The last decade has been the decade of the gig economy. Companies such as Uber, Lyft, Doordash and Airbnb that occupy this space have had access to unprecedented amounts of venture capital that has fueled tremendous amounts of unprofitable growth. Airbnb has raised $4.8 billion dollars since inception and Uber has raised $24.5 billion dollars since inception, neither has been consistently profitable. These companies have hit many speed bumps along the way, some as a result of their - grow at any cost attitude and other regulatory pressures that have altered overly optimistic profitability predictions and valuations. However, COVID-19 and the impending fallout from this crisis is the ultimate test of the robustness of their business models and valuations they command. It is nothing like these companies, let alone anyone in the world - perhaps with the exception of Bill Gates, ever imagined in their wildest dreams was coming.
The platforms that these companies have created are essentially quasi economies. They comprise of owners of assets such as cars or houses that make up supply and people that want to use these assets in some way or form that make up demand. Prices are set, much like any other economy, through the interaction of demand and supply. Liquidity is the lifeblood of an economy, but these platforms aren’t born with liquidity. Liquidity is purchased through an elaborate and expensive scheme of subsidizing both the supply side and demand side of these markets, forcing fruitful economic exchange and changes in consumer behavior.
The upside of spending so much money for growth is the theory that once some liquidity is infused in these markets, network effects take over and attract more people to these marketplaces. These companies are brokers of the digital age, they own none of the wares that they ply. Revenue and profitability are generated by taking a cut of every economic transaction that these platforms enable and costs are kept to a minimum. Fixed costs mostly amount to the salaries of full-time employees and office leases and any other costs are highly variable, fixed assets that require debt financing are close to non-existent.
The biggest assets that these companies have, in addition to the technology behind their platforms and the brands that they have built, is a highly liquid platform where economic transactions take place. For these companies, the platforms or more importantly the liquidity in the platforms is the proverbial golden goose, the hard-fought and expensive gift that is meant to keep giving. The cost of building the platform and artificially creating liquidity was meant to be a one time expense, an exercise in deploying growth capital to build an economic flywheel that would generate revenue at very low marginal costs. An attempt at applying the software playbook of platformization and zero marginal cost growth to the real world, if you will.
The impact of COVID-19 has resulted in not only the actual economy grinding to a halt but a complete erosion in demand in many of these quasi economies. Food delivery seems to be a holdout, Uber Eats has seen a 30% jump in new sign-ups. Uber’s ride-sharing business, on the other hand, has seen a 70% decline in bookings on its platform in Seattle, a city especially hit hard by the virus. Airbnb has also been hit hard, bookings have fallen off a cliff with Europe seeing an 80% decline. The very same structures of these companies that allow them to bring costs down dramatically with a decline in demand present a unique set of challenges when there is an inevitable economic recovery.
Unlike a conventional asset-heavy company like a hotel that owns or leases all its supply, these platform companies don’t own any of the supply and as a result, can’t guarantee its existence on the platform when demand eventually recovers. The assets that make up the supply on the platform, while not on the balance sheet of these companies, reside on someone’s balance sheet. In the case of Uber, these assets are typically cars that individuals have bought with the explicit goal of using on the platform to make a living. In the case of Airbnb, these are homes bought by individuals to rent out to either make their primary living or to make supplemental income. None of these car loans or mortgages are going to pay themselves, they still need to be serviced. This has already set in motion an erosion of supply from these platforms.
In the case of Airbnb, there seems to be clear evidence of a flight of supply from the platform. Many major cities have seen a spike in suspiciously well done up fully furnished long term rentals suddenly appear onto the market. Uber and Lyft drivers are reporting total losses in income from the platform and while there is no clear evidence of them finding other employment (maybe it doesn’t exist) as in the case of Airbnb owners, it is inevitable that some of the supply disappears from Uber and Lyft’s platform too. The simultaneous drawdown of demand and supply is a death knell for these platforms, it can lead to a death spiral that is the end of the highly-priced liquidity that is so important to the economic flywheel that these companies have built.
While demand may take its own time to come back, supply can be preserved on these platforms, albeit at a cost. The cost is giving the actual asset owners economic relief - money that they would have otherwise made on these platforms that allow them to sit on the sidelines and wait until demand returns to these platforms. These platforms are currently looking to the government and lobbying it to rescue its distressed supply. However, any action from the government is a broad response geared towards rescuing the economy as a whole. No doubt, some of these actions will help these asset owners. But what these platforms need is a targeted response.
These platforms owe their liquidity to a dedicated set of individuals that make their primary living off these platforms. While these companies might claim otherwise, it is an open secret that these individuals make up the backbone of their supply. These individuals are hurting the most as a result of the current crisis. For most of them, these assets reside on their personal balance sheets, they can’t hide behind an LLC and shield themselves from filing for personal bankruptcies. Unfortunately for them, the government isn’t handing out stimulus checks based on how much outstanding debt each individual has. These individuals - the most loyal supply on these platforms - will be wiped out by this. These companies need to utilize the reams of data that they have to identify this supply and transfer money from their cash reserves to keep them afloat. This would preserve their shared economic future. In the absence of this targeted bailout, they risk killing the golden goose and ending up with empty marketplaces devoid of any liquidity.
Airbnb seems to have woken up to the fact that it needs to step in to preserve supply on the platform or risk losing liquidity forever. It has pledged $250 million to pay hosts for missed or canceled bookings. Furthermore, it has pledged an additional $10 million to help ‘super hosts’ on its platform - these are presumably the owners of the backbone of supply on its platform. Admittedly, Airbnb is the first to do this because, given the nature of the rental market, it will be much harder for Airbnb to regain lost supply than it will be for a platform like Uber.
It is, of course, unreasonable to expect these companies to own the entire risk on all of the supply on their platform in economic downturns. This would erode most of the advantages of their current business model and cost structures. A fine balance has to be struck - targeting the right supply with the right amount of money to preserve the right amount of liquidity. How they might arrive at this balance, is a question for another day. The fact remains, however, that they need to think about and act on a targetted bailout of supply.
These companies though, are here to stay. They still have tons of unrestricted cash on their balance sheets - Uber has $10billion and Airbnb has $3 billion. They will surely weather this crisis that, from the looks of it, is far from over. The crisis, however, has exposed more chinks in the armors of these companies. The long-touted cost advantages over conventional asset-heavy businesses that have led to almost SaaS like multiples on valuations are looking, if not already, all the more suspect.
Much like actual economies have central banks that look after the health of the economy, provide liquidity and backstop debt to prevent a complete implosion in troubled times, these platform businesses will have to step in to do the same for their quasi economies. Fortunately for central banks, they have a whole bunch of tricks up their sleeve to generate the money to help during times of crisis, one of which is literally printing more money (The United States Federal Reserve is the only central bank that can do this without much consequence). Unfortunately, platform companies aren’t as fortunate. Helping to preserve liquidity comes at the cost of reduced profitability. This only means one thing for these companies, most of which have never been profitable ever - the long road to profitability just got a little longer.