Author: Sriram@Searchlight

Long ago, the stock market was invented as a means for companies to raise money from the public that they could invest in growing their business.

If the companies invested that money well and the business grew, the faith of their shareholders was rewarded with dividends and rising share prices. If not, then things went the other way.

Over time, however, speculative forces changed the dynamics of the stock market and took away the link between a company’s performance and its stock price. Yes, it still forms part of what determines a price and a buy/hold/sell recommendation but there are far more factors at play and when you boil it down to its essentials, it’s really all about supply and demand and those are often driven by sentiment rather than business logic.

No better proof of this than the following 4 charts all sourced from Statista. Briefly, the first one shows that the US economy is in its worst shape in a long time. Despite this, the stock market is up over last year. Illogical? I think so. A more sector specific look at share prices and market capitalizatin in the automobile manufacturing sector shows unreal valuations for Tesla that are far in excess of its status as a relatively low volume producer of cars. It may some day outstrip its competitors in volume and therefore market value, but in order to get there it’s going to need to raise more money so the current valuation is unsustainable no matter how you look at it.

https://www.statista.com/chart/22426/long-term-gdp-growth-in-the-united-states/

https://www.statista.com/chart/22769/change-in-us-stock-market-indices-in-august-2020/

https://www.statista.com/chart/22043/market-capitalization-of-publicly-traded-car-manufacturers/

For a while, it seemed like venture capital was the replacement solution for the original purpose of the stock market. That was until big funds and VC firms started investing in companies with the specific intent of gaming the system, raising valuations at each round and eventually exiting via an IPO. This is how turkeys like Uber and Lyft which have no hopes (or even plans) of being profitable, viable companies lurched along to vastly inflated valuations and IPOs, while eventually the bell didn’t toll for WeWork and it got stuck along with the very aptly named Softbank.

What’s the future then? Perhaps it is investment funds that are not speculative in nature, not looking for the crazy 50-100X returns that everyone seems to think exist all around us. Funds that invest in companies with a sensible model that will, over time, deliver dividends and consistent growth to patient shareholders who are not in a hurry to have their shares listed on an open market. That would also mean not looking out for unicorns all the time but being willing to invest in mid-sized companies, B2B startups that are looking at a high probability of moderate success rather than a tiny probability of unbelievable success… overall, a moderation in expectations and greed is key to making this whole system work better and return to its original objective of providing a link between funds and companies that need investment to build a better future.

One of the things that bugs me about most people in the business world is their propensity to adopt a new term, quickly bastardize it so it doesn’t mean what it was supposed to, put it into a dozen strategy presentations and go home secure in the knowledge that lip-service to innovation and change has been paid.

Let’s take digital transformation, for instance. For most companies, it just means opening up another channel for sales and advertising. The close link between the two on ecommerce platforms may change their criteria for advertising effectiveness but that’s about it.

To me, digital transformation is really about business transformation. Digital is almost irrelevant to this – it may be that at this time in our lives, the digital ecosystem allows businesses to reinvent themselves, but 50 years ago the advent of commercial aviation was a similar opportunity and 50 years hence something else will come along that offers the opportunity to reshape businesses.

While people have been paying lip-service to digital transformation for over a decade now, COVID19 ushered in some real transformation in a matter of months. Some quick examples:

1. The Fitness Industry: With gyms closed and social distancing in place, many trainers came up with ways to run virtual classes online. Some of these were initiated / sponsored or in some way hosted by the gyms they work at but for the most part, we saw an explosion of individuals who realized their knowledge had value for people even if it had to be delivered virtually. For the good trainers, a way of monetizing their knowledge has opened up that they never really explored before. Virtual classes with hundreds of viewers each paying a little bit can be far more lucrative than one-to-one or even one-to-few classes. Apart from trainers, home training equipment of all sorts has seen a boom but this is not a business transformation, merely a short term opportunity. A handful of businesses specializing in equipment that allows flexible remote participation in classes or group activities or trainer supervised exercise or online training programmes will find themselves accelerating now – Peloton being one of them. Physical gyms, I’m afraid, are not going to find it so easy to reinvent themselves (although I do have some ideas which I’ll share in a bit).
2. Medical consultation: Remember long long ago (well, about 6 months ago, really) when you had to go to a doctor’s clinic and wait to be seen? Often you waited with a lot of other people suffering from various illnesses and left the clinic with more germs than you brought in. It’s astonishing how quickly doctors have adapted to virtual consultations as a result of COVID19. Did it really need to take this long? How much further can this go? Companies selling medical devices that are set up by a human being – hearing aids, spectacles and so forth – all have a golden opportunity to go direct to consumers and bypass their middlemen, there can be no better time for them to do so. Technology intermediated set-up for hearing aids, testing eyesight etc. are all possible now and if their distribution partners complain, they can blame it all on the pressures of a global pandemic.
3. The entertainment business: Movie halls have been closed for several months now and show no signs of reopening (which is odd, gyms in China reopened in April – surely they’re a more virus-prone environment than cinemas). Video streaming services have boomed in this period. However, the number of movies where shooting has been put off for several months is growing. What will that mean for conventional movie production? I’m seeing more and more “virtual plays” being put up for viewing – with the cast and audience all scattered over various parts of the world. Is there an opportunity for the movie industry to go virtual in this way? Imagine how great it would be to have actors all act in front of a Zoom camera in their homes and an audience having to put it all together – it would be different, challenging and potentially a new format for storytelling.
4. Work in general: The idea of going to an office suddenly seems like old hat. Why do so when you can have all of the output with none of the commuting? Tools like Zoom and Teams have helped but tools like these have existed for a decade or more. While we probably won’t continue to work remotely en masse and forever, there is a clear shift in thinking. Roster based office attendance and smaller offices with hot-desking are a clear trend. That means companies renting out hot-desks / flexible office space will start to do better than those expecting two year leases on fixed spaces. Surely that was an innovation which could have happened a long time ago.

I’m sure there are more examples. Returning for a moment to my favorite category – gyms and fitness – let’s think about this for a moment. Gyms have traditionally focused on real estate, physical equipment and selling expensive long term subscriptions. Their whole model is to get people to pay for a 2-5 year non-refundable subscription and ideally, drop off after a few months. They’ve gone after people who don’t fundamentally have the desire or motivation to go to a gym regularly and tried to get them to shell out money for an expensive membership and then pay more for training by some young punk with very little experience and qualifications. Said young punk often makes the first few training sessions so incredibly unpleasant that people just stop going to the gym. (I’m not sure if this is a deliberate strategy but it does seem to be the pattern with most trainers, mainly because most of them don’t really know anything about training other people and operate a one size fits all, high-rep, maximum-discomfort workout for everyone. I also believe that the best trainers are not affiliated with any gyms or run their own gyms where you can attend a class without first paying for a long term membership).

What’s COVID19 shown us? A lot of people are very keen on staying healthy. Clearly the number of people exercising has gone up immensely – but the key thing is that they all had oodles of time and discovered they could do so at home. When they go back to work, perhaps the time will shrink again but the insight that they don’t need to go to a gym to train will remain. For those who do go to gyms, there will be worries around being near other people, not wanting to touch a lot of things and so on.

What I would do if I owned a gym is change the model completely. I’d look at different segments:

1. Hardcore gym users who need a place to come and lift heavy
2. People who could train at home but want some coaching / classes / group activity whether for no-equipment strength training, yoga, spinning, dumbbells or kettlebells
3. People who need a place to come and train (with/without a trainer) but don’t have time to commute

There are then a series of services / offerings at different price points for each segment. Instead of today’s open, crowded gyms there could be workout pods which users have to book in advance with the equipment they specify already put in the pod and the whole area disinfected in advance. This would be the most premium offering for those who are willing to invest in it because they see themselves as serious athletes. Pod and equipment booking and payment can all be done digitally but you’ll still need a physical facility and some staff to take care of the rest.

For people who want the camaraderie of a group or the guidance of a trainer there are virtual classes and possibly rented equipment. In this there are no concerns about viruses spreading in a class. This is almost completely a digital business.

For those who want to train with utmost flexibility there can be travelling gyms – equipment loaded in the back of a truck and set up so the user can work out right inside the truck (there are some people offering this already in the US and the UK). The equipment and area can be disinfected between users, making it a safe option. This can be app-intermediated like Uber, with users requesting gyms at certain locations and times and drivers responding based on where they are.

COVID19 has thrown up a lot of very interesting consumer insights. In many cases, those insights represent opportunities to transform businesses. Digital transformation? Perhaps, in some cases – but really, starting out with a digital lens is not the point. The point is to create new, better business models in response to the changes we see in the world around us.

The news during each country’s lockdown has gone through the same phases. From initial doom and gloom about the spreading virus to some positive news around better air-quality, lower levels of pollution, work-life balance and calls for business to make working from home a longer term change. However, as the virus infection rate comes under control, things start reverting to type.In Shanghai, public transport is crowded, just as it used to be. Air quality is back to the red zone most days. While some businesses (including the one I run) are experimenting with roster-based attendance schemes most seem to be back to full-time in the office. It looks like we’ve learned nothing, changed nothing from the horrible experience of COVID-19.

In the rest of the world, as restrictions lift, I see articles about how long term working from home is bad for mental health. The initial outpouring of support and sympathy for migrant and day-wage workers seems to have faded now and everyone who’s ensconced in a cozy space of their own is still finding it all too hard. From initial support for staying home, I find a lot of people questioning the efficacy of such moves and making claims that flattening the curve only means delaying when everyone has had COVID-19.

Separately, the blame games have begun and are well underway. China seems somewhat isolated and there’s a lot of bad press internationally, but as they seem set to be the first major economy to recover, will that continue? Will any soul-searching take place amongst the leadership either in China – which, no matter how you look at it, is where COVID-19 started – or elsewhere in the world where initial carelessness led to such a rapid spread of the virus that multiple countries have alarming fatality numbers that completely eclipse those from China? I somehow think not.

We’re seeing the same old scripts play out. The Travel industry will be hit really hard but already its barons are holding their hats out for government bailouts (funded by taxpayers, of course). Apparently the worlds top 10 billionaires added some new obscene level of wealth to their net worth in the last couple of months. Businesses are firing people and cutting costs so that they can still deliver to their shareholders. So much for looking after employees.

The reality is, apart from some businesses that are hard hit, most will recover and carry on much as they were before. Weak businesses that were going to fail anyway will have failed faster, but that won’t stop new ones from popping up with the same business ideas. To give you an example, even if some airlines go out of business now, when air travel returns to its previous peak in 12-18 months, lots of people will think about the excess capacity (unused airplanes still available for lease or purchase) and seeing a short term opportunity, will jump back in. Gold’s Gym may have closed because it was heading for closure over a long period but once people start returning to gyms someone will either buy them or launch a new chain of gyms to get all the customers who developed some training habits at home over the last few months. Many restaurants will close now, but many new ones will come up as replacements in months to come. In some cases business models will be tweaked and optimized – like gyms/personal trainers trying to drive an online training component as well as onsite, or restaurants doing a greater proportion of takeaway as they reduce seating to provide more social distancing.

Those aren’t bad things. Economic resilience is to be celebrated, after all. The one missed opportunity though, is in recognizing the value in lots of jobs that we underestimated before. Things which are now recognized as essential services will go back to being taken for granted, which is a pity. The COVID-19 crisis has shown that people who grow and distribute food, provide medical services, keep the utilities running, clear the trash and clean our streets, homes and public places are absolutely essential. Yet, for the most part they remain underappreciated and underpaid.

Once the crisis is over I suspect we will cease to appreciate how much these people helped and miss the chance to re-evaluate the excessive value we place on office jobs that are, ultimately, deemed entirely non-essential in a crisis such as this.

This is an area that requires a change in how we value jobs. Why is a piece of software able to make a billionaire of Bill Gates while the ability to produce real food doesn’t allow a farmer in India to even have a subsistence level income? That is a fundamental imbalance in our value equations that requires a change in our thinking. Unfortunately it doesn’t look like the post COVID19 world will demonstrate any such recalibration.

(Originally posted on Linkedin in early February 2020, when China was in the grip of COVID19)

Like most other non-manufacturing businesses in China, we’re observing a two week “work from home”. Since my wife and I just got back to Shanghai on Sunday we’re also trying to stay indoors for 14 days to make sure we didn’t catch the virus while away and then infect lots of other people.

Yesterday was the first day of working from home and it was very productive indeed. Some catching up on emails, answering questions and a client conference call. Of course, the advantage of working from home is that in between I made lunch (I must confess to choosing alliteration over accuracy in my headline – I’d omitted to buy tomatoes on Sunday so I couldn’t make chicken curry and had to make do with a breaded chicken fillet in alfredo sauce instead) and got to work out at home. I’m normally a regular gym goer but over the years I’ve accumulated bits and pieces of home workout equipment – a pull-up bar that lives on the balcony and fits just nicely over the more frequently used outdoor grill, a medicine ball, a kettlebell, jump rope, resistance bands and my newest love, an ab roller.

Now, I’m not a stranger to working from home. I ran my own consulting business from a spare bedroom for about 2 years when I lived in Singapore and always found it remarkably productive as well as conducive to work-life balance and health. However, I know a lot of people are experiencing this for the first time and by default, once everything goes back to “normal”, most people will want to go back to the office to work.

Which is where I want to say “Wait! Stop! Think for a moment!”

While most things about this coronavirus are horrible, one of the few silver linings in the cloud is this opportunity it’s given all of us to re-evaluate the necessity of having people commute to work every day. I’ve been trying to get my colleagues to consider letting people have 1-2 days of remote working every week and I keep getting told it isn’t practical – but now all of us are working from home 5 days a week for two weeks. I know that isn’t ideal either but surely there’s an in-between.

So use this time well, especially if you’re running an office or a team and everyone is working remotely. Pay attention to all the tasks you do. Figure out the bits of your work that are genuinely difficult to do remotely – some situations do require face to face meetings and interactions – and also see whether there are parts that are actually better done from home, with no distractions. For most people working from home devolves into just answering emails but try and do more than that – work up proposals, write presentations, do some of that desk research you need to do for your prospect pipeline.

When things get better and we’re all able to go back to work – see if you can experiment with some remote working days for everyone. It’ll improve their productivity, make them feel happier about life and as an extra bonus, give you more room in the office if on any given day some people are away – that means you can put in the table tennis / video games / massage chair you guys have been talking about for ages.

As for me, I’m going to order tomatoes online and see if I can make that curry today.

I was reading recently about the entry of content companies into online streaming, foremost among them being Disney. Amongst other things, that implies key erstwhile Netflix content partners will now become competitors, forcing Netflix to either pay a premium for licensing content from other players or to spend a lot more on developing original content.

However, here’s the rub – Netflix has already been spending a lot on original content.

As the statista chart above shows, that spending has been increasing steadily and will now need to grow even faster to replace the content deals that are no longer available.

Although they’ve been showing a profit in recent times, there still isn’t a cash profit and part of what drives their better net income numbers is how they account for some of their longer term investments and amortize them over time.

Companies like Disney with a huge library of pre-existing content that has already paid for itself have a massive advantage over Netflix – they just need to set up the streaming business, which is not the challenge here.

There are parallels to Uber here – Uber just set up an app and a way of making ride hail more convenient. They didn’t actually own any cars or employ any drivers. They didn’t really change the economics of the industry.

Netflix has created a new way to monetize content, but unfortunately it isn’t powerful enough to allow for the costs of massive original content production. It works well with a large library of pre-existing content and allows a small percentage of original content production, which is perfect for companies that have been in the content business for decades. Unfortunately, that may not work for Netflix.

Time and time again we see these charts showing how the biggest “new-age” businesses don’t own much of the assets that are core to the actual consumer experience. I think what we’re seeing now is that most of them are just a glorified “pipe” – and at the end of the day, if you don’t own what’s flowing through the pipe, it’s unlikely you’ll have a profitable business. If you can get an IPO and get out quick, good for you, but if not…

In recent times, there have been multiple startups that went IPO with a lot of hype – Lyft, Uber, Zoom, Pinterest, and China’s own Luckin Coffee were at the forefront of the news.

Now, while many may claim that Lyft and Uber received their come-uppance by ending up below their IPO valuation very quickly, they still managed to unload a lot of shares at a decent valuation. Luckin has fared much better with an initial spike in valuation. What unites these 3 companies? None of them has ever made a profit and none of them (if you read between the lines a bit) claims any possibility of doing so. While Lyft and Uber have many years of loss making history behind them, Luckin has very smartly gone public before it has too much of this kind of history.

Lyft has additional woes as its investors sue it over alleged misrepresentation in its IPO.

Zoom, on the other hand, has been hailed as “the profitable unicorn” which, ironically, highlights how few unicorns are profitable.

I don’t think anyone is buying Uber stock in the expectation that it will pay out in the longer term, with dividends, stock splits and the like. Most investors seem to be buying it in the hope that the valuation will go up and they can sell at a profit. Somehow the way in which the pre-IPO valuations of these companies kept multiplying seems to make people think that will continue long enough for them to make a killing.

Here’s the sad news folks – the people who were going to make a killing on Uber have already done so. They’re all the folks who bought in early and fuelled the hype. Each round of investors bought in hoping there would be a next round at an even higher valuation – but that cycle ends with the IPO.

You want to make money from a startup going public? Buy into their shares long before they go public. Or better still, start your own company.

Here’s some thought provoking links on the subject of recent IPOs.

Overview on recent IPOs

Lyft gets sued by investors

Beware of Luckin IPO

Not all unicorn IPOs are bad, obviously. Zoom has come to market after several years, working patiently to establish a working model for a viable company.

Zoom expected to break even for last quarter

The thing is, the mentality in today’s investment market is that you just have to ensure there’s one layer of suckers left to buy stock from you at a higher valuation than you paid. That may continue for a while longer but as the majority of startup IPOs lead to sharp drops in investor value, the entire startup / IPO route will start becoming questionable. Hark back for a moment to the symbols of solidity from 20 years ago, the blue chip companies as we called them. P&G for instance, where if you held stock for a long time, they kept paying dividends and issuing stock splits so that, as the fable goes, many a secretary from the early days ended up a millionaire.

Isn’t that the story we should be seeking to live out – support a company in its early days, and over time, see it deliver value to customers and shareholders. I don’t think Uber, Lyft or Luckin particularly care about their shareholders apart from seeing them as a convenient source of cash or as a way for the VCs and funds to unload their shares at a profit.

It reminds me of an O’Henry story (A Tempered Wind) where a pair of grafters hatching a Ponzi scheme get an attack of conscience when they realize their investors are all poor people, and get them lined up to return their money. (The illustration above is from the story) One of them admonishes the people in the line as he returns the money – “Salt away that chicken feed in your duds, and skip along,” says Buck. “What business have you got investing in bonds? The tea-pot or the crack in the wall behind the clock for your hoard of pennies.” While that may not be the advice I give I’d certainly advocate that you invest your hard-earned money in companies that are going to be around a long time and generate a profit and dividends over their lifetime. “What business have you got investing in unicorns, the blue chip that’s been around the last 50 years for your hoard of pennies” I’d say, to paraphrase Buck Skinner.

Aviation is having one of it’s best decades in a long time, with the traditionally wafer thin margins improving a little bit as per IATA’s 2018 data.

So, the question is, why are so many airlines still losing money? And why are budget airlines, in particular, often on the brink (or over the brink) of shutting down and stranding their passengers?

As a recreational pilot who runs businesses for a living, there were 3 times in my life when I contemplated starting an aviation related business. First, I explored starting a flying school in China about 15 years ago. Then, I considered a private charter service between Singapore and key South East Asian destinations that were important for specific industries but not well served by airlines (Balikpapan in Indonesia, for instance). Finally, at one point I had an invitation to invest in a FBO (Fixed Based Operator) business in Senai Airport, Malaysia.

On all 3 occasions, I decided against taking the plunge because, to summarize rather summarily, there were too many factors outside my control which could impact cost – thus making it very hard to assess the viability of running such a business.

The most fundamental cost in aviation is the cost of the airplane. When I owned a plane, it cost me a fixed amount of money. Whether I flew it or not, I paid insurance and hangarage and had to pay engineers to do an annual inspection. I’d worked out a dry operating cost per hour on the assumption that I’d fly about 100 hours a year and realized at that time that if I rented it out and got it to fly 200 or more hours a year, my cost per hour would come down drastically.

The same is true of the airlines. Apart from the plane, airlines have other fixed costs as well that look better when amortized over more hours. Pilots get a base wage, so a pilot who flies to the legal maximum every month delivers more value than one who does less hours.

For airlines, one of the things that helps them get the most out of their planes and pilots is standardizing things as much as possible. Successful budget airlines try and fly just one aircraft type. They’ll pick it for maximum efficiency and profitability on a small number of routes and steadfastly avoid other routes that don’t make sense for this plane. This is why when budget airlines start trying to fly long-haul, they get themselves into trouble – because then they have to buy longer range aircraft and impair the efficiency of their model.

Everyone thinks budget airlines make money by charging you for sandwiches, water and checked in bags – while that helps recognize the real costs of these services it’s not usually a revenue earner. The core of profitability in budget airlines is getting the most out of fixed cost assets like pilots and planes (pilots are kind of a fixed cost asset in the sense that once you have one, you need to use them for the maximum legally allowed flying hours per month and year).

So, here’s the question – is that something that only budget airlines can do? Clearly not – there are enough airlines that attempt to limit the diversity of their fleet, are very choiceful about routes, avoid unnecessary costs and maximize their flying hours per aircraft and pilot. In fact, surprisingly, a look at the world’s most profitable airlines shows very few of the budget persuasion. (Data is from a Forbes report for 2017)

What’s interesting there is the low margins for most companies – Southwest being the only one in double digits. From an investor’s point of view that’s a pretty low ROI.

Separately, all kinds of things can affect an airline’s ability to maximize the annual hours for each of it’s aircraft. Take the impact of the 737 Max crashes that have led to the entire fleet being grounded worldwide – we can expect every airline that flies these planes to have some problems this year. Planes sitting on the ground cost money – hangarage, maintenance contracts, bank loan repayments and so on. Pilots trained on these planes will have less to do but will still make their base salaries. It’s certainly possible for the airlines to make up a lot of the missed flights using the rest of their fleet but that’s not the optimal arrangement so the impact on P&Ls may be larger than the overall flight cancellations indicate. It may be that the airlines are able to recover some of these costs from Boeing or their insurance companies but unlikely that they will recover all of them.

Overall, this is a hard business to make money in even when everything is in your control, which clearly is not the case.. Between aircraft problems, weather and government control over airspace, there are many unpredictable factors that might make it a challenging business to be in, even for those who appear to be succeeding at it.

The Uber IPO filing (and Lyft just before it) made me think about all the speculation that they’re waiting for self-driving cars to come along and save their bacon.

Which made me think a bit about what might change when self-driving cars become practical and widespread. So let me put on my speculative futurologist hat for a moment and do my best Isaac Asimov imitation (and if you’re wondering why, try and read this absolutely wonderful story about self-drive cars, which he named automatobiles).

The thing is, like most big changes in technology, a self-driving car isn’t just going to substitute the driving and navigation functions of a human driver. Effectively a self-driving car is a form of robot. It will have a fair bit of processing power, high speed access to live information (not just navigation and maps) and the ability to process commands. The moment you think of it as an intelligent mobile entity rather than just a driverless car you realize it may change how we look at transportation.

For instance, if a self-driving car – let’s call it an automat in honor of Asimov – can accept instructions, plan a route and be at various points at specific times, keeping track of vacant seats and so on, why should we each own one? Simpler to hail one and have it show up at my door or go to a designated pickup location. If I want to go somewhere quickly I can specify that I want the entire car to myself and am willing to pay a premium for door to door service, urgent service and exclusivity. If not, I can book a seat on a scheduled service like a bus and walk a bit to a standard waiting point. There are all kinds of permutations and combinations possible to trade-off cost, convenience and exclusivity.

All of which sounds a lot like Uber, so people might think that’s when Uber comes into it’s own.

However, think about this. Why would the rest of the transportation industry wait around and keep buying regular cars, leaving automats for Uber and Lyft to buy? Taxi companies, car rental companies, bus companies can all shift to automats. If less people buy personal cars maybe even the car makers and dealers will shift to this kind of car rental model instead of selling them. Owning a fleet of vehicles takes a very different business model from that of the ride-hail app companies, but it is pretty much the same model that all the conventional transport companies have had all along.

If Uber and Lyft were to continue doing what they do now, it would hinge upon using excess capacity from private cars and selling that capacity at slightly above the variable cost so that owners are incentivized to make their cars available. So, if people continued to buy cars in an automat era and decided after they’d been dropped to work that the car could be made available for public use, then potentially a ride-hail app ecosystem could continue. Potentially it could be priced lower than regular cabs and transport services if owners are willing to recover just slightly more than the variable cost. However if the ride-hail companies owned their own fleet, their economics are no different than the other players in the field so they won’t be able to sustain a different pricing model.

The fundamental problem is that ride-hail companies haven’t changed the economics of transportation. Automats will, but they’ll change it for everyone so that won’t confer any advantage to the ride-hail companies.

Here’s the important thing to remember about Uber (or Lyft, Didi, Grab… you name a company) – at the end of the day, it’s just an app. Not unique, not hard to replicate and certainly not worth 120 billion dollars.

This past weekend I had occasion to visit Inner Mongolia. Now, of course, Inner Mongolia is part of China and is probably quite different from Mongolia proper, but long ago it was all open land belonging to the tribes of the Mongols that united under Genghis Khan and created the largest empire on Earth, stretching all the way from China in the East to Central Europe, taking in Persia and parts of India, Pakistan, Afghanistan and other countries along the way.

Legend has it that the world almost became a global Mongolian empire – their armies were poised to conquer Hungary when Ogodei Khan – Genghis’s son and heir – died. The generals all had to return to Mongolia to decide on their new leader and once they left, they never returned to continue their conquest of Europe.

The reality is slightly more nuanced. Before Genghis Khan, the Mongols were divided into several tribes who often fought each other. They lived a nomadic life, pitching their yurts to make camp and moving regularly with the grass and the seasons. Genghis was the first to unite all the tribes into one great army and start invading the neighbouring countries. However, while it was relatively easy to be a marauding force that thundered in on horseback, looted, plundered and then left, it was quite different from settling down and running an empire. This was a dichotomy that the tribes never quite got over. Ogodei’s death resulted in a tussle for the position of supreme leader and more importantly, for a clear vision and future. Were they going to continue expanding their empire or go back to being nomadic horsemen who rode into battle mainly for short term plunder? The tribes splintered into four (later five) khanates, and over time the people they’d conquered absorbed their rulers and eventually overshadowed them.

Would it have been a bad thing if the Mongolian expansion had continued? By all accounts, Genghis Khan was a pretty enlightened leader, proscribing undue violence by his troops, enforcing a standard civil code across all citizens of his empire and absorbing the conquered people into his administration. Perhaps if they’d conquered the world and let their Persian and Chinese administrators (and Hungarian?) run it, they’d have gone back to the grasslands to ride free and roam the land.

Today, their boundless grasslands are all marked with barbed wire fences to demarcate farm holdings, the grass is not native to the region but something the Chinese government has planted which has a better yield. Yurts come complete with a proper toilet, hot and cold water, floor heating and wifi – and by the way, they are all semi-permanent structures with a fake tent covering on the outside. Genghis Khan would turn in his grave if he saw it.

Today, Inner Mongolia is mainly populated by Han people – the ethnic majority of China. They run the tourist attractions, the horse riding, the tourist friendly yurt experience, the “local” restaurants, the desert treks…everything. We saw perhaps 3 Mongolian people over the 3 days we were there. Where their forefathers once thundered across endless grasslands on their sturdy ponies, putting fear in the hearts of all who saw them coming, the Mongolian people are now a footnote in history.

Why did they fail? Perhaps because, as in the modern world, it’s relatively easy to go in as a disruptor, but what happens when you succeed? Do you have a plan for going from marauder to administrator? Do you have a plan for what happens when you become the one everyone is trying to disrupt? Most companies don’t – they succeed in a certain role and when success forces them to change that role they don’t necessarily know what to do and how to adapt. The pages of business history are full of examples and I’ve written about a few of them elsewhere in this blog – Apple, IKEA, Google and others are all more similar to the long vanished Mongolian Empire than they know. Disruptors about to be disrupted.

 

I was reading about the bankruptcy filing by adtech firm Sizmek and was blown away by how big a business it was. Sizmek serves 1.5 trillion ad impressions yearly, with a user base of 20,000 advertisers and 3,600 agencies globally. Yet it couldn’t make a profit, prompting its lead private equity investor to cut off further funds and leading to a bankruptcy filing.

In the meantime, Uber and Lyft are gearing up for their IPOs, Uber apparently expecting a valuation of 120 billion US$ and Lyft a more modest 23 billion. Apparently NYSE has “Won” the Uber IPO while Lyft will go to Nasdaq.

Neither Uber nor Lyft has ever made a profit, at this point there is no projection that they will. Yet “winning” their IPO is considered a major prize.

Will regular folks be beguiled by the glamour of these companies and buy up their IPO at these valuations? If so, it would be a travesty. Companies like Sizmek served a real need, clearly got themselves a large share of the market and still didn’t get their business right in order to turn profitable. Eventually they ran out of rope and had to declare bankruptcy. These consumer facing app startups, on the other hand, never seem to run out of funds, investors are eternally willing to fuel an ever more unbelievable valuation and put money into them.

Which makes me think success and failure here has nothing to do with the basics of the business. If you manage to get enough large investors aligned with the need for a startup to exit successfully, then it will defy all business logic and get there somehow, kicking and screaming.

I’d love to be proven wrong but I suspect we’ll see Uber and Lyft continue their journey to an unrealistically overvalued IPO, their current investors will be laughing all the way to the bank and a few years from now, their soon to be shareholders will all be weeping copiously into their handkerchiefs – heck they’ll need big towels to soak up all the tears.

Which is ironic because Sizmek’s road to profit might not have been as impossible as the one ahead of all these ride-hail startups.