Deliveroo IPO's lesson for digital unicorns: go beyond financials

Chengyi Lin
Chengyi Lin4/16/2021 07:00 AM GMT+08  • 5 min read
Deliveroo IPO's lesson for digital unicorns: go beyond financials
Now may be a good time to pay closer attention to how values are created and how they are then distributed in the ecosystem.
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Since its fumbled March IPO, Deliveroo’s price dissipated like our dreams to enjoy a proper summer vacation on a white sandy beach. Before dismissing this as another idiosyncratic event in the digital start-ups world including Uber and WeWork, it may be time to ask whether the repeated pattern can provide a few lessons that cut across these examples.

For quite a while, the valuation of digital startups have been based on the digital promise: enter with low price and high convenience, capture a large market share, understand the consumers better, deliver on scale (and reasonable margin), and the winner will take all. The concept is an attractive feed forward loop, i.e. Amazon growth flywheel, but the reality is much less simple. For example, even after reaching high penetration of the market, many ride-sharing digital platforms are still struggling to make sustainable profits, including Uber, Lyft, Didi, and Grab. In the e-commerce space, Amazon.com only turned profitable around 2017.

Value does not fall from the sky. Behind every digital platform, there are financial, environmental, and human capital inputs into the value equation. Now may be a good time to pay closer attention to how values are created and how they are then distributed in the ecosystem. This could help us understand the long-term sustainability of some digital business models.

Financial capital subsidising consumer surplus

Deliveroo and other “digital” start-ups provide improved value proposition to consumers — more convenience at a lower price. Before reaching the necessary scale to make the low price sustainable, they often rely on the injection of financial capital to jumpstart their business. Speed is essential in this game. Strong financial capital backing is one of the reasons why Didi successfully drove Uber out of China and Grab, Southeast Asia.

However, this model cannot be sustained. After the price war to gain market share, Didi and Grab have both raised their prices to make their business model more sustainable. The consumer surplus starts to decrease. And this has a lot to do with the hidden factor of human capital.

Human capital sustaining digital value

Deliveroo, Uber Eats, and ele.me, among many other last-mile delivery service platforms, rely on gig-workers to deliver the goods to the consumers. While digital platforms can expand customer reach, increase efficiency, and reduce search costs, the undeniable yet overlooked factor is that delivery workers are providing the services behind the improved value propositions.

Different models are observed across regions. In China, during the initial O2O movement, in order to build the delivery network, Meituan Dianping, ele.me, and JD.com used financial capital to subsidise gig-workers. They also took advantage of the large number of migrant workers in metropolitan areas and offered them attractive packages including healthcare coverage. In the US, Uber and Lyft provided attractive flexible working hours to those who cannot work on a rigid schedule on a full-time or part-time basis. These initial benefits provided by the gig model caused much excitement as workers had an alternative to traditional employment.

Only in recent years were we able to look beyond the excitement and reflect on the longterm sustainability of these models at both individual and societal levels. The debate on value capture has just started. After the California court ruled that gig-workers should be categorised as employees, Proposition 22 was passed by voters to overturn the ruling. The UK supreme court dismissed Uber’s appeal and reaffirmed earlier rulings that drivers are workers, not independent contractors. And Spain passed the regulation that gig-workers should have the same benefits as employees. Although the debate will not change the underlying value, the results will change who captures the value and who carries the costs (i.e. healthcare) — individuals, companies, or society.

Environmental capital as afterthought

Despite best intentions, a shared economy does not always help the environment. Part of the ride-sharing promise is reduced emission. However, as gig-workers get up early to provide rides during rush hour, there are more cars and more traffic jams on the road. Similarly, the bike-sharing business is meant to reduce carbon pollution in major cities in China. However, the disposal of 23 million bicycles from 77 companies in a couple of years has caused substantial waste.

As we continue to explore last-mile delivery, it is important to factor in the environmental impact early. How can we reduce the carbon footprint as well as burdens on existing infrastructure in major cities? How do we reach remote areas with sustainable methods? Carbon reduction needs to be part of the business model instead of an afterthought.

Covid-19 has undoubtedly accelerated the speed and scale of digital transformation. As businesses and society continue to push in the direction of digitalisation, we need to start planning on a hybrid equilibrium, a model in which all capitals are integrated in the business model — financial, environmental, and human capital.

Chengyi Lin is Affiliate Professor of Strategy, INSEAD.

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