Network economy – Unicorns and Donkeys Pt. VI

2019 will be the year of the shake-out.

• With a darker economic picture and shrinking access to capital, 2019 is shaping up to be a year where the donkeys (see here) are forced out meaning that 2020 could be the year where the unicorns finally start making some money.
• No sub-segment of tech is likely to be immune as the end of 2018 saw three high profile failures in augmented reality (Meta, ODG and Blippar) and now food delivery start-up Munchery has just closed its doors.
• To be fair, Munchery has lasted much longer than I thought it would which probably had something to do with the huge $125m of funding that it raised over its lifetime.
• Munchery’s problem was simple, it failed to become the go-to place to order food online meaning that it would never be able to charge a premium and thereby earn a return on the money it was investing in developing its service
• Munchery also follows Sprig, Josephine and Maple out of the door and I suspect that Blue Apron (see here) will follow.
• This will leave Hello Fresh as the biggest enabling it to become the go-to place to order ready-made meal kits.
• Almost all of these companies rely on the economy of the network to derive their value and make a profit.
• Metcalf’s Law of networking states that the value of a network is the square of the number devices that are attached to it which is why these companies have been so focused on acquiring users at all costs.
• The essential problem here is that barriers to entry are very low meaning that competition will be brutal unless one player is significantly larger than all of its rivals.
• A company in this hallowed position then becomes to the “go-to” place for the service in question and it is then that real monetisation can begin.
• The rule of thumb that I have applied for the last 3.5 years is:
• A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making a profit.
• In reality, this means that in every market, there can only be one which is why Uber’s failure to crush Lyft when it had the chance may very well end up being its undoing.
• We have already seen a similar trend in bike sharing with most Chinese players going out of business or being swallowed by a bigger stronger player like Didi or Uber.
• Scooter sharing companies are also going the same way evidenced by the fact that recent fundraisings fell far short of the valuation that they were hoping for (see here).
• The net result is that the sharing economy is in for a brutal 2019 where only the most aggressive, well run and best-financed companies are likely to exit the year intact.
• Amazon, Spotify, Airbnb, Expedia, Didi, Alibaba & Tencent are good examples of unicorns that are likely to exit 2019 relatively unscathed.