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Nikkei Business Daily August 24, 2018

Scooter Explosion: Solution or Disaster

With Uber, Lyft and several other global competitors at the forefront, venture funded disruption of the transportation industry continues at a rapid pace. As the foundational ride sharing marketplace matures, a natural and rapid development of adjacent businesses follows: from moped services like Scoot, to car-sharing services like GetAround and bike-sharing services like JUMP.

In 2017 a new wave of electric scooter companies were added to the ecosystem, with companies including Lime, Bird and Scoot raising significant venture capital.  Just this spring, in what literally feels like an explosion from the sky, thousands of scooters hit the San Francisco sidewalks. This adjacent market launch has three characteristics which, together, make for an unusual situation: 1) extremely rapid deployment of a high-volume of low-tech scooters with minimal planning and controls 2) an almost violent community backlash and immediate regulatory backlash and 3) a very divided investment community reaction to the fact that non-proprietary, asset-based businesses have been able to raise such large sums of money at extraordinary valuation multiples.

The scooter development is highlighting the fact that there is still an unmet need for on-demand, inexpensive transportation options in highly dense and trafficked urban areas. It appears that scooter rides are particularly convenient for city residents who don’t own cars, can’t afford hourly car rental or car-sharing services, and have impromptu transit needs.

But local residents are up in arms over what many are calling a “scooter disaster.” The machines quickly littered sidewalks and inexperienced riders continue to pose a danger to other pedestrians, bikers and themselves. In addition, early analyses suggest that these companies will not be the earth friendly, sustainable alternative originally imagined, due to the need for frequent maintenance, retrieval and charging.

Meanwhile, to avoid the years of run-around that local government’s experienced trying to get ahead of local regulation in car-sharing and home-sharing services, SF has banned all but a handful of vetted and regulated services.  City officials are developing programs to ensure that the services are carefully controlled, monitored and contributing local positive externalities, from pure revenue participation to social community engagement.

Amidst an evolving myriad of stakeholders, investor reactions are varied.  Many of the largest and most well known venture firms have made very large investments in these companies, not wanting to miss out on the next Uber or Lyft. Others are wary of heavy losses associated with a scooter war from which only two or three are likely to succeed. Others are questioning whether there will be extensible demand beyond a handful of dense, temperate urban locations to justify the extraordinary amounts of capital raised and associated valuations.

Perhaps what is the most interesting angle to consider as we observe the scooter arms race from outside the ring, is the evolving nature of two-sided markets, particularly when they emerge alongside scaled adjacent markets.

It now seems obvious that start-ups pursuing leadership in emerging marketplaces should be focused on two critical industry attributes: 1) those markets in which they can “variabilize” fixed costs like Uber does for cars and AirBnB does for residences and 2) those markets where customers use their commodity service on an ad hoc basis. We have plenty of evidence from the bounty of failed startups in which customers and service providers are ultimately incentivized to establish a relationship off of the platform given the nature of recurring, quality service (such as Kitchit for home chefs, or Shuddle for driving kids.)

Since Uber and Lyft have not only achieved mainstream adoption across local communities, but also developed core competencies in selling additional local services (from meal delivery to package delivery), they are in an ideal position to either replicate the services or simply acquire and integrate into their existing offers. Just as Amazon expanded to sell 3rd party products as a two-sided market and then eventually used its scale leverage to acquire adjacent companies like Zappos and Audible, Uber and Lyft both applied to operate their electric scooters in San Francisco this summer and Uber made a sizable investment in Lime.

Perhaps the less obvious lesson for two-sided market incumbents and new start-ups in the sharing economy is to recognize that the best business model for adjacent emerging marketplace start-ups is early exit to the incumbents. If the incumbents can execute M&A before the newcos have actually demonstrated scaling, than the acquisition price will make sense.  Given the multi-billion valuations for the current cohort of electric scooter companies, they may have passed what is reasonably affordable and inspire the incumbents to develop their own. In sum, I wonder how the scooter services will fare in less friendly weather.

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