Pando

With its new food delivery service, is Uber biting off more than it can chew?

The only thing that might kill Uber is Uber’s ambition.

By Sarah Lacy , written on August 18, 2015

From The Travis Shrugged Desk

“See you in the trenches.”

I’ll never forget that moment. We were at the 2012 Crunchies just after Paul and I’d left to start our respective companies and Michael Arrington was watching it at home in Seattle on a live stream. Uber was doing well but it wasn’t nearly the company it is today. I still considered Travis Kalanick a friend.

Bastian Lehmann -- an old friend of Paul’s, and by extension, mine, from the UK— had started Postmates. It had bombed in its Disrupt demo the year before, but had found its sea legs in a market that suddenly wanted an Uber or an Airbnb for everything.

Lehman was a fan of Kalanick’s and went up to express his admiration. The Uber founder’s smirky face turned cold, he sneered at Lehmann and said: “See you in the trenches.” Then he turned on his heel and walked off.

When Lehmann first told me about it, I assumed he must have misunderstood the exchange. That surely Kalanick was kidding and had turned around with finger guns and a smile. But no, he was dead serious. How well I knew my “friend.”

When a regular startup bro says that, it’s a little like him saying he’s going to “change the world.” When a “come at me bro!” pugnacious egomaniac-- who would go on to lead one of largest privately traded companies in Valley history says it-- it’s a bona fide threat.

Yesterday, Kalanick more fully delivered on his threat against Postmates— but also against Grubhub and the rest of the overcrowded food delivery market— when Uber dramatically redesigned its app to highlight UberEATS on an equal footing to getting a ride. It used to be buried at the bottom along a lot of other pilot Uber product extensions. Now it’s at the top: You want a ride somewhere or you want food? The message is clear: Uber does two core things for you, not one. The change is being rolled out to users gradually.

Right now, Uber’s food delivery service offers just a handful of restaurants in just a handful of cities. But it’s a direct volley and another huge step towards Uber’s oft-stated goal to move not just people but everything around cities. This is how Travis Kalanick goes through life-- and did even in Uber’s earlier days, before the billion dollar valuation, the warchest of some $6.9 billion in funding, and the self-described war room in its headquarters. “I’ll take that market, and that market, and that legislature, and that political operative…”

I remember when he expanded to Europe in 2011, just 18 months into Uber’s existence and well before he’d even entered most major US cities, or we even knew if the company would be able to operate legally in them. I asked Kalanick why he'd go international already when there’s still so much to do here. “It’s a big world, Sarah, open your mind!” I remember him saying in that smirky, bro’d out way.

But it’s possible for anyone— even a company that is valued well north of $40 billion — to try to do too much.

Uber has dominated— absolutely dominated— US ridesharing. The only reason there’s even a strong number two in Lyft is because the market is just so huge and Uber keeps shooting itself in the foot PR-wise. Because that’s the thing-- Uber’s product is so great, people will still use it even when there are weekly reports of assault and abuse and convicted rapists skirting background checks on the service. That’s created a culture within the company of birthright and invincibility.

Even doing the worst things we could possibly do to drivers, riders, the press and anyone who gets in our way doesn’t hurt us! We’re golden!

Now, far be it from me to offer advice to Uber...

This is-- after all-- a company that I’ve expressed serious concerns about, whether it’s their “eh, maybe” attitude towards comprehensive background checks, their utter disdain for their own inconvenient and expensive drivers whom can’t wait to replace with self driving cars, or -- yunno-- threatening my family.

And I get that this company– with its $7 billion (and counting!) cash reserves, insane “we’ll pay no matter what you do to us or how you surge us!” customer retention, and pugnacious “we can’t lose" attitude –doesn’t listen to anyone’s advice ever, whether that person be a board member or much despised me.

But still…

Many a Silicon Valley giant that has come before it has been humbled at three things:

-- Capricious expansion into a new business that isn’t its core

-- Believing that because it absolutely dominated one category it can dominate any category

-- Believing it can do something better than competitors because, Well duh! We are Amazon/Google/Microsoft/Facebook/Fill-in-the-blank.

Here’s where Uber is now: It is reportedly valued at near $50 billion. That’s more than two and a half Twitters or two LinkedIns. And that’s not because of the business it does now-- which is impressive but not $50 billion impressive. It’s because of the growth potential. Specifically the growth potential it must capture before Uber should try to go public. The public markets-- after all-- aren’t seeing near the premium prices the late stage private markets are.

There are two ways Uber shows growth commensurate with that price; two promises they’ve essentially made the newest investors. The first is about rapid international growth. But in some of the biggest markets Uber is being challenged by strong local incumbents backed by even bigger pockets including some of the largest Asian super unicorns and large US hedge funds.

In China in particular, Uber is showing growth in rides and market share against the massive market share leader Didi Kuaidi. But Uber doesn’t have the homefield advantage or first-mover advantage, so that growth is coming via massive, insane subsidies. The exact strategy everyone in startup world decries… except when Uber does it. People familiar with Uber’s plans say that if the rate of subsidies continues, Uber could lose as much as to $1 billion a year in China. Even if that number is inflated, it’s surely hundreds of millions of dollars in Chinese subsidies alone, chasing growth in a market it will never win.

And now, this. Aggressively taking on the food delivery space in the US. One that is, yes, about sending things around cities, but is fundamentally a different business. Food delivery can have bikes and couriers who don’t want to speak to people and have totally different insurance issues. It’s not impossible, but learning a new business and out-slaying others in it certainly isn’t a lay-up anymore than it was a given that Facebook could shrug and add a new features to destroy Twitter, Foursquare, Quora, and Snapchat. (None of those happened, and Facebook seemed genuinely shocked.)

Sometimes platform isn’t everything. And sometimes a company-- even one valued in the hundreds of billions with much bigger resources -- simply can’t win every battle. The problem is Uber doesn’t know or believe that yet. And it’s getting paid in bucket-loads of cheap capital to keep buying new markets, new growth, and new future options to grow into that heady price.

But Uber is on a price prespice. One false move…

And this is a famously libertarian company that has already attracted the attention of lawmakers-- whether it’s Al Franken questioning its use of customer data or Hillary Clinton raising concerns about contractors. Just because it’s kept growing in spite of all its safety and PR missteps doesn’t mean there isn’t a lingering stigma.

Let’s not forget-- this is at its core a company that prides itself on security and safety which can’t go a week without a scandal. After one of the largest ones in Delhi, it came out that the company had a scant four people working in its local Delhi operations. A proudly “lean” operation… that’s raised some $7 billion in capital.

There’s a problem when a company raises billions of dollars on a growth proposition that it only puts subsidies-- not actual people or solid processes-- behind.

On one level, I’m heartened that the latest expansion only involves ferrying quesadillas from place to place, not people. Still, for Uber to think it can dominate every international market the way it has in the US by way of tiny skeleton staffs, and now move a few pixels and dominate food delivery, seems like a crazy distraction, considering its still growing core business that doesn’t exactly grow itself.

What’s interesting is Lyft and Postmates aren’t getting dragged into the same battle the way LivingSocial did following Groupon around the world. Despite raising $1 billion Lyft has steadfastly determined it will focus on the US market, and Postmates has long held to a policy of protecting margins and growing at a deliberate sustainable pace. Both are smart strategies. Uber wins if Uber can drag everyone else into its unsustainable cash burn race. If a dozen other companies who are good at specific logistics or specifics locales hold to their own playbook, the combination of them all may be far more devastating.

Will Uber go under? Hard to imagine. But an up round on this price is hardly a given.