You Are Experiencing Peak Free
November 5, 2019
For those of you who wake up, ambitiously squeeze in a workout on your Peloton bike before taking an Uber to your shared workspace at WeWork, where you then order your food through DoorDash before catching a Lyft ride home – you are participating in an urban ecosystem of convenience that presently loses, by most estimates, in excess of $10 billion a year. While steep losses among young companies that dream of revolutionizing their marketplace is nothing new here in Silicon Valley, recent events in the public markets may be a harbinger of change for your highly subsidized consumer lifestyle.
For over a decade, venture capitalists and private market investors have been willing to foot part of your lifestyle bill in order to build a wave of innovative transport, food delivery and office space companies. The hope has been that one day, consumers won’t be able to live without these services, and of course, at scale, profitability will be achieved. It has been a winning formula historically, perhaps best personified by the success of technology giants like Amazon, who powered through deep J-curves of their own to build near-monopolistic businesses.
But today, with the abundance of private capital, companies have the luxury of staying private longer, which has obvious advantages as well as observable drawbacks. For instance, what passes for good governance, accepted financial losses, or even sustainable valuations can skew significantly over time in the private markets. The failed WeWork initial public offering is perhaps too unique of a canary in the coal mine to focus on, but the poor public market reception for Uber, Lyft and Peloton is tougher to ignore. Investors are clearly skeptical that these aspiring consumer business models are on the right path towards financial sustainability. So what does this mean for you?
For starters, companies have to eventually break even to stay in business – a reality that comes into sharp focus in the public markets. That reality means that these companies can either cut costs or increase revenues to improve their near-term financial position. Cutting costs is a difficult proposition, especially for those companies that aren’t even paying benefits to their existing employees. So that leaves revenues, which means pricing has to change, and indeed, we are already seeing that happen with the above-mentioned transportation companies.
Secondly, while we suspect that many of these companies will one day achieve sustainable metrics, the march to sustainability isn’t going to be a straight line and will likely occur beyond many public market investors time horizons – particularly in today’s late cycle economic environment. As a result, for those with concentrated stock positions in this ecosystem, it is important to evaluate what these business model changes will mean in a public market environment. While it may be easy to do nothing out of a belief in the long-term or even a sense of loyalty to one’s employer, any investment strategy you pursue should consider the bigger picture of your overall risk profile as well as your near and long-term financial goals.
At the end of the day, many of these companies are going to fundamentally change our lives, but the market’s current unwillingness to reward open-ended financial losses is likely to curtail your highly subsidized consumer lifestyle faster than most want to believe. So enjoy this “peak-free” moment while it lasts, because according to the public markets, we may never have it so good again.
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