Several tech firms have benefited from the coronavirus. Amazon has made significant gains, as have streaming and video conferencing platforms reminiscent of Netflix and Zoom. But the pandemic has exposed the shaky foundations of many other platforms that market themselves as tech firms and enjoy the high valuations that come with that label.
The biggest losers of the pandemic include ride-hailing applications: Uber, To catch (in Southeast Asia), Ola (India) i Didi Chuxing (China). People just don’t take taxis. Office sharing firms like WeWork (which, in fact, has already had problems) are also in trouble practically no occupancy. An analogous situation occurs in the accommodation industry Airbnb and start hotel reservations Oh.
As a result, investment in technology firms is falling. But at the same time, it opens the way for the few winners to purchase larger stakes from those that are struggling.
Naked swimming
Two many years after the collapse of the web industry, one other crash is likely in the tech sector. As with the rise of the dot-com bubble, enterprise capital funds abound fueled speculation and encouraged investors to put bets on the next Google or Amazon.
As Warren Buffett once said: “Only when the tide goes out will we see who swam naked.” As a result, the tide has turned and many startups touted as disruptive technology firms are in serious trouble.
The only upside right away is how much money many startups must survive failure. How long they last will vary. WeWork will struggle to survive the yr without further investment. Meanwhile, there are ride-hailing apps well financed but he may find this yr very difficult. They are under pressure to chop their losses and break even, but that goal is now even further away.
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Recently, a mysterious Airbnb appeared raising money at great expense. This suggests that investors perceive significant risk to the business and due to this fact money is tight. The proposed entry for this yr is now valid highly unlikely.
The fundamental problem with many startups that are struggling today is that they give the impression of being like tech firms but are just using recent technologies to disrupt existing industries. Uber follows the dynamics of the taxi industry, WeWork follows the dynamics of the office rental industry, and Airbnb follows the dynamics of the accommodation booking industry.
The winner takes all
Facebook, Amazon, and Google are different in that all of them began recent industries. They created network effects – the more people use the platform, the higher it becomes – and they benefited enormously from it.
Network effects can create a winner-takes-all situation. The more of your mates and colleagues who use a given social network, the more likely you are to affix and use it. Similarly, the more suppliers compete with each other to sell on Amazon, the more selection and competitive prices are offered to customers. More customers attract more sellers.
At firms like WeWork, it’s harder to see network effects – there are few reasons for loyalty and barriers to entry for competitors are low. Even with taxi ride-hailing apps, where Uber pioneered, all taxi firms now have an app, and the network effects are quite limited once a certain level of responsiveness is achieved – customers and drivers can easily switch to competitor apps.
Similarly, accommodation booking sites can now be accessed in the same way via the app, and it is very easy to match accommodation availability and costs. Airbnb was an early player in the home rental market, but the sector has been hit by Fraud and security issues.
Therefore, all these markets will remain very competitive in the long run, which implies low margins and low profits. It’s no surprise that share prices of passenger transportation firms have fallen by half. In these industries, technology is now not a competitive advantage because just about all competitors now have similar technology. Technology is simply infrastructure.
Cash flow and consolidation
Stock exchanges are uncertain and Airbnb does canceled its initial public offering. Appetite for recent listings is weak and prone to remain so, suggesting that it’ll be difficult for enterprise capitalists to exit their investments. If there is no way out to make money, why invest?
As a result, there’ll likely be a reduction in investment in technology startups. There will likely be much less money available and enterprise capitalists will have to be more careful in selecting where to speculate.
Meanwhile, we are already witnessing the entry of real technology giants. For example, Amazon was the largest investor in struggling UK takeaway app Deliveroo’s last round of collection. This month also saw the merger of two other food delivery firms – with the European Takeaway.com, fresh after purchasing Just Eat, now purchase of Grubhub based in the USA. We can expect more consolidation in the coming months.