Recently, with the rush of Internet companies from the sharing economy era either going public or have gone public, we are beginning to see commentators and pundits in the technology space questioning their value to the market.
When we think about these sharing economy Internet companies, a few examples will come to our mind: ride hailing companies such as Uber, Didi, Grab, Ola and Lyft and travel and accommodation experiences companies such as Airbnb and Oyo Rooms and corporate workspaces such as Wework.
Let’s starting by looking at the valuation of these companies vs their traditional companies in the same industry:
- Airbnb is reported to be worth US$35B before their current move towards a public offering as compared to Hilton (at US$25B), Marriott with the acquisition of Starwood (at US$43B) and Bookings at (US$80B)
- Uber is seeking for a US$90-100B valuation, with Lyft has just gone public with US$24.3B.
- Wework is estimated to be worth US$50B with 425 locations and an operating losses of US$2B and their nearest competitor IWG (who owns Regus) has 3306 locations but have a US$4B valuation and an operating profit of US$200M (note that we convert GBP to US$ for their respective valuations).
The major criticisms on these new wave of technology companies that interact with real world physical assets are the following: one, they are stilling running at a loss with lots of subsidies particularly in the transportation space; two, they are over-valued as compared to their counterparts and three, the claim on their high valuations against their competitors are predicated on the advantages of technology and network effects without the need to own the physical assets and workforce. The workforce are viewed as contractors and hence the additional costs to maintain them from healthcare and safety are not included. As a result, some technology pundits and commentators out there concluded that there could be no value in these companies and some even felt that these companies going public are likened to Ponzi schemes where the investors in the private market are now passing the liabilities to the public market i.e. retail and institutional investors.
I have a different perspective to these types of companies. Their value to the economy has been their consistent ability to recalibrate the prices of physical assets and shaving the regulatory tax with the authorities that govern them i.e. the cost imposed by governments on the owner of these assets such that safety and interest of the customer are ensured and the right to operate these businesses. For example, Uber leverages on driver subsidies and high volume of consumer transactions to push down the price of a customer taking a ride from point A to B and skips the regulatory tax that a traditional taxi operator need to adhere such as driver insurance, training and having the license to operate and not set prices that customers might be ripped off.
In the case of Airbnb and Wework, these companies are recalibrating the value of the real estate and bypass regulatory tax of how a hospitality and hotel chain will run. After all, like Uber, they did not need physical assets to sit on their accounting balance sheet.
By recalibrating the value of physical assets downwards, these companies have managed to shift the regulatory tax down for everyone. However, as they are going public, they will face the serious risk that is how governments across the world might impose the regulatory tax by setting new laws on them from forcing them to include the fleets and labor force under their care. We have seen in Asia that most governments have started to impose a new set of regulatory tax onto them while at the same time, reducing that tax and revising the requirements for traditional companies within the same space. Once that regulatory tax comes in, the value of these companies should reduce or be pegged to how a traditional company will work in that space. In turn, these companies will be tested to become sustainable and profitable, which they don’t seem to be able to do so in this moment.
So what does that mean for new digital companies in general? We are now seeing a new wave of Chinese companies which are taking the same model and start applying to food and beverages companies. I will refer you to this podcast conversation on China Tech Investor by Elliott Zaagman, James Hulland Michael Norris. For example, Luckin Coffee is using the same model to challenge Starbucks in China by reducing prices, and using blitz-scaling strategies similar to a software company to recalibrate the food and beverage industry. In fact, they have also tried with bicycle sharing companies but the unit economics just collapsed given how they pushed the prices down till the transportation authority impose regulatory taxes on them to render them with no choice but to fold in the process.
The recalibration of value by these startups implies that there will be another wave of companies in the future that will do deeper with the vertical integration. I will hazard a guess that autonomous vehicles will disrupt Uber someday but that company may be now small today or not exist yet. These companies have succeeded by recalibrating value by allowing investors to accept that they have to make losses today so that they can be the winner of the market category. However, we have seen from Uber S1 filing that transportation is much more local, meaning that Uber’s booking engine might have economies of scale but the assets that are linked up by their network are not. That sets up a strange dynamic to how investors will value these companies in the future.