Is the e-scooter craze more bubble than business?

Jun 21, 2018

Venture capitalists have invested hundreds of millions of dollars in scooters — electric scooters, specifically. On a sunny day in San Francisco, they're clogging every sidewalk. Lime and Bird are the two best-known options. They also operate in Santa Monica, California; Washington, D.C.; Austin, Texas; and Atlanta. You use an app to check out a scooter, GPS tracks your location and you just drop it anywhere when you're done with it. There's speculation that Uber or Lyft will buy one of the bigger companies since both have invested in electric bikes. Bird is being valued at $2 billion. And that's got lots of people wondering why. Paul Kedrosky, with SK Ventures, spoke with Marketplace Tech host Molly Wood about how the scooter investment craze goes back to Segway. The following is an edited transcript of their conversation.

Paul Kedrosky: So Segway, who was in a sense the creator of the e-scooter marketplace, never really thrived and was eventually acquired by Ninebot, a Chinese scooter company which is backed by Xiaomi, which is a Chinese conglomerate manufacturer of all kinds of products, including rice cookers as it turns out, and Sequoia, a well-known venture capital firm who just happens to also back Bird, one of the largest scooter companies here. So this is a whole ecosystem that is built around the scooter market, but in a weird way is built on the bones of Segway.

Molly Wood: Are you saying it's by design on some level? That if you were, let's say, a large investor in Xiaomi that you would then have a vested interest in scooter startups and all of that is OK or legal?

Kedrosky: Oh, it's 100 percent. Just to really break it down here, Xiaomi is walking towards an IPO — the largest IPO this year, over $100 billion valuation. Xiaomi three years ago was considered dead and buried because it was too reliant on smartphones and its sales had slowed down. Well now, 20 percent of their sales and among their fastest-growing categories, it's not rice cookers, air conditioners or smartphones, it's scooters. So they are now showing dramatic revenue growth again, in part on the back of the scooter marketplace. And so, as a result of that, it's in their best interest to continue to drive up the valuation of scooter companies that they've backed through their venture capital arm in partnership with firms like Sequoia, as well as making sure that cheap scooters are populating the U.S. market. Because again, that helps them seed a marketplace that gives them a top-line growth, even if it's not super profitable. And helps them towards this IPO.

Wood: OK, and so then if you also buy the argument that Uber and Lyft and DiDi are in need of, let's say, an additional revenue stream or a supplemental part of their business so that they aren't using cars to go a mile, they're using scooters and bikes instead, then don't you have the venture industry essentially subsidizing a hole in their business models?

Kedrosky: Oh, absolutely. So, you know, we've been talking a lot over the last few years about the eventual arrival of autonomous Ubers and autonomous Lyfts. Well, this is autonomous Ubers and Lyfts. Where's the driver? Who's the driver that I'm paying on a scooter? It's already autonomous; it's me, right? So if you can think of it in those terms, the hole that it's filling is partly the last mile, but it's partly also this idea of sort of semi-autonomous. And the reason why autonomous is interesting for investors isn't because they just think, "Whoa, isn't autonomous cool." It's because you don't have to pay a driver anymore. So I can make money on lower billings than I would if there was a driver. So ignoring that it's a scooter, this is more profitable in theory because there's no driver to pay.

Wood: And the device itself, unlike a car, is pretty cheap to operate.

Kedrosky: Right. It's almost, not quite, but almost a throwaway. With the cost now down under a thousand, under $500 in most cases, this is a commodity.

Wood: There's been this hunch, right, the sense that at the end of the day, this is not really a product or innovation story, it really is an investment story. It is really a venture capital community story.

Kedrosky: I think it's a venture capital community story crossed with a Chinese capital markets story. It's two things happening at once. And in physics terms, those are two giant point masses of capital coming together. So that always leads to, at the very least, entertaining places. So you have a point mass of capital, and that needs to deploy money towards the scooter market or towards anything like the scooter marketplace that's growing and can take a lot of money, and then at the same time you have a giant Chinese manufacturer who needs to drive revenue growth in its ecosystem, and it's found a way to do that.

Wood: What do you think the end result is of all this?

Kedrosky: I think that scooters end up being deployed fairly broadly, but I think they turn out to be a kind of a niche solution and most of them are owned by the Ubers and Lyfts of this world, and it's tightly regulated, and venture capitalists wonder why they got so excited about it because it's not nearly as profitable as they thought it would be.

Wood: What's the most recent corollary to this? This story reminds me a little bit of, except without all of the sort of interplay and the mechanics of the incestuous ecosystem, reminds me a little bit of food delivery apps, where all of a sudden anybody could get venture for that. Is that the most recent?

Kedrosky: Yeah, I think that's actually the closest because it was a similar attempt to solve a last-mile problem. It was a similar attempt to sort of bridge the physical world and the bits world, and everybody came to the exact same solution at the exact same time and deployed incredible amounts of capital. It turned out that consumers weren't really all that excited about it. And once they tried it a few times, they went back to stopping at grocery stores on the way home.

Wood: So what's happened to all those startups, as our cautionary tale?

Kedrosky: It's for the most part been a trail of ruin. There's a long line of bankruptcies in the grocery delivery marketplace, and we're into our third wave of them now. So I'll give the venture industry credit for continuing to experiment here, and I think eventually there'll be some subset of this that will work reasonably well. But the list of bankrupt companies is much longer than my arm. 

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