I am constantly surprised by the number of companies that intentionally describe themselves as the “Uber of Healthcare”. If you hear me describing your company that way, I don’t mean it as a compliment. What I do mean is some combination of:
- Your ethics and values are dubious
- Your swashbuckling disregard for regulatory boundaries is backfiring
- You underestimated the competition
- Your network effects are overstated
- Your platform governance model is Medieval
- Your business model is unproven
- Your valuation is inflated
Let’s take a more detailed look at each of these seven criticisms. Drawing on my background of 30 years in healthcare, I’ve included examples specifically directed at companies describing themselves as the “Uber for Healthcare”. However, I hope you’ll find the analysis applicable to a much wider range of companies that have described themselves as “Uber for X”.
1) “Your ethics and values are dubious”
Uber is “the most ethically challenged company in Silicon Valley”.
Peter Thiel, Co-founder PayPal, VC, first outside investor in Facebook
Some of the specific allegations that have been made against Uber include:
Lack of concern about passenger safety
Lax investigation of sexual assault allegations
Price gouging during emergencies
Company sexism and discrimination against women
Management immaturity and arrogance
Failing to cooperate with an NLRB probe into labor practices
Sexual harassment by Uber drivers
Misrepresenting income levels to prospective drivers
Displaying phantom “available” cars on its consumer app
Tracking customers’ locations and contacts
Smearing journalists with personal attacks
Beyond the specific allegations, Uber has become a lightning rod for negative press. Its downward spiral from media-darling to media-pinata occurred rapidly. Sometimes the headlines say it all:
We Can’t Trust Uber
Zeynep Tufekci and Brayden King, New York Times; December 7, 2014
Maybe Uber Isn’t God’s Gift To Mankind
Carmen Nobel, Forbes; January 20, 2016
Is Uber the worst company in Silicon Valley?
Dominic Rushe, The Guardian; November 18, 2014
Gizmodo editor Mario Aguilar summed it up: “Uber is run by dirtbags”.
2) “Your swashbuckling disregard for regulatory boundaries is backfiring”
Uber’s approach to local market entry has been “Enter first, ask questions later”. Pennsylvania Public Utility Commission prosecutor Michael Swindler described Uber’s approach: “In my two-plus decades in practice, I have never seen this level of blatant defiance,” pointing out that Uber continued to operate in despite an unambiguous cease-and-desist order.
Uber has attempted to avoid many of the regulatory hurdles that have been placed on traditional taxi operators, for example:
- Classifying drivers as independent contractors rather than employees
- Avoiding local taxes
- Avoiding other costs incurred by incumbent taxis, e.g., sufficient liability insurance, background checks on drivers, medallion licenses
I’m not defending archaic regulatory schemes that favor bloated and lazy incumbents. I am saying that Uber’s approach is backfiring and turning out to be a lousy business strategy. They simply didn’t anticipate the amount of push-back they would receive.
Uber’s regulatory tone-deafness has locked it out of many markets. Michael Carney — a reformed investment banker turned journalist — concluded that “Uber’s current legal battles could lock it out of nearly half of the world’s GDP.”
Uber’s “ask questions later” approach to regulation is particularly unsuited to healthcare. People’s safety and their lives are at risk. Regulatory attorney Bradley Merrill Thompson spelled out five reasons why Uber’s strategy doesn’t translate well to medical apps. Digital health journalist Christina Farr recently wrote an aptly entitled article in FastCompany — “Dear Silicon Valley: There Are No Shortcuts in Healthcare”. She described the headaches and heartburn of three healthcare companies that took regulatory shortcuts — Theranos, Zenefits and 23andMe.
3) “You underestimated the competition”
Here’s a sampling of companies coming out of the woodwork to compete with Uber:
In the U.S., Lyft currently is Uber’s biggest competitor. Lyft recently received $500 million in an investment by GM and has raised a total of $2.0B. Curb is another competitor operating in 60+ U.S. cities.
Some taxi cab companies are revamping their operations and giving Uber a run for its money.
CB Insights reported that at least 30 companies are working on autonomous vehicles.
In China, Didi Kuaidi — Uber’s biggest competitor — claims 83% market share and has raised $4.4 billion. Uber CEO Travis Kalanick recently revealed that “we’re losing over $1 billion a year in China”.
In Latin America, 99Taxis, Tappsi, and Easy Taxi are strong competitors.
Some of the newest competitors are taking bow shots directly at Uber’s weaknesses. New York based Juno and San Francisco based DriverCars are developing driver-friendly business models; Juno plans to offer 50% of its shares to drivers. In Boston Chariots for Women is offering a women-only alternative to Uber.
Uber overestimated the value of being early-to-market and underestimated 1) the range of competitor companies and investors, 2) the ability of competitors to build stronger models after learning from Uber’s mistakes, 3) the vigor of incumbents threatened by Uber.
4) “Your network effects are overstated”
In 2014 Benchmark Capital VC Jeremy Levine elaborated on the “winner-take-all” phenomenon he believed was at play:
“Look, for example, at the ongoing battle between Uber and Lyft…. It’s a high stakes battle: when one company controls a market with strong network effects, they can generate huge profits, retain customers and keep competitors at bay – which usually means the leader takes all.”
As I’ll be explaining, however, world domination and winner-take-all just aren’t panning out for Uber.
Ride-share services need critical mass on both sides of the platform — drivers and riders. If there’s a critical mass of drivers but not one of riders, many drivers will have to wait; conversely, if there a critical mass of riders but not drivers, many riders will have to wait. This is the common chicken-and-egg problem faced by multi-sided platforms. Thus achieving initial critical mass (aka “liquidity”) of drivers AND riders — is necessary to create a viable platform and is valuable to both drivers and riders.
Thus while network effects are strong in early stages of local market development, it gets fuzzy after that. A number of factors then make Uber’s network effects weaken and/or become less defensible:
Regional network effects, not worldwide. IMO, this is Uber’s single biggest misread of market dynamics. We’ve learned that Uber’s network effects occur primarily at a city or regional level. Thus, there are hundreds of individual markets to win, defend, and potentially lose over time — not one big world market.
Switching costs are very low, both for drivers and riders. This diminishes the strength of Uber’s network effects. I can easily have both a Lyft app and an Uber app on my phone and go back and forth. “Wait time too long on Uber? Let’s check out Lyft.”
Uber faces a wide array of capable and well-funded competitors, many with dominant markets shares in their regions; over time — more competitors, not fewer — are emerging (see #3 above). This isn’t the pattern you’d expect if Uber were being successful at creating worldwide network effects; there is no “virtuous cycle” here providing Uber with increasing power and dominance across regional markets.
As NYU Professor Aswath Damodaran foresaw, the market has quickly devolved “into a city-by-city trench warfare among the different players”.
Network effects are mixed — they’re both positive and negative. Ideal network effects consist of having an equilibrium of drivers and riders at any given time. Network effects are weakened by having too many drivers or too many riders at the same time. Too many drivers? Drivers wait. Too many riders? Riders wait. This becomes a much trickier proposition for Uber than simply maximizing the number of drivers and/or riders.
Do riders value other riders on the Uber platform? Yes, up to the point of reaching critical mass. Beyond that point the next rider is someone who is competing for “my ride”.
Same for drivers. Beyond the point of reaching critical mass, the next driver to join the network is someone competing for the next rider.
Do riders value more drivers on the network? The answer up to a point is “yes”, but the incremental value of more drivers diminishes. Sure, I greatly value the wait time being reduced from 30 minutes to 10 minutes to 2 minutes…but beyond that?? Product developer and former VC Sam Gerstenzang capsulized the notion of diminishing returns: “I don’t care if there are 10 drivers or 10,000 drivers as long as they come to my house in two minutes.”
And also as discussed in #1, Uber has become a lightning rod for negative press. This is another negative network effect that will discourage many from trying or using the service.
Surge pricing discourages using the network. Surge pricing is another mixed bag. While it arguably does balance supply and demand, surge pricing should also be viewed as a negative network effect. When prices are high, many riders will simply say: “I’ll wait” or “I’ll walk” or “I’ll try another app” instead of using the Uber network.
Transportation — commodity transactions produce weak network effects. How should network effects on a platform be valued? Earlier thinking (e.g., Metcalf’s Law) focused on the size of the network. More contemporary thinking (Beckstrom’s Law) suggests that value is driven primarily by the value of the transactions enabled by the network/platform.
In many instances transportation is a commodity — people simply want to get from point A to point B. Uber has learned that many customers are very price sensitive and less wowed by the frills or the experience. The availability of many potentially acceptable transportation alternatives again diminishes the strength of Uber’s network effects.
In contrast, consider the strength of network effects held by Facebook. Your network and your friends are not a commodity — they are highly differentiated and customized to you.
5) “Your platform governance model is Medieval”
Despite having the technological makings of a modern platform company, Uber has an old style command and control management ethos.
In particular, Uber treats its drivers like serfs. Modern technology platforms are different from traditional businesses that simply provide products and/or services. They are facilitators of transactions and interactions — value is created by the parties themselves, the platform is simply an enabler.
In her insightful book Peers Inc, Robin Chase describes the increasing importance of achieving “power parity” between platform owners and users: “as the platform gets stronger, it must make overt and significant efforts to continually invest and share power with peer creators”.
This power parity is enabled by the platform governance model — the rules established by the platform owner under which different sides of the platform (drivers and riders) operate and interact.
Chase suggests 5 ways in which platform owners can and should share power and value:
- Permit data portability
- The platform should be an advocate for the peers
- Give peers the ability to communicate with each other and organize
- Share best practices with all peers
- Increase transparency
She goes on to describe how Uber is failing at all of these.
Power parity is much more than basic fairness — it’s an increasingly important business mandate for success. Venture capitalist Fred Wilson paints the way forward: “allow platforms an easy and elegant way to share their equity with network participants so that the broader ecosystem can share in the value these platforms are creating.” As noted earlier, the newly founded company Juno is doing exactly that.
It worth watching to see how this will play out in healthcare. The industry traditionally has had a hierarchical, command and control culture. Expect a lot of experimentation and many failures with platforms in healthcare.
6) “Your business model is unproven”
Uber was founded in 2009. Seven years later the company still is not profitable. Bloomberg reported that “Over the first three quarters of 2015, Uber lost $1.7 billion on $1.2 billion in revenue.”
Business models are necessarily based on assumptions about the market and the future. In Uber’s case, soooo many of their assumptions aren’t working out — assumptions about pushback from drivers, local regulators, national regulators, the press, incumbent taxi operators, competitors, customers; assumptions about network effects and platform governance; assumptions about how quickly their blitzkrieg strategy could work.
Here’s another potential deal-killer to Uber’s business model that no one foresaw — a novel antitrust lawsuit. Uber has insisted that drivers are independent contractors, not employees. A class-action lawsuit is claiming the technology in Uber’s app is being used to illegally coordinate high surge-pricing fares among these “independent contractors”.
How many other potential deal-killers are lurking in the shadows? We don’t know.
7) “Your valuation is inflated”
Uber’s latest valuation of $62.5 B is pie-in-the sky. Let’s consider this from a couple of different angles.
First, Uber the company is flaky and not grounded in the emerging realities of the market (you can revisit the first 6 points above).
More broadly, however, recent market downturns make Uber’s valuation even more delusional. Venture capitalist Bill Gurley is a Series A investor and board member of Uber. Gurley’s must-read, sobering analysis spells out details of recent market events:
“lofty paper valuations”
“massive burn rates”
“low levels of IPOs and M&A”
“reduction in valuation multiples — A high performing, high-growth SAAS company that may have been worth 10 or more times revenue was suddenly worth 4-7 times revenue.”
“mutual fund markdowns”
“an increase in startup failure”
“dirty term sheets”
While you and I don’t know the specifics of Uber’s financings and term sheets, Gurley’s cold-shower perspectives on market downturns could be much worse than he describes. Gurley curiously argues that “the typical Silicon Valley term sheet does not include” dirty terms such as “guaranteed IPO returns, ratchets, PIK Dividends, series-based M&A vetoes, and superior preferences or liquidity rights”. However, recent Fenwick & West analyses document the prevalence of dirty term sheets in recent unicorn ($1 B+ valuations) financings. I’d love to hear Gurley’s candid views on the rationality of Uber’s term sheets.
Gurley also suggests that “the seminal bubble-popping event was John Carreyrou’s October 16th investigative analysis of Theranos in the Wall Street Journal.” Healthcare and non-healthcare companies should expect much higher levels of scrutiny in the future.
Summing up: If in 1996 I described your company as the “AOL of X”, you’d probably have taken it as a compliment; today, not so much. Today, Uber is not a role model for healthcare. Uber is not a role model for any startup.