In 2013, venture capitalist Eileen Lee coined the term “unicorn” to describe a private company that has reached $1 billion in valuation. The term caught on quickly, ostensibly because the number of unicorn companies has grown exponentially in the short time since the terms creation. The crux behind the adjective was that these newly minted billion dollar companies were something of folklore. Extremely rare, overcoming seemingly impossible odds from concept to thriving existence. Discovering a unicorn company in its infancy was every investors dream. While initially used to describe a handful of companies, it is now not as rare as it once was. Uber, AirBnB, and WeWork are among the more than 300 unicorn companies around the globe. Why was something that was once so scarce now increasingly abundant? Perhaps it is because some of the companies, such as Lyft and Uber, are unsustainable and are sucking the lifeblood from the very people who are meant to benefit from the disrupting technology: the drivers.
Gig economy apps were supposed to be the future. Many people daily are looking for ways to make more money. This leads them to wonder, how much money can I make driving for Uber or Lyft? Uber’s propaganda machine proudly proclaimed that you could be your own boss. This marketing focus is not haphazard. In their SEC filing, they indicate that one of the biggest risks to their business is if their drivers were classified as employees instead of independent contractors. They recognize that a shift in classification would “incur significant additional expenses for compensating drivers.” These concerns are becoming a reality in New York, which recently has set a minimum hourly rate at $17.22 for drivers. Undoubtedly, they are going to fight tooth and nail to make sure this doesn’t become a trend that spreads across other municipalities. The problem lies in the fact that these cheap rides are unsustainable. In the 2018 MIT study titled “The Economics of Ride-Hailing: Driver Revenue, Expenses, and Taxes laid out just how bad it is for drivers of these unicorn darlings. They found the median profit from drivers to be a minuscule $3.37 with 74% of drivers earning below minimum wage in their state. Additionally, 30% of drivers are actually losing money once vehicle expenses are included. Yikes. Talk about bad PR. One would think that this kind of negative attention would incite action to raise rates. In this dystopian present day work environment, the opposite actually happened. Recently, in Los Angeles Uber slashed their per mile rate from the already low $.80 to an abysmal $.60, a 25% drop.
In their filing with the SEC, Uber surprisingly disclosed a concern that that has grown more and more over the years: it admitted it may never become profitable. This reluctant insight may be damage control for the impending collapse of the company. They are nowhere near profitability. Drivers are getting absolutely shafted with their ever decreasing pay, their legal fees are astronomical, and the saving grace of self-driving cars is many years away from fruition. Despite these concerns, Uber has had no problems raising money from venture capital over the years. The valuation doubled year after year. Now with its IPO it is looking at a near $100 billion valuation. This may be be their final swan song, again screwing over the common man who will finally have access to investment. Unsophisticated buyers will fail to realize that institutional investors have been subsidizing these too-good-to-be-true cheap rides for years. Once this epiphany is realized, the house of cards will fall. But not until all of the smart money has made their exit unscathed with a healthy profit, of course.
Where did all of this money come from? Low interest rates from the Federal Reserve is the primary cause of this unicorn bubble. Money can flow to risky investments because the cost of money is so cheap. The risk-free, real rate of interest is essentially zero. Why not throw money at uber-risky investments? In Texas Hold-em poker, one is much more likely to go all in on a hand if there was no buy in. That’s essentially what money has become in this decade long bull run in financial markets. Play money. Monopoly money. The similarities between the dot com bubble and the unicorn bubble are eerily similar. Some people have predicted that the end of this bull run will end with Uber IPO’s. That day is (almost) here. I expect a significant drop in Uber’s price once it hits the market, just like what happened to Lyft. This could spell trouble for the market at large. Only time will tell.
Like real life, the truth about these ride-sharing unicorns will seem obvious after the fact. In nature, unicorns aren’t real. The valuations of these companies are just as fraudulent. They are the horse with a faux horn attached that calls itself a unicorn. Though, the problem with ponzi-schemes is that they can go on for very long while before facing repercussions. Look at Bernie Madoff. If he hadn’t confided in his own son, who knows how long he could have continued getting away with it. With Uber and Lyft, they are scamming in plain sight. The drivers have been crying afoul for years. Yet the echo-chamber of Silicon Valley continues to charge ahead at the expense of working class people. The question becomes, will Dara Khosrowshahi have his Elizabeth Holmes moment? At what point does innovation and disruption become immoral deception bordering on outright fraud? When will the lies and misdirection about driver compensation be addressed by investors?
While it is risky, you can make money off of the Uber and Lyft scams. Look into shorting the stocks or buying put options. Lyft is currently trade-able, Uber’s IPO date will be announced soon.