Winner-Takes-All: When Growing Your Company Is Bad For Business

So, what is this Winner-Takes-All strategy?

It’s a strategy in which a company — often in a new or fast growing sector — uses venture capital funding to rapidly acquire a disproportionately large share of the market. In reality, this means operating at a sizeable loss to push out competition and exponentially grow the company’s user base.

The end goal of this strategy is to become a market monopolist. The monopolist doesn’t compete with other firms to deliver services which is the polar opposite of perfect competition. A monopolist can charge any price and establish a fat profit margin but setting the price too high most likely leads to the customer not buying their service anymore, or their service offering becoming unsustainable for their user base. In the world of food delivery & takeaway platforms, we now see Winner-Takes-All strategists struggling to turn a profit.

Why is “Winner-Takes-All” not sustainable?

With a strategy that requires a monopoly to become profitable, the risks and the costs associated with maturing a business are high. In the past decade, investors were avidly seeking exposure to technological change. As a result, venture capital funds have been seeking investment in growth equity. The investment thesis was based on the idea that tech platforms are driven by network effects, meaning that an increased number of platform users and merchants improve the overall value of the platform. The result? Food ordering and delivery platforms started burning through their cash aggressively with the goal of forcing competing players out of the market. The goal being to achieve exponential growth with a business that isn’t capable of turning a profit on its base unit-economics. Then raising new funds at a higher valuation. Rinse and repeat. This works as long as new funds keep coming in. Some companies make it to the IPO stage and unlock new ways of funding their exploits through equity financing; issuing new shares and selling them. You can see where we’re going with this, right?

Below is an overview of the statistics of losses for some food delivery & takeaway companies using the Winner-Takes-All strategy.

Twelve month trailing net income for Deliveroo (-$356,6 million), Uber Technologies (-$10,062 billion) & Just Eat Takeaway (-$4,007 billion). Source: Yahoo Finance, October 2022

The macroeconomic tide is changing!

It feels like yesterday. Just a year ago, funding rounds were oversubscribed and start-ups were raising capital at all-time high valuations. Now, all of a sudden, the tap is running dry as fear of a global recession grows. In turn, rising interest rates makes it much more expensive to further finance growth at a reasonable (or free) rate and this is hitting tech-stocks extremely hard on the financial markets, as investors take a ‘risk-off’ approach and seek returns on interest markets.

This is disastrous for the “Winner-Takes-All” strategists. As follow-up investments are not coming in anymore, these companies cannot spend as freely as in the past on acquiring new customers. Equity financing is a far worse alternative given the current market on top of that.

So what is the way out? If anything, they need to start caring about cash reserves and start cutting costs to increase their runway and start turning a profit — at all cost. This has caused waves in the food delivery & takeaway market recently with Deliveroo announcing ceasing its operations in the Netherlands and Just Eat Takeaway attempting to sell GrubHub, which they acquired in 2020. In the grocery delivery market, Gorillas announced leaving four markets and laying off 300 workers, just 7 months after raising 1 billion in growth capital.

“The elite charade of changing the world” — Anand Giridharadas

In the next episode, we dive into the WHY. Why is it so difficult for companies with a Winner-Takes-All strategy to suddenly pivot their business model and turn a profit? To answer this question we will dive into the nitty gritty of operating costs and profit margins of restaurants as well as the associated platform and delivery costs imposed by take-out platforms.

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