‘Earlier this week, Deliveroo was reported to be cutting 367 jobs (and furloughing 50 more) from its workforce of 2,500.’ Photograph: Alex Pantling/Getty Images
If any company can weather coronavirus well, it should be Deliveroo. The early days of lockdown saw demand surge for the service delivering food from restaurants and takeaways. The decision by several major restaurant and fast-food chains to shut for weeks during the early stages of lockdown might have dented demand, but as they begin to reopen for delivery – with most other activities still curtailed – prospects would seem bright for the tech company.
The reality looks quite different. Earlier this week, Deliveroo was reported to be cutting 367 jobs (and furloughing 50 more) from its workforce of 2,500. Others seem to be in similarly bleak positions – Uber is said to be discussing plans to let go around 20% of its workforce, some 5,400 roles. The broader UK start-up scene has asked for – and secured – government bailout funds.
Why Deliveroo is struggling during a crisis that should benefit its business model tells us about much more than just one start-up. The company’s nominal reasoning for needing cuts is that coronavirus will be followed by an economic downturn, which could hit orders. That’s plausible, but far from a given.
The financial crash of 2008 – which led to the most severe recession since the Great Depression – saw “cheap luxuries” perform quite well. People would swap a restaurant meal for, say, a £10 Marks & Spencer meal deal. Deliveroo is far cheaper than a restaurant meal for many people – there’s no need to pay for a childminder, or travel, and there’s no need to purchase alcohol at restaurant prices. Why would Deliveroo be so certain a downturn would be bad news?
The answer lies in the fact that Deliveroo’s real business model has almost nothing to do with making money from delivering food. Like pretty much every other start-up of its sort, once you take all of the costs into account, Deliveroo loses money on every single delivery it makes, even after taking a big cut from the restaurant and a delivery fee from the customer. Uber, now more than a decade old, still loses money for every ride its service offers and every meal its couriers deliver.
When every customer loses you money, it’s not good news for your business if customer numbers stay solid or even increase, unless there’s someone else who believes that’s a good thing. What these companies rely on is telling a story – largely to people who will invest in them. Their narrative is they’re “disrupting” existing industries, will build huge market share and customer bases, and thus can’t help but eventually become hugely profitable – just not yet.
This is the entire venture capital model – the financial model for Silicon Valley and the whole technology sector beyond it. Don’t worry about growing slowly and sustainably, don’t worry about profit, don’t worry about consequences. Just go flat out, hell for leather, and get as big as you can as fast as you can. It doesn’t matter than most companies will try and fail, provided a few succeed. Valuations will soar, the company will become publicly listed (a procedure known as an IPO) and then the company will either actually work out how to make profit – in which case, great – or by the time it’s clear it won’t, the venture capital funds have sold most of their stake at vast profits, and left regular investors holding the stock when the music stops.
This is a whole business model based on optimism. Without that optimism, and the accompanying free-flowing money to power through astronomical losses, the entire system breaks down. That’s the real struggle facing this type of company. It’s also why the very idea of bailing out this sector should be a joke: venture capital chases returns of at 10 times their investment, on the basis that it’s high risk and high reward. If we take out the element of “risk”, we’re basically just funnelling public money to make ultra-rich investors richer.
What pushes this beyond a tale that many of us might be happy to write down to karma, though, is the effects it has well beyond the rest of the world.
Tech giants move in on existing sectors that previously supported millions of jobs and helped people make their livelihoods – cabs and private hire, the restaurant business, to name just a few. They offer a new, subsidised alternative, that makes customers believe a service can be delivered much more cheaply, or that lets them cherry-pick from the restaurant experience – many restaurants relied on those alcohol sales with a meal to cover their margins, for example.
These start-ups come in to existing sectors essentially offering customers free money: £10 worth of stuff for a fiver. It turns out that’s easy to sell. But in the process, they rip the core out of existing businesses and reshape whole sectors of the economy in their image. And now, in the face of a pandemic, they are starting to struggle just like everyone else. It’s not hard to see how this sorry story ends. Having disrupted their industries to the point of leaving business after business on the verge of collapse, the start-ups could be tumbling down after them.
If any company can weather coronavirus well, it should be Deliveroo. The early days of lockdown saw demand surge for the service delivering food from restaurants and takeaways. The decision by several major restaurant and fast-food chains to shut for weeks during the early stages of lockdown might have dented demand, but as they begin to reopen for delivery – with most other activities still curtailed – prospects would seem bright for the tech company.
The reality looks quite different. Earlier this week, Deliveroo was reported to be cutting 367 jobs (and furloughing 50 more) from its workforce of 2,500. Others seem to be in similarly bleak positions – Uber is said to be discussing plans to let go around 20% of its workforce, some 5,400 roles. The broader UK start-up scene has asked for – and secured – government bailout funds.
Why Deliveroo is struggling during a crisis that should benefit its business model tells us about much more than just one start-up. The company’s nominal reasoning for needing cuts is that coronavirus will be followed by an economic downturn, which could hit orders. That’s plausible, but far from a given.
The financial crash of 2008 – which led to the most severe recession since the Great Depression – saw “cheap luxuries” perform quite well. People would swap a restaurant meal for, say, a £10 Marks & Spencer meal deal. Deliveroo is far cheaper than a restaurant meal for many people – there’s no need to pay for a childminder, or travel, and there’s no need to purchase alcohol at restaurant prices. Why would Deliveroo be so certain a downturn would be bad news?
The answer lies in the fact that Deliveroo’s real business model has almost nothing to do with making money from delivering food. Like pretty much every other start-up of its sort, once you take all of the costs into account, Deliveroo loses money on every single delivery it makes, even after taking a big cut from the restaurant and a delivery fee from the customer. Uber, now more than a decade old, still loses money for every ride its service offers and every meal its couriers deliver.
When every customer loses you money, it’s not good news for your business if customer numbers stay solid or even increase, unless there’s someone else who believes that’s a good thing. What these companies rely on is telling a story – largely to people who will invest in them. Their narrative is they’re “disrupting” existing industries, will build huge market share and customer bases, and thus can’t help but eventually become hugely profitable – just not yet.
This is the entire venture capital model – the financial model for Silicon Valley and the whole technology sector beyond it. Don’t worry about growing slowly and sustainably, don’t worry about profit, don’t worry about consequences. Just go flat out, hell for leather, and get as big as you can as fast as you can. It doesn’t matter than most companies will try and fail, provided a few succeed. Valuations will soar, the company will become publicly listed (a procedure known as an IPO) and then the company will either actually work out how to make profit – in which case, great – or by the time it’s clear it won’t, the venture capital funds have sold most of their stake at vast profits, and left regular investors holding the stock when the music stops.
This is a whole business model based on optimism. Without that optimism, and the accompanying free-flowing money to power through astronomical losses, the entire system breaks down. That’s the real struggle facing this type of company. It’s also why the very idea of bailing out this sector should be a joke: venture capital chases returns of at 10 times their investment, on the basis that it’s high risk and high reward. If we take out the element of “risk”, we’re basically just funnelling public money to make ultra-rich investors richer.
What pushes this beyond a tale that many of us might be happy to write down to karma, though, is the effects it has well beyond the rest of the world.
Tech giants move in on existing sectors that previously supported millions of jobs and helped people make their livelihoods – cabs and private hire, the restaurant business, to name just a few. They offer a new, subsidised alternative, that makes customers believe a service can be delivered much more cheaply, or that lets them cherry-pick from the restaurant experience – many restaurants relied on those alcohol sales with a meal to cover their margins, for example.
These start-ups come in to existing sectors essentially offering customers free money: £10 worth of stuff for a fiver. It turns out that’s easy to sell. But in the process, they rip the core out of existing businesses and reshape whole sectors of the economy in their image. And now, in the face of a pandemic, they are starting to struggle just like everyone else. It’s not hard to see how this sorry story ends. Having disrupted their industries to the point of leaving business after business on the verge of collapse, the start-ups could be tumbling down after them.