop another $550M into Doordash in 2018 as it continued to grow rapidly in a very unprofitable way. Chasing the liquidity dream.
Instead of being forced to go public to get huge amounts of cash, these companies could raise hundreds of millions in Series Gs. Historically, most companies would go public after Series D. With every subsequent series of funding, Softbank increased the overall valuation of these businesses. This in turn moves the goal posts for how much scale a company has to hit in order to actually warrant that value.
This brings us to the present day.
Reaching a point where even Softbank can no longer satisfy their capital needs, some of these companies are going public. It turns out public investors are less patient… and we’re not seeing the original marketplace theory play out. These companies aren’t seeing the benefits of scale where at a certain liquidity level they can ramp down supply and customer acquisition costs and generate profit as the platform.
Last week Grubhub’s stock fell by 41%. In a shockingly candid shareholder letter, Grubhub basically said that they don’t think anyone can generate profit in food delivery right now. They’re not experiencing economies of scale running a delivery network, and neither supply nor the customer is proving to be loyal despite Grubhub’s insanely massive scale.
Uber and Lyft are similarly down almost 40% since IPOing.
BlueApron IPOd at a $3B market cap and is now worth $111M. Before going public it cost BlueApron as much as $150to acquire a new customer. 70% of these customers churned within 4.5 months. When BlueApron was venture-backed this spend was defensible because of the liquidity dream. When they went public, non-patient public investors just saw a massively unprofitable business.
DoorDash, Postmates, Thumbtack, TaskRabbit, Bird, Scoot, Skip, Fair, and almost every other consumer marketplace business that is still private should be shaking in their boots. They have huge paper valuations based on the liquidity dream.
Nobody in the public markets is reaching this liquidity dream. Customers and supply are not loyal to a given platform. If your platform tries to improve its economics (say by raising delivery rates or increasing rideshare costs) another private venture backed platform will undercut you and the supply and customers will leave you.
What are the implications of this?
I think we’ll see the bigger marketplace companies try to cut their more egregious marketing costs to lower supply and customer acquisition. I think we’ll also see prices go up on your food delivery, uber rides, plumber, etc. inherently leading to slowing or negative growth. Some of these companies will be acquired or go bankrupt.
Investors are going to be much less inclined to invest in two-sided consumer marketplaces as the liquidity dream never really panned out. This will mean less innovation and new products in this space. But we’ll see more one-sided marketplaces where the supply is owned by the company and automated. For example, rideshare from a company that owns a fleet of autonomous vehicles. Food delivery from a company that owns its own massive kitchens in major population centers (the uber founder is actually working on this). City owned last mile transport as a public good.
Given the significant consumer value these businesses generated, I think we may also see massive companies bundle them into their business as a frequency play to get customers within their ecosystem. For example, Amazon owned grocery delivery as prime benefit to lock you in to overall ecosystem. Food delivery within a super app like Facebook also a marketing expense to lock you into their ecosystem, etc
This also has big implications for the gig economy as gig workers have been effectively subsidized by investors the past decade and the reduction in growth above will also lead to a reduction in gigs.
From a trading opportunity, I’d be short every consumer marketplace including Uber and Lyft at their already deflated values.
Disclaimer: Consult your financial professional before making any investment decision.