A Blog by Jonathan Low

 

Jul 9, 2019

Everyone In Silicon Valley Wants To Disrupt. Why So Few Actually Do

Given the amount of venture capital looking for excess returns, the ostensible disrupters spend as much or more time and money competing with each other as they do actually disrupting whatever market they've targeted. JL

Laura Forman and Justin Lahart report in the Wall Street Journal:


The field of wannabe disruptors has become so crowded that they risk spending as much time thwarting one another as taking on the established players they mean to displace. When disrupters fight, they burn through investors’ cash while making limited progress toward becoming entrenched and profitable. Call it the dual disrupter dilemma. Part of the problem is that would-be disrupters don’t get as much of a first-mover advantage as they might have in the past. The heightened competition is reflective of an era where big investors, desperate to generate returns when interest rates are low, are plowing money into startups
Disruption is Silicon Valley’s favorite buzzword. Investors are starting to realize that it cuts both ways.
The field of wannabe disruptors has become so crowded that they risk spending as much time thwarting one another as taking on the established players they mean to displace. As framed by Harvard Business School professor Clayton Christensen in the 1990s, disruptive companies get their start appealing to lower end or underserved customers before moving upmarket. Now the definition has loosened to the point that any company somehow using technology to attack incumbents can be called a disrupter.
Uber and Lyft both set out to disrupt the taxi industry. Uber also has entered the food-delivery fray with its Uber Eats, alongside Grubhub , GRUB +1.47% DoorDash, Postmates and many more. In real estate, iBuying startups such as Opendoor and Offerpad aim to disrupt the traditional real-estate model by offering to quickly sell homes with the help of algorithms.
But when disrupters fight, they can burn through a lot of investors’ cash while making limited progress toward becoming entrenched and profitable. Call it the dual disrupter dilemma.
Meal-kit firms serve up a cautionary tale. Blue Apron was early out of the gate with its mission of making “incredible home cooking accessible to everyone,” but in an environment rich with venture capital looking to fund the next new thing, it soon found plenty of competition. Recently shuttered Munchery, which raised $125 million, said its mission was “to make delicious, healthy, high-quality and cost-effective meals accessible to everyone, everywhere.” Sound familiar?
It wasn’t the only one to bite the dust. Chef’d closed in 2018 and Sprig did in 2017. Spoonrocket and Bento also are gone. And while Blue Apron is still kicking, its split-adjusted stock price has fallen about 95% from its initial public offering price two years ago, valuing the company at $90.4 million. Since 2014 the company has burned through more than half a billion dollars, according to FactSet.
The food-delivery business risks traveling down a similar path. SeamlessWeb, which eventually merged with Grubhub in 2013, pioneered modern day online food delivery. Now imitators abound. They compete with one another for shared business (many eaters report using multiple apps) as much as they do to popularize the online takeout market.
Winning over diners often means cheaper or free delivery fees and faster delivery times, often enabled by more paid drivers. A recent perusal of VC Fund My Life, a website that catalogs startup discounts and freebies, showed discounts from Postmates, DoorDash and Caviar, among others. Amid intensifying competition, Grubhub’s shares are down nearly 45% over the past nine months.
Part of the problem is that would-be disrupters don’t get as much of a first-mover advantage as they might have in the past. There was no stampede to sell books online after Amazon.com opened its virtual doors in 1995. Meanwhile, incumbent booksellers such as Barnes & Noble and Borders didn’t recognize the threat until far too late.
At least two meal-kit companies wanted to make home cooking ‘accessible to everyone.’
Contrast that with iBuying pioneer Opendoor, which must contend with newer entrants such as Offerpad, Knock and Flyhomes—as well as online real-estate giant Zillow, which said this year that it was shifting focus from its agent advertising business model to double down on the more automated concept. Zillow Chief Executive Rich Barton reportedly called iBuyers an “existential threat” to its traditional model and felt compelled to get involved in a big way.
The heightened competition is reflective of an era where big investors, desperate to generate returns when interest rates are low, are plowing money into startups like never before. By The Wall Street Journal’s count, as of April there were 88 still-private U.S. startups valued at $1 billion or more, up from 43 just five years earlier.
Uber and Lyft are perhaps the most prominent examples of the dual disrupter dilemma. While it is up for debate which was first to market (Lyft evolved from older Zimride), they offer essentially the same rideshare services. The upshot is that, in the U.S., both companies are now locked in a land grab for an overlapping customer base even as the majority of the transportation market remains untapped.
Despite recently adding lower-cost alternatives such as bikes and scooters, both companies continue to put the lion’s share of the funding toward luring ride-share customers. Uber has burned through nearly $10 billion in cash since 2016, according to FactSet, while Lyft, the smaller of the two, has consumed $1.4 billion. Despite all the money spent, Lyft said in a filing that ridesharing still accounted for just 1% of the total vehicle miles traveled in the U.S. in 2016.Both companies remain unprofitable, but Lyft raised $2.6 billion in its IPO in March and Uber raised $8.1 billion in its May offering, giving them both plenty of firepower to keep disrupting each other. How much of that gets snapped up by savvy, existing customers playing one off against the other remains to be seen.

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