A bubble in Venture Capital (and similar public Cos)?

[AdjustedEarnings]

Hi all - I don't mean to go from one battle ground to another, but I wanted to put out there my observation that when many economists/regulators are looking for problems in real estate, credit, banking, etc. they're really fighting the last battle, as often happens. It seems to me the new bubble is in VC (particularly late-stage VC, and similarly situated public technology companies - i.e. not AAPL, GOOG, FB, but more like NIO, TSLA, NFLX, OKTA, etc.)

 

Here's a link to why I think there's a bubble. It's 4200 words long, so I have not reproduced it here, but you can read it over at that link. I have tried to explain the entire incentive system and capital machinery and how it works to cause these overvaluations:

 

https://adjustedearnings.blogspot.com/2018/10/my-last-memo-on-vc-bubble-now-is-time_13.html

 

 

My main hope in posting this is to find out the DISSENTING views, i.e. what would argue for there NOT being a bubble. What am I missing?

 

I understand this could be a 'battleground', so I hope everyone will keep the discussion civil and limited to investment merits of the companies involved. Thanks!

 

Since this is CoBF, I figured we could get more participation if I point out that Charlie Munger and Buffett appears to have a similar view on VC (although I don't think what they think should matter to us in determining our own conclusions based on the facts presented. So I'm purely point it out just to stimulate dialogue.). See video below starting at 2:33 mark:

 

https://www.cnbc.com/video/2018/01/10/charlie-munger-i-think-promoting-greg-abel-and-ajit-jain-is-a-very-good-idea.html

 

[Spekulatius]

Pretty well thought out post. It certainly feels like there is a bubble in tech/ venture capital where it’s not even clear to me that the business model will allow profitability in thrnforrseeable future.  Companies like Wework, Uber, Lyft, Tesla, Cannabis stocks, cloud and payment companies but also the self driving ventures come to my mind. most of this is equity, so a collapse should not lead to a debt crisis. I can see collateral damage in bubble area real estate (Bay area). Maybe just a other indication that we are late in the cycle.

[SmallCap]

I did a lot of work within the startup community and with entrepreneurial programs in college. I left the area because while I loved the dreaming entrepreneurs I wasn't impressed with the VC's and funds and how they approached investing in the businesses.

 

So I have felt for a while that there is a problem there but AdjustedEarnings lays out the case so much better than I ever could.

 

The question I have is how do we profit from this?

 

Best of my knowledge I have no exposure to this area and i have purchased puts on Tesla but how do we profit from this.

 

In the case of the big short, while it shows only a few people who figured it out, my guess is there were a lot more people who figured out that there was a problem in Mortgages but never knew how to profit from it.

[oddballstocks]

In the case of the big short, while it shows only a few people who figured it out, my guess is there were a lot more people who figured out that there was a problem in Mortgages but never knew how to profit from it.

 

Maybe something like StartupLiquidators?  I was talking with someone yesterday who worked for a medium sized company.  The company went from tiny to medium quickly by buying a bunch of Adelphia assets for pennies.

 

The way to profit might be by purchasing discounted assets and then putting them to use somehow.  I agree, this is a really difficult route to take.  But we all know if this crashes and someone does it there will be articles about how smart they were, how they got rich by purchasing stuff for nothing and we'll all think "oh I wish I did that too."

[AdjustedEarnings]

Another day, another (paper) dollar:

 

https://techcrunch.com/2018/10/16/instacart-raises-another-600m-at-a-7-6b-valuation/

 

InstaCart is up 80% in 8 months.... if they were a public company raising money to fight off Amazon, I can imagine the direction the valuation would move and that direction would probably not be up 80%.

[Guest ajc]

 

Interesting blogpost. Did some googling and put roughly the following together:

 

 

 

(current p/s and sales growth for biggest private unicorns)

 

Uber around 10x and growing at 50% yoy.

Airbnb around 8x and growing at 45% yoy (profitable in 2017).

Didi estimate 8x. growth rate ?%, with lower margins than Uber, but $12B cash.

Palantir estimate about 15x or 12x. will probably IPO at a down round price.

Wework 22x if it gets new $40B valuation. however, it's growing sales at 113% yoy.

Bytedance around 10x if it gets new $75B valuation. not sure about growth rate.

Pinterest around 14x and growing at 90% yoy.

Lyft around 14x and growing at 150%+ yoy.

Grab around 10x and growing at about 100% yoy.

Slack estimate about 15x with growth about 100% yoy.

 

 

 

In '98 and '99, you had this:

 

@Home    158x

eBay        117x

Yahoo      111x

Priceline    52x

Cnet          40x

AOL          33x

Lycos        28x

Amazon    23x

Etrade      23x

Microsoft    23x

Cisco        16x

Netscape  14x

 

 

 

However, I'm guessing sales growth was perhaps higher for those businesses then with the internet taking off. Dunno, I'd have to look it up.

The obvious retort in favor of today's unicorns is if you look at Google or Facebook during their early post-IPO days, you could've paid 8.5x sales at 100%+ revenue growth for GOOGL and done very well.

You also could've paid up to 20x sales for FB with lower revenue growth than Google at its IPO, and done really well.

Clearly, you gotta look at margins but I think there are a bunch of businesses in this current unicorn crop that will be able to get up to the same level as those tech megacaps of previous years.

 

As always with tech investing the whole game is decided by which companies you invest in. Choose the best of the best, using a reliable investment approach, and you can do well.

Go for a bunch of good-but-not-great businesses and you can easily overpay when you're talking about the multiples being discussed.

It's really about separating the top few percent of the 200+ global unicorns using intelligent investment filters.

 

 

 

PS. On the bubble issue, my thinking is those numbers don't look badly out of whack for what you'd expect given their high profile nature across the VC community. Maybe someone with more industry experience could weigh in on that though, since my views could be inaccurate.

 

 

 

[bizaro86]

I'd pay 8x P/S for airbnb if that was available to me in a heartbeat. I think long term their margins are better than booking.Com (less advertising required) and their relationship with thousands of individual hosts is a moat. I think they have untapped pricing power as well.

[AdjustedEarnings]

 

Interesting blogpost. Did some googling and put roughly the following together:

 

 

 

(current p/s and sales growth for biggest private unicorns)

 

Uber around 10x and growing at 50% yoy.

Airbnb around 8x and growing at 45% yoy (profitable in 2017).

Didi estimate 8x. growth rate ?%, with lower margins than Uber, but $12B cash.

Palantir estimate about 15x or 12x. will probably IPO at a down round price.

Wework 22x if it gets new $40B valuation. however, it's growing sales at 113% yoy.

Bytedance around 10x if it gets new $75B valuation. not sure about growth rate.

Pinterest around 14x and growing at 90% yoy.

Lyft around 14x and growing at 150%+ yoy.

Grab around 10x and growing at about 100% yoy.

Slack estimate about 15x with growth about 100% yoy.

 

 

 

In '98 and '99, you had this:

 

@Home    158x

eBay        117x

Yahoo      111x

Priceline    52x

Cnet          40x

AOL          33x

Lycos        28x

Amazon    23x

Etrade      23x

Microsoft    23x

Cisco        16x

Netscape  14x

 

 

 

However, I'm guessing sales growth was perhaps higher for those businesses then with the internet taking off. Dunno, I'd have to look it up.

The obvious retort in favor of today's unicorns is if you look at Google or Facebook during their early post-IPO days, you could've paid 8.5x sales at 100%+ revenue growth for GOOGL and done very well.

You also could've paid up to 20x sales for FB with lower revenue growth than Google at its IPO, and done really well.

Clearly, you gotta look at margins but I think there are a bunch of businesses in this current unicorn crop that will be able to get up to the same level as those tech megacaps of previous years.

 

As always with tech investing the whole game is decided by which companies you invest in. Choose the best of the best, using a reliable investment approach, and you can do well.

Go for a bunch of good-but-not-great businesses and you can easily overpay when you're talking about the multiples being discussed.

It's really about separating the top few percent of the 200+ global unicorns using intelligent investment filters.

 

 

 

PS. On the bubble issue, my thinking is those numbers don't look badly out of whack for what you'd expect given their high profile nature across the VC community. Maybe someone with more industry experience could weigh in on that though, since my views could be inaccurate.

 

Thank you for your thoughtful response. I'd say we ought to ask the question, is EV/Sales really a valid metric? P/E shows kind of a rough 'yield' equivalent. P/FCF is similar. How can we interpret P/S? And, by extension, why should they be comparable across companies?

 

Google, FB can serve as examples of how large companies can get but they've also been profitable right from the beginning, which confounds the comparison a little. E.g. Google is a monopoly by the nature of their business and execution whereas Uber/Lyft are engaged in cutthroat competition, not dissimilar from airlines or auto manufacturing. The multiples on those industries have not been high for that reason. It's not even looking like they could be a peaceful duopoly.

 

Secondly, it's true perhaps based on your numbers that P/S multiples were higher in 98-99, but is that the only level acceptable to call something a bubble? Many of those companies then fell 90-95%. So, instead of 35, let's say, we're at 10, would then a fall of 83% be expected to reach the same end place? Could we then call it a bubble? This of course assumes that P/S is an acceptable touchstone, which I have my doubts about (though I'm not ruling it out completely, I have yet to hear anything about why it is a logical metric.)

 

I'm not simply trying to be difficult. I'm really trying to find reasons to believe. Just haven't found something worth believing yet.

[Guest ajc]

 

@bizaro86

 

Agreed. That'd be one hell of an interesting IPO price. Good point about the host relationships. On profitability, I also think Airbnb Experiences has a lot of potential if done right.

 

 

 

@AdjustedEarnings

 

No difficulty inferred. It's a very interesting debate. Anyway, there's a bunch in there so I'll try break it down.

 

P/S or EV is a useful guide on the one end. My preferred starting point though is unit economics. That's usually more boring to explain for most (not myself), so P/S can give you a very rough guide to whether you're being nuts.

 

Take unit economics though. You can go do some basic googling and find the take rates for Uber, Airbnb, Instacart, etc. There's some very accurate info out there from users and giggers. That's simple enough. The question then becomes whether they have great management, whether there are entry barriers, is there pricing power, are there large adjacent areas they can expand into that give them obvious growth options.

 

In my view a lot of that has to do with understanding network effects, consumer psychology, and where the technology world is likely headed for consumers and enterprise people. If you get a good handle on all that, I think you can reduce your risk of bad decisions tremendously.

 

You mentioned Uber/Lyft and made an airline comparison. I think that's exactly wrong. I'd say the correct one is more like an Amazon and eBay situation from the 90's and early 00's. Airlines have multiple carriers, ride-sharing has duopolies almost everywhere. Why? Because Uber's scale meant it had the lowest pick up times. Quicker pick-up times meant happier users and more users meant more drivers gravitated to the platform which further lowered pick up times. Eventually it got to only a few minutes in their major cities. Lyft was in second place and they had enough scale to become the worthy alternative with enough drivers and users for competitive pick up times.

 

The issue for anyone else is that if they wanted to compete with Uber or Lyft today in any major location, they'd first need to put 1000's of drivers on the road just to get the low pick up times you need in order to have the chance to beat Uber or Lyft. Note, that's not a guarantee, just the opportunity to compete.

In practice, what that means is you'd have to pay 5000 or 10 000 full-time drivers say, to move around LA or NYC and be prepared to do pick ups. Times that by $20 000 per year for their salaries and it'll cost you $200M per year just to have a hope of competing against them in a city like LA or NYC.

Fact is, very few people have that kind of money to burn on something that fruitless, and if they do they're already invested in Uber or Lyft.

Like Buffett says, give me 1 billion or 10 billion dollars and let me see how much I can hurt Coke. It can't be done.

Like Amazon and eBay, those two got the network effects first for that big, two-sided marketplace.

 

Further, if you consider that filling up an EV with electricity is far, far cheaper than using gas, and given the rate big auto's are going to be pushing out EVs in the next decade, you're immediately making the operating costs of an Uber/Lyft vehicle drop by maybe 30 or 40 percent. Essentially, the three major costs are the cost of gas, the driver salary, and the vehicle purchase & maintenance cost.

EVs will drop the cost of operation substantially, when fully AVs finally hit the road 10 or so years from now, you'll also no longer need a driver. Of course, the purchase and maintenance costs will always remain but EVs have way fewer parts than ICE vehicles, so really it'll be the tires and one or two other things that are constantly being replaced. Think of those old dumb cellphones that lasted forever without breaking.

 

To put that in perspective, if a $10 Uber trip currently splits around $2.50 to Uber and $7.50 to the driver and this just allows the driver of an ICE car to cover expenses and get a minimum wage salary, then what happens when 5 years from now they're all buying EVs. What does that do for Uber's ability to increase its cut while also allowing the driver to earn a bigger salary?

Clearly, the same goes for autonomous technology, so I think it's important to actually figure out the details of each industry and unit economics as they relate to whatever company and industry you're analyzing.

 

Response-wise on the '98 and '99 thing, I'd say the opposite is also true. If you look at Yahoo, Microsoft, Amazon, Cisco, etc, you certainly didn't lose money if you invested in one of those better companies anytime in '97 or before. In fact, '98 and '99 where the only two truly crazy years. In other words, 2 years in the last 30 have been bonkers and yet they're often held up as a reason to never buy tech stocks.

I think the reality is that buyers of high quality companies at reasonable historical multiples in the tech space, if you can identify them correctly (quite a big if), are more likely that not to be solid investments.

The trick is putting two years of trauma to one side, except to use them as an indicator of overvaluation, and being rational.

 

What I'd say though is if you're able to persuade yourself that Blue Apron, or GoPro, or some flash in the pan is great, then this isn't a good place to invest because you will lose 90% of your capital. On the other hand, if you're doing the research and thinking, and analyzing all those 200+ unicorns for the five or ten with the very best prospects, then even if you only get two right you'll do well. If you get three right, you'll do very well. Anything above that would be exceptional.

 

My take on current private valuation is we'll see when they file and go public. The best indication right now is to see the big companies that have recently gone public and compare their unit economics and stock prices to what has gone before. One thing that might indicate there isn't a bubble is that none of the big VCs are really out there saying that.

Four or five years ago though, Benchmark, Sequoia, and a few others were talking down prices and that was when Fidelity and others had to mark down their Dropbox, Snap, and other investments.

Either way, there was no shortage of leaks or VCs saying the market was bubbly.

 

 

 

[bizaro86]

I could take on Uber with a few billion. You'd need the tech infrastructure, of course, which I don't think would be insurmountable.

 

Then, you'd contact all the existing Uber and Lyft drivers, and offer them 125% of the fare collected if they drove for you as well, then charge 90% of Uber price. Cheaper for users and more $ for drivers. Drivers would sign up, because they can do both. Many already drive for Uber and Lyft, and I don't think Uber can make their contracts exclusive without risking making the drivers employees.

 

You could leverage their existing driver base to gain scale. You'd burn money, of course, but that doesn't seem to be an issue for actual Uber. I'd start in big VC cities for maximum exposure to funders...

[LongHaul]

Excellent blog post Adjusted Earnings.  You have a wide grasp of history.  Basically you are likely an expert on financial history and investing and you may or may not project that onto everyone and assume they know as much as you.  They don't and likely wont listen to anything and will experience a ton of pain when it blows. 

 

Very high probability of a bubble in a lot of VC and tech IMO.  The exception will be those companies that do extraordinary over the next 10 years and those may be fairly valued.  Needle in a haystack type of thing. 

Every company is a case by case basis ultimately.

 

When I look at individual tech companies and try my best to value them, I almost always today find that prices are well above any reasonable expectation.  Often very high growth and margins are assumed in the out years.

Basically they are priced to perfection and if anything goes wrong with the assumptions - a lot will - speculators will be toast. 

 

 

 

 

 

 

 

[Guest ajc]

 

@AdjustedEarnings

 

Did some further digging and it seems like SaaS multiples are overheated (http://tomtunguz.com/publi-arr-multiples/), and if I'm guessing based on all the new unicorns sprouting up daily, I'd say early round raises globally could well be happening at bubbly valuations right now.

On the other hand, large cap private market valuations don't seem that crazy as I mentioned above.

In other words, I think there are pockets (some noticeable) of definite over-valuation but also some reasonably attractively priced tech companies that are excellent potential investments at their current market caps.

Sam Altman had a reasonable take on the situation (

).

 

 

@bizaro86

Juno tried taking them on in NYC during 2016. Raised $30M and didn't even make Uber/Lyft blink. They offered better pay and half the business equity to drivers. Also, the guy who ran Juno was no dummy. Talmon Marco built Viber, which had 400M users when he sold it. Juno was later sold to Gett. Anyway, I'm not trying to say it's impossible for any amount of money with an A-plus team, but I do think there are a limited amount of VCs (Softbank, Sequoia, Benchmark, Tencent, etc) who could come up with the funding needed, and they're all already invested in ride-hailing leaders.

 

Not only that, but rolodexes are a massive competitive advantage for the best VCs. In other words, Bill Gurley or John Doerr or Alfred Lin has way more connections and sway with ex-Apple, Google, Amazon, etc, executives and when you're scaling a high-growth start-up, those are the people you need to hire into your top VP positions.

There's a reason that Sequoia, Accel, a16z, etc, see the best deal flow, because entrepreneurs and everyone in the industry knows that they have the most experience in building the Apple's, Google's, and Facebook's, of this world, plus they have way more pull with the people you will eventually want to hire into your management team.

 

Anyway, my point is that the management and building of a company that's growing at an exponential rate and will become one of the world's biggest is simply not one that most people or venture capital firms have the ability or experience to do. It really depends a lot on being able to hire people who are very sharp and having a bunch of VCs who can give you substantially better advice and help at crucial stages along the way. When you're growing at 100's of percent a year in the early stages, a mis-step can cost you a lot and give your competitors everything, so you want funding really from the best, most experienced VCs who've seen all the major mistakes before and know what to avoid. The group of people who can actually do that at an exceptional level, and help build a genuine megacap, are not as numerous as some people might think.

 

There are similarities to soccer clubs and coaches. If a player truly wants to achieve greatness, they'll eventually have to join up with a Barcelona, Real Madrid, Bayern Munich, etc, in order to have access to the best coaching, physiotherapy, and team-mates who they can learn and improve from. Once there, they'll hopefully also get a manager like Guardiola, Mourinho (current form notwithstanding), etc, who are not only the most competitive people to be in business with, but also those who understand the fundamentals of management far, far better than almost anyone else. Of course, it helps to have deep pockets too, and again there are only a few clubs which have those. Put all that together, and is it any wonder the same teams get the best players and the best players move to the same teams and get even better until they're sometimes close to unstoppable?

Not really. Occasionally, a Manchester City will come along every decade (see the VC's at a16z) but mostly its the same old clubs/VC firms who win everything, produce the best teams, and are chosen by the greatest players. It's actually the ecosystem that exists around these founders and VC firms that creates the vast majority of these results, so it makes sense to keep in mind that not everyone can do this and come out on top. It might look that way from outside, but the reality is far more complex and competitive.

 

Anyway, that still doesn't mean it can't be done but I think with the buy-in Uber & Lyft have across the big VCs, banks, etc, the challenge would be all uphill the whole way and the chance of success would be slim. If anything, you'd be better off using those billions to build a self-driving EV and build your own fleet, because that'd get you ahead of the game instead of having to compete on a level playing field. Ha. That's a different discussion for another time though.

 

 

 

[Spekulatius]

Also, Uber and Lyft  have no advantage as it pertains to electric and/or autonomous vehicles. They have a user base and an app, that’s it. If a company comes out with an autonomous vehicle and they have capital and a user base like GOOG or Apple, they could put out Uber and Lyft out of business. There is no indication to me thet the benefit of lower cost from electric or autonous vehicles (if indeed there is one) will accrue to Uber or Lyft.

[Munger_Disciple]

This article screams "bubble" in the VC land (people flocking to the bay area attracted by the vc gold rush with very vague job descriptions):

 

https://www.businessinsider.com/a-day-in-the-life-of-hsbc-executive-melania-edwards-2018-10

 

Here is another press article commenting on the above:

 

https://www.news.com.au/lifestyle/real-life/true-stories/this-bank-executives-very-busy-daily-routine-is-exhausting/news-story/2c24986ec49db79322f3949ed787e71b

[Munger_Disciple]

Mirror post on the original article:

https://www.mirror.co.uk/news/weird-news/business-woman-shares-ridiculous-list-13442122

 

BTW, I used to play tennis and I really don't understand how Ms. Edwards gets a game of tennis at 7:30am and already leaving for work at 8:30am. That is only an hour to play, shower, dress and leave for work!

[bizaro86]

If I had $1 B I certainly wouldn't burn it trying to take down Uber, but I'm pretty confident that with that amount of cash you could scale a competitor. I make no claims that it would be easy to raise, but you had quoted WEB on coke, and I don't think Uber is the same at all.

[SHDL]

Thanks folks for the interesting discussion.  This space is generally too difficult for me but it’s certainly fun to read and learn about. 

 

On the Berkshire guys though, didn’t they actually try to make an investment in Uber recently? 

[Guest ajc]

 

 

Also, Uber and Lyft  have no advantage as it pertains to electric and/or autonomous vehicles. They have a user base and an app, that’s it. If a company comes out with an autonomous vehicle and they have capital and a user base like GOOG or Apple, they could put out Uber and Lyft out of business. There is no indication to me thet the benefit of lower cost from electric or autonous vehicles (if indeed there is one) will accrue to Uber or Lyft.

 

 

 

Sure, I could be way off base. I'd like to think I'm keeping that possibility in mind whenever I discuss this stuff. Hopefully the same is true of others and their views.

 

A few points on the whole situation...

 

The characterization of Uber/Lyft as a 'user base and an app' is a huge over-simplification. I get why people say that, but really if you study how the ride-sharing market has evolved since 2011 you see there are actually real network effects, barriers to entry, and consumer psychology at play.

Here's a good piece on some of that - https://medium.com/@heosphoros22/uber-and-the-network-effect-b6a4395c58ab.

If it weren't the case, you definitely wouldn't have a ride-sharing duopoly in pretty much every major geographic region. Remember, each major region basically had 10's of different apps to begin with and that as almost always been whittled down to 2.

In fact, there's an Anthony Tan (Grab CEO) quote online somewhere in which he says ASEAN had 100's of ride-sharing apps to start.

Today it's essentially only Grab and Go-jek.

Anyway, if it were truly that easy to compete, then Alphabet and Apple would already be major operators in the space with their own ride-sharing apps because they'd have no problem building and distributing it.

Obviously, that's not nearly the case.

 

What that means, as I noted in my previous post and you've also zeroed in on, is the only real corporate threat that can potentially challenge the duopoly is a company with level 5 autonomous technology and quite probably car production capability.

Level 4 might also be enough for certain towns or cities around the world in specific neighborhoods (say a certain type of downtown area), but that wouldn't threaten Uber, Lyft, Didi, Grab, and so on, in major terms since there'd still be so much area left for them to continue dominating revenue-wise.

 

I think it's also clear, for anyone who has been following, that Alphabet's Waymo and GM's Cruise, are the two likeliest contenders right now to reach level 5 autonomy first. Doesn't mean someone else brilliant can't come out of nowhere and develop it first, but they're the current leaders I think we can all agree (

).

On the other hand, if you look at what John Krafcik (Waymo CEO) himself has said this year (https://www.investors.com/news/technology/self-driving-car-waymo/), level 5 is still a "very long way out."

Amir Efrati of The Information, has also written really well about Waymo's various challenges. The article is paywalled, but he tweeted out a great thread about them (

).

 

Where does that leave the current analysis of the competitive landscape then?

 

What I'd say is that it's reasonable to assume, for at least the next 5 years, that Waymo can at best be a small player in the ride-sharing space globally. The could stick with well laid out parts of various suitable cities, in Chandler, maybe places with a Singapore-like quality or places that are similarly conducive.

I admit to not being sure how many such parts of each city globally would qualify for this, and how many cities.

However, as I indicated before, I think it'd be less than we might initially assume. I could be wrong, but that's my view for now.

 

One of the reasons for my rationale is that Alphabet for one thing doesn't own a major auto manufacturer. Not yet anyway.

Another, which I think could be under-appreciated, is that Uber will likely be the biggest corporate job provider in the US within 2 to 3 years.

Finally, it would clearly be a huge mistake for Waymo to roll out to areas of towns/cities where they aren't absolutely sure that customers will get a practically flawless ride experience.

 

Let's break those three things down then...

 

The manufacturing issue first. Let's say Alphabet buys Fiat Chrysler (ha, I'm saying that because I own their stock and they already have the Waymo partnership). If that were to happen, it would take some time to close and would instantly put everyone else on notice.

Fine. Uber and Lyft have their stock drop and have 6 months to come up with something.

Well, right now Softbank is Uber's biggest shareholder and also the biggest outside shareholder in GM's Cruise (about 20% of each).

Furthermore, Toyota is a minor investor in Uber and a 10% owner of Grab.

I think in this scenario it's entirely likely that if Alphabet ends up going it alone against everyone, the rest of the major global auto manufacturers as well as Uber, Didi, Grab, Softbank, Tencent, Alibaba, Sequoia Capital, and others, will quickly realize they need to either buy Cruise or the whole of GM in order to compete.

Given how much cash they all have at their disposal, I think raising $50B between them and super-charging the Cruise effort until they can put out a competitive product is not a difficult ask at all.

GM already plans to bring out a Waymo competitor next year anyway (https://www.cnbc.com/2017/11/30/gm-to-take-on-ride-sharing-services-with-self-driving-cars-by-2019.html).

Either way, I think Uber and Softbank will be just fine in this sort of scenario but I also have to believe that given the strong links between Softbank, the Chinese tech giants, Toyota and all the other global ride-sharers (Ola, Grab, Didi, etc), and their need to survive, that they will find a way to get GM to the table for the sake of everyone.

As smart as Alphabet has been here, that is an awful lot of combined power, money, and survival instinct for them to be going up against.

That group can then share the Cruise technology, level the playing field again pretty much, and Uber, Softbank, Didi, Tencent, and others, all get to continue in their business and with their major investments increasing in value.

 

The other option which has been put forward around Waymo is that they'll licence the technology to manufacturers, stay out of the car production business, and gain dominance that way. Unfortunately, they already seem to have tried that with Honda and it never happened because Honda was wise to Alphabet's long-term aim (http://www.autonews.com/article/20181005/MOBILITY/181009764/honda-waymo-talks-collapse).

Honda then went on to invest in... (drum roll)... GM's Cruise.

In other words, I think the dramatic threat that some imagine Waymo will pose either with there own manufacturing, or with licencing domination, is actually quite over-stated.

From what I can tell, Uber, Didi, Grab, Toyota, Honda, GM, Softbank, Tencent, Alibiba, and more, would all suffer some serious financial consequences for their core businesses or their major investments if that were to happen.

Sorry, but whichever way they play this aspect, I think the pushback Alphabet is going to receive will be quite something.

 

If you see any other likely scenario's based on the recent actions/investments of those major competitors, it'd be great to hear what I've overlooked. For my money though, those are the two main approaches Waymo can take and I don't see their options as being incredible.

 

The second point I made on a potential quick Waymo roll-out, is about jobs. Let's say, for the sake of argument that Waymo does succeed mightily with their own manufacturing or by becoming a globally dominant licencer.

I don't know how long that would take for them to get all up and running, but let's imagine they take a year to get started and after three years they're producing 10 million cars per year, or 20 million AV units that can be fitted.

I'm making the number up, but I think in the history of tech that'd be a massive execution that only the best tend to be able to achieve.

The issue though, is if they could get there with all the massive competitors listed above who'd be trying to confound them at every point, what about the job losses?

I think Uber now has 3 million or so drivers globally. Grab has another 3 million. Ola has over 1 million. Didi has 30 million registered drivers.

In the 3 years it could take Waymo to do their thing, those numbers will have likely grown by 50% or more.

Point being, even if Waymo executed perfectly on their plan for world domination, the amount of hell they'd get from local politicians, federal politicians, unions, and everyone else, would quite possibly be astronomical.

Tech is already being blamed more and more openly for destroying jobs. I don't even want to imagine what the response to Alphabet would be across the board if they destroyed 2 million jobs in the US over the course of a year or two.

Like I say, I think that's perhaps extremely under-appreciated. I would think Alphabet would become public enemy number 1 in that execution scenario, and I don't think it would ever be allowed to happen.

As a result, I think even in the best case you're more likely to see governments, unions, workers, lobbyists, lawyers, and everyone else, slow down the AV roll out of any company, not just Waymo, to a relatively plodding pace.

What that'd mean, I think, is from a realistic job-protection perspective, it'd take a decade for AVs to roll out in any major numbers.

No matter how good the tech is and how determined the players are, workers, governments, and lawyers, are going to fight like hell.

I mean if you thought Uber had trouble disrupting the taxi industry to create jobs, just wait until you see how tough it will be for Alphabet or anyone else to destroy millions of them overnight.

 

My final point was around the ride experience. Imagine in some ideal world for Alphabet, they faced down every major company on Earth pretty much and killed them all on the manufacturing or licencing aspect.

They then destroy 10 million jobs or more globally and everyone hates them more than anything on the planet, but somehow they're made of Teflon and keep on humming along.

One other thing to consider, which now that I think about it I should've put first, because it's kind of like ending on a damp note (hehe) given the seriousness of obstacles one and two, is that if the ride experience sucks because they bite off more than they can chew in the initial roll-out of their level 4 cars in various parts of certain cities, then the customer response could be so damning that it could really turn people off and damage their reputation as a company.

Think about it. If you have just a thousand customers or so who have a truly terrible experience because Waymo put a car into an area it couldn't handle, those people are gonna be all over the news and social media about the crash they were in, or how the car suddenly stopped and needed a technician brought out, and so on and so forth.

Just like Alphabet completely screwed up the release of Google Glass and that whole business was a massive own goal for the company image, so the Waymo roll out could have similarly negative consequence if they don't make damn sure they roll it out very slowly and always make sure the car is well within its actual abilities.

Ha. Like I say, I should've put that one first. Ah well....

 

Anyway, it's a long post but I'm a fan of the Bezos requirement that you write out your idea and thinking so people can put the logic together. Short posts, black and white points, and other stuff always seems to contain so many assumptions that it's almost impossible to have a genuinely open-minded sharing and discussion of ideas. Unfortunately, COBF is littered with that stuff because it has the benefit of making a person sound smart even if it isn't actually smart on a deeper, more rational and realistic level. Then again, for many people the instantaneous high you get from displaying a snappy sense of superiority is obviously pretty appealing. Such is life.

 

If you've got any, or a bunch of, rebuttals, it'd be great to hear them. Like I said, as I think this stuff through I try reminding myself I can always be wrong. Ha. Probably not enough of the time. Fortunately, others are usually willing to help in that regard. Yeah though, that all is kind of the way I'm generally thinking about this situation overall and long-term.

I think what it all means when you put it together, is that Uber, Didi, Grab, and others, Potentially not Lyft (unless GM tries to save their stake or Uber realizes a merger would be good for taking on Alphabet), have at least 5 years at the absolute mind-bending minimum or 10 years far more realistically to grow their businesses while combining together with others in order to beat the Waymo threat.

 

Look forward to your, or anyone else's, counter.

 

 

 

[Spekulatius]

Good write up. Ubernsncertainly more than an app, it connects two pools,nahe driver pool and the rider pool, both of which benefit from scale and network effects. I certainly miswrote when I stated that it’s just an app, it’s more than that. I do think I am correct when stating thet autonomous vehicles are more of a threat to Uber and Lyft than they are a tailwind, because they negotiate the network effects from the driver pool, although this will take a long time. autonomous driving is probably 10 years out anyways.