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Why You Should Be Rooting For Startups Like Uber

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Why You Should Be Rooting For Startups Like Uber

FreightWaves is providing a forum – Market Voices – for a number of market experts.

Disclaimer: The author is not an investor in Uber Technologies Inc (NYSE: UBER), or any of its competitors. Steve Case's Rise of the Rest® is an investor in FreightWaves.

On May 9 – just one day before Uber's initial public offering (IPO), The New York Times published Why You Should Root for the Uber I.P.O. to Fail, an op-ed by Mihir A. Desai – a professor at Harvard Business School and Harvard Law School. He is also the author of How Finance Works.

I couldn't disagree more. We should all be rooting for startups like Uber to succeed. Our future depends on it.

This article is not an exhaustive examination of Uber's business model, corporate governance or how it treats its employees and drivers. That is beyond the scope of this article given that Mr. Desai does not critique Uber on those issues specifically.

What is the case for rooting against Uber?

In his article, Mr. Desai argues that Uber's pre-IPO investors have thrown an unprecedented amount of capital at Uber – $24.7 billion over 23 funding rounds, to be exact, according to Crunchbase. That capital helped Uber sustain more than $10 billion in operating losses in the three years preceding its IPO. Mr. Desai urges us to pray for a comeuppance for those investors. Here's a summary of his reasons:

  • First, the era of bloated venture capital funds, like Softbank, distorts the allocation of capital, talent and entrepreneurial energy toward unviable business models.
  • Second, the success of a company like Uber can lead young people and investors astray. Young people can view their jobs as lottery tickets. Investors of all kinds can be seduced into imitating these giant venture funds.
  • Finally, the venture capital world will become even more "clubby." Startups will compete on funding rather than on the merits of their products.

He makes a seductively compelling case, and I understand his complaints. That being said, his argument fails because it takes a rather narrow view of the issue. Let me explain.

We are entering a new era

In his book, The Third Wave: An Entrepreneur's Vision of The Future, Steve Case, former CEO and chairman of AOL, makes the argument that we are entering a Third Wave of the internet. Briefly:

  • The First Wave extended from 1985 to about 1999. This was the era during which technologists and entrepreneurs laid the foundation for the online world. It was driven by people, products, platforms, partnerships, policy and perseverance.
  • The Second Wave extended from 2000 to about 2015. This was the era of the mobile revolution and the app economy, characterized by search, social networking and ecommerce. This era was driven by people, products and platforms.
  • The Third Wave extends from 2016. This is the era of ubiquitous connectivity and pervasive computing, enabling entrepreneurs to use digital technologies to transform real-world sectors of the global economy. This is the era during which software – made up of bits, and physical products – made up of atoms, intersect and collide. This era is driven by people, products, platforms, partnerships, policy and perseverance.

Though Uber was founded in 2009, and Lyft Inc's (NASDAQ: LYFT) predecessor company, Zimride, was founded in 2007, it is not difficult to see that they fit squarely in The Third Wave. Together with other startups that were also founded before 2016 you may not know yet, they represent the canaries in the coal mine of Third Wave Startups.

So, what's the problem?

The problem is that, with only a few exceptions, in general, Third Wave startups have not been very popular with venture capitalists. Indeed, this is the impetus behind Steve Case's Rise of the Rest® initiative. Third Wave startups are unlikely to be founded by entrepreneurs who grew up or live in San Francisco, New York or Boston.

Third Wave startups are likely to be building innovations to reinvent supply chains in industries like manufacturing, agriculture, energy, transportation, healthcare, fashion and apparel, consumer packaged goods, real estate – huge, global industries in which the opportunity to exploit the latest advances in software technology to increase efficiencies in the conventional economy has not yet been fully realized, if at all.

Some of the reasons Third Wave startups have been unpopular with venture capitalists are:

  • First, generally speaking, they require significantly more capital than the Second Wave, or even First Wave startups.
  • Second, initially, it can appear that they are operating non-viable business models and that they may require more time to mature and experience a liquidity event than venture capitalists can stomach – in fact it can often seem as if they will never become profitable businesses.
  • Third, at the outset it can seem as if such startups will never be able to overcome entrenched norms in legacy industries, overcome existing anti-competitive barriers, or work in partnership with regulators and industry incumbents to achieve mutually beneficial outcomes.
  • The long-term success of Uber, Lyft and other startups like them can help start to change that narrative.

Every Third Wave innovation is about refashioning supply chains

A supply chain is a network of interdependent organizations that cooperate and collaborate with one another to manage the movement of goods, services and information between producers and consumers. The world as we know it would not exist without supply chains. Every Third Wave startup reflects an effort to rethink and reinvent the way the world's supply chains function and operate. These innovations are critical if we are to have any hope of reversing climate change and creating a more sustainable future for our planet.

I am not suggesting that Uber is without blame or blemish. I am not suggesting that it is the very best example of a Third Wave startup. It is not yet clear that Uber or Lyft, or any of their competitors, is good for the environment – I rarely use Uber or Lyft, preferring mass transit whenever I have the choice. I do not seek to dissuade, Mr. Desai and others like him who would critique venture capitalists in general, and Uber's investors in particular. However, while we critique Uber and its investors, let's also demand that regulators and government fix the problems that are best fixed through policy as Third Wave Startups grow, mature and implement new business models. Merely praying for Uber's comeuppance doesn't fix the very real shortcomings of regulatory authorities.

There is much to critique about Uber. Others have done so ably elsewhere. However, many of the issues that Uber, Lyft and some of their early Third Wave counterparts are facing may be emblematic of the same sorts of issues and obstacles that successive generations of Third Wave startups will face. Reinventing the way the world produces, transports and consumes the goods and services that characterize life as we know it is a difficult and complex task that will take time and require many trade-offs and compromises.

Third Wave startups are the startups that excite me most. I believe that supply chain innovation is the foundation for all other sustainable innovation, and that supply chain innovation functions as a powerful economic multiplier. We should celebrate the era in which venture capitalists become more willing to fund startups taking on problems in unsexy but important industries – industries in which entrenched interests profit from inefficiencies that harm consumers and damage our environment. We should encourage, celebrate and champion entrepreneurs of the Third Wave, even while we hold them accountable for their personal shortcomings. We should all be rooting for startups like Uber to succeed.

The post Why you should be rooting for startups like Uber appeared first on FreightWaves.

Image sourced from Google

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