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Uber And Its FOMO Effect On Startups

Uber’s success is the envy of every other entrepreneur across the globe, but the reality is, not every startup can be an Uber. While simple on paper, Uber’s business model is extremely difficult to emulate. Startups see in Uber a fairytale ending they think they can replicate simply by building a slick app and crowdsourcing a work force. What they find is that their efforts to copy Uber’s path to success instead lead them to failure by undermining their own business plan. Otherwise promising startups fail to look at the logistics of their business and the services they provide, and instead, fall victim to FOMO, a fear of missing out on becoming the next Uber.

This is Uber’s FOMO effect and it’s driving a generation of startups to ruin. While the Uber model is informative, good time-tested business sense takes startups further. Creating value in the market and knowing what parts not to reinvent are two sides of the same coin for any disruptive business. Here’s how Uber succeeded and how startups today need to take these lessons with a grain of salt.

Being Uber

Uber’s business model cracked the insular taxi market wide open. Taxis as a service were slow and unreliable, while the taxi industry was guaranteed a virtual monopoly by government regulation. It was a market ripe for disruption. But before Uber took on the taxis, it first focused on the black car market, where it could focus on figuring out logistics such as a pricing model and the necessary workforce to support it. Then, when it came time to move into the taxi market, it was as simple as providing an easy-to-use app, low prices and an army of eager drivers to push out competitors – remember Sidecar? – that thought first mover advantage would be enough to win.

One of the integral aspects of Uber’s story was its ability to take advantage of the value created in the market – whether they created that market or not. Uber was front and center to offer alternatives to hailing a cab. They handled any negative press by turning their narrative into a story of an innovative underdog versus the stodgy old system and raised astounding amounts of capital that allowed room for the last part of their model – subsidizing costs until the company could dominate markets and pivot this dominance to tackle bold initiatives around food and e-commerce logistics, not just ride sharing for people. Uber’s recent sale of its operations in China to Didi Chuxing, for example, gives Uber a 20 percent stake in Didi Chuxing, which is currently valued at $36B and has the backing of Chinese Internet giant Alibaba.

FOMO and Failure

Every day, startups attempt to emulate Uber’s path to success. Wanting to capitalize on new markets, they start small, raise money and scale up. As unsustainable costs creep in and their small-scale success fails to translate to larger markets, many startups scale down or fail. Farmigo serves as an excellent example of what can go wrong. This farm-to-table VC darling now serves only restaurants instead of becoming the online farmer’s market it envisioned. Transportation costs made their model unsustainable and, unlike Uber, they didn’t have bottomless pockets from which to subsidize these costs – at least until scale and market dominance could allow them to recoup costs in other ways.

What so many startups miss about the Uber model is that Uber isn’t seeking to replace an experience like Farmigo aimed to replace a trip to the farmer’s market. Uber is the experience of getting a ride. Uber doesn’t have transportation costs. It is transportation.

Downfall of Startups

As with Farmigo, transportation becomes a top-heavy business expense for many startups. The costs involved in transportation – paying drivers enough while keeping prices in the range consumers are willing to pay – leads many new companies to hemorrhage money just to meet demand. One often overlooked piece in the startup universe is that online shoppers overwhelmingly choose free or low cost shipping rather than paying extra to get their order the next day.

The Uber model monetized the demand for immediate rides. Startups that deal with products have yet to create demand for immediate delivery. According to the Internet Retailer’s 2016 Delivery Survey, 93 percent of respondents said that half or more of their customers choose standard or free shipping. Until a startup can upend this trend, the answer is to control shipping costs.

Wheels Don’t Need Reinventing

Startups don’t need to reinvent the transportation wheel. Today’s shipping infrastructure grew by answering the same questions facing new companies today. Maximizing the value of each trip and each mile traveled means the difference between success and failure.

Two main lessons stand out when looking at the transport industry. First, centralized distribution allows each driver to boost the number of deliveries made with each trip, something called route density in logistics parlance. Think FedEx trucks loaded with a variety of shipments instead of stopping back at the warehouse between each delivery. This reduces both traffic congestion and greenhouse gas emissions as well as saving on fuel costs. The second lesson to take from the shipping industry is to increase revenue per stop. This is easier when larger items are being shipped.

Some entrepreneurs have taken the Uber delivery model and applied it to the shipping industry. With easy-to-use apps to connect carriers and consumers, it makes it possible to outsource transportation needs. Customers enter the details of what they need shipped and carriers bid on jobs, from local to over-the-road. Carriers use the apps to fill whole trucks or just pad out their empty space on a run they are already making.

The app and technology is the easy part. Many of these start ups cannot even spell SEO or PPC. It is those companies that are the ‘night of the walking dead’ in logistics. Most also do not have route density or high revenue per stop. Without one or the other, there is literally no hope. One way to drive higher revenue per stop is serving more than just local. However, with weak marketing infrastructure they have no chance.

Make It Or Break It

Costs catch up quickly with startups trying to make it in today’s economy. Stretching every dollar means looking closely at transportation costs. The easiest way for new companies to make those delivery dollars count is to let carriers bid on the jobs or accept offer prices. This transport-sharing economy could mean the difference between balancing the books or unwillingly taking that last step of the Uber model, having deep enough pockets to fake it until you make it.