Commentary: Multibillion-dollar wizards – how COVID-19 is exposing what’s behind the curtain

Platform giants should be thriving where the coronavirus have pushed consumers and merchants to embrace e-commerce, yet many are laying off staff, says Jonathan Chang.

SINGAPORE: In the Wizard of Oz, Dorothy sets off with newfound friends to find the elusive Wizard of Oz, a being said to be so powerful, he could help them out with their troubles and grant them their biggest wishes.

I was reminded of that when reading the news last week.

Even as we live in uncertain coronavirus times, an unusual set of paradoxes unfolded, which will have huge reverberations for workers and economies across the world, from Silicon Valley to Singapore.

The first is that while food deliveries have witnessed an unprecedented boom as restaurants shuttered and households stay in, local food delivery platform Grab claimed it was losing money.

We heard it first hand from the company: Grab’s total revenue was “lower than it used to be pre-COVID-19,” said co-founder Hooi Ling Tan in news reports.

We also saw some corroboration of this across the Pacific Ocean, where Uber, a shareholder of Grab, booked a loss of approximately US$2.1 billion from its investments in Didi and Grab.

Deliveroo just last month laid off 25 per cent of staff in Singapore.

READ: Commentary: This COVID-19 outbreak, corporate leaders should acknowledge they don’t have all the answers

The second was AirBnB’s announcement of some 1,900 job cuts,  a quarter of its global workforce global, including some in Singapore, barely a month after the platform had raised US$1 billion in a new round of funding in April.

Interestingly, Airbnb is not the only game in town raising capital yet letting people go during this pandemic. Big brand names like Expedia raised US$3.2 billion in end-April yet announced a 12 per cent cut to jobs.

Even Uber, which has planned a US$900 million bond launch in its bid to acquire competitor GrubHub, announced a second round of job cuts this month, totalling 6,700 roles.

If tech giants are staging takeovers and receiving huge infusions of cash amid government aid to keep workers employed, why are they laying off staff?

THE CORONAVIRUS SHOCK

If the 2010s was the story of the astounding rise of tech start-ups to become the industry behemoths they are today, the narrative of the 2020s may well be that of their great unwinding.

To be fair, the coronavirus pandemic has taken every imaginable business by surprise. The threat of a global pandemic was not something business school teaches you or a risk factor typically asked about at a start-up’s fundraising pitch. Business continuity was simply a huge blindspot.

Listen: How many stars will you give Singapore F&B this COVID-19 season?

READ: Commentary: COVID-19 will reshape the Singapore office property market outlook

For a long time, the main business problem facing many high-profile start-ups had been how to grow quickly and snuff out rivals. The abundance of cheap venture capital injections fuelled price wars aimed at acquiring consumers and undercutting rivals.

So it’s no surprise GrabFood, GrubHub and UberEats are losing money on delivery orders or barely breaking even today.

While food delivery apps in Singapore have come under heavy criticism for charging eateries and hawker food stalls high commission rates during this circuit breaker, the reality was that these fees could barely cover how much deliverers, the scarce resource in this competition among platforms, were compensated.

Now, when demand is brimming but almost every delivery can be loss-making, that focus has been their Achilles heel. UberEats has seen a 50 per cent jump in sales this first quarter, yet made even greater losses of US$313 million.

READ: Commentary: I miss my regular bar – but I accept I might never get to return, even after circuit breakers are lifted

READ: Commentary: We are becoming a 'dabao nation' – why does it feel like a bad thing?

THE COMING BUBBLE BURST

Some will argue all COVID-19 has done is accelerate this winnowing process where intense competition among platform firms in the same space was bound to lead to natural attrition at some point.

My view is that this dynamic between cash-rich venture capitalists and start-ups has been an unhealthy one from the outset, and a market correction is long overdue. The bigger question is whether these firms can retool their businesses quickly enough to avoid a bubble bust.

That adjustment has been rapid. Today, many VC firms, once infatuated with the idea of growing unicorns, even decacorns, with high sky-high valuations, have sobered up to the risks that recovery will not be forthcoming, and are more reluctant to pump in more money to rescue companies.

Is it any surprise therefore that VC-backed firms have come under greater pressure to focus on profitability instead of expansion? Those days of being cash flushed, of having a free hand to hire the best talent and raise more money from other investors to drive up valuations, are over.

Softbank-backed firms in particular are likely to come under greater scrutiny after a high-profile ruckus over WeWork last year opened up questions around the Vision Fund’s mandate.

Now WeWork looks more like a cautionary tale of what happens when a charismatic founder is able to artificially inflate a company valuation despite its shaky foundations. It has even backed out of a fifth of Hong Kong leases.

Let’s not forget COVID-19 could delay IPO dates, meaning investors cannot recoup their investments any time soon.

READ: Commentary: The curious case of slick start-ups that tout billion-dollar valuations then rapidly collapse

READ: Commentary: Game of unicorns – as more seek IPOs, is this tech bubble about to burst?

PULLING DOWN THE CURTAIN

In some way, it is a wise step for Grab to plan for “a potentially long winter” as it looks to cut down its spending and become more efficient, Tech In Asia reports.

But the blowback will be on workers who have bought into these firms for so long, pouring in endless hours of work, hoping for a huge payoff once they go public. Many are contract staff or gig workers that do not enjoy employment protections.

That reckoning is at hand, at least for Grab. Even though senior management have taken a 20 per cent paycut and staff have been urged to take no-pay leave, Grab had said earlier this month that financial support for drivers may not be forthcoming if the circuit breaker is extended.

These disruptors are scaling down almost as quickly as they were scaling up.

Perhaps part of the reason these firms have come under tremendous pressure is because COVID-19 has exposed many for being services companies with a long logistical train, instead of the tech firms they were masquerading as, which can expand quickly without huge costs, because of intellectual property, software and hardware owned.

After all, when high tech firms have a valuation-to-earnings ratio of 23 times, who didn’t want to be a tech firm? But are they really the Microsoft or SalesForce of today?

Still, it is too easy to cast platform giants as the villains in this narrative of job losses and what makes for a sustainable business. 

We would do well to also remember we are all part of the same story – whether as consumers who reaped the rewards of discounts, deliverers who now have alternative income, or governments who proceeded cautiously but nonetheless allowed these platform giants to upend industries.

We all benefited when the cycle was in full swing, as the music continued, business hummed along and consumer spending surged.

It would be wise for us to learn the lesson that things can change very quickly, and that betting the economy on unprofitable businesses is a risky strategy when balance sheets can be wiped out and jobs can vanish in a blink of an eye.

Airbnb would know. Its market valuation went from US$31 billion to US$26 billion in barely two months.

A bright beacon shines amid this bad news as a group of established companies have come together to pledge not to lay off staff – including DBS, PayPal and SalesForce – while others – like Facebook and Amazon – will be adding more jobs.

READ: Commentary: How Singapore will remain a top trading hub in a post-pandemic world

READ: Commentary: If we can share or hitch rides, why not food delivery?

COVID-19 has challenged many assumptions and put pressure on businesses. We all yearn for a speedy recovery of the economy – but we must accept that realistically, some business models are just not cut out for that.

Back to the Wizard of Oz. It was not a pretty sight when Dorothy pulled back the curtain, only to reveal an ordinary man with no superpowers. 

But if we can recover like Dorothy did, we’ll be better for it.

LISTEN: Repairing and recycling to reduce e-waste: A pipe dream in Singapore?

BOOKMARK THIS: Our comprehensive coverage of the coronavirus outbreak and its developments

Download our app or subscribe to our Telegram channel for the latest updates on the coronavirus outbreak: https://cna.asia/telegram

Jonathan Chang is an entrepreneur, investor, educator, and global speaker.