72 Business The Economist November 13th 2021
Theflywheeldelusion
I
n the real world a flywheel is a mechanical contraption that
stores rotational energy. In Silicon Valley it has come to mean
something else: a perpetualmotion business that not only runs
forever but is selfreinforcing. Thanks to powerful network ef
fects, the theory goes, a digital platform becomes more attractive
as it draws in more users, which makes it even more attractive and
so on. The end state is a venture that has gathered enough energy
to selflevitate and throw off tons of cash.
The payout on one of the most richly funded bets of the past de
cade or so revolves around whether ridesharing and delivery
firms—which once were part of something known as the “sharing
economy” but are better described as the “flywheel economy”—
can actually ever live up to their heady promise. The outcome will
matter to more than just venture capitalists who backed their
growth. Whether these flywheels do gather unstoppable momen
tum is also of interest to regulators worried about technology’s
propensity for winnertakesall business models, not to mention
paidbythegig workers caught in its cogs.
Consider the results of Uber and DoorDash, the largest Western
ridesharing and delivery apps respectively. Optimists will have
seen plenty to cheer them. On November 4th Uber proclaimed it
was at last profitable, albeit only on the flattering metric of “ad
justed ebitda”. Strong thirdquarter figures from DoorDash,
which were released on November 9th, fuelled an already heady
rally in its shares (the firm also announced the acquisition of
Wolt, a Finnish fooddelivery company, for $8bn).
But look deeper and evidence is mounting that business fly
wheels are not defying the laws of capitalism. The money that
went into building them recalls the railway mania among other
past speculative investment crazes. The nine firms that have gone
public so far—Uber and its American rival Lyft; Didi, a Chinese
ridesharing app; and six delivery firms, from DoorDash and De
livery Hero, which is based in Berlin, to China’s Meituan and In
dia’s Zomato—collectively raised more than $100bn. In most cas
es, the capital was intended to jumpstart those network effects
and make market dominance a selffulfilling prophecy. Seemingly
bottomless pits of investors’ cash went to subsidising rides and
deliveries to juice demand. This reached absurd points: a pizzeriacouldmakemoney by ordering its own food for a discounted price
on DoorDash (which then paid back the regular amount). To justi
fy such profligacy, interested parties pointed to the huge “total ad
dressable market”, another popular term in Silicon Valley. Bill Gur
ley of Benchmark, an early investor in Uber, argued in in 2014 that
the firm could vie for as much as $1.3trn in consumer spending if
one saw it as an alternative to car ownership.
Measured against such visions, the flywheel economy has pro
ven a dud. To be sure, the nine listed flywheel firms are still grow
ing nicely—at 103% on average in their latest reporting period
compared to the same period the previous year. This explains why
they are collectively worth nearly $500bn. But selflevitating they
are not. Nor are they profitable. Sales for the group amounted to
$75bn over the past year and the operating loss to nearly $11.5bn.
As the firms have discovered, their businesses are less perpetu
al motion machines than realworld flywheels that inevitably lose
energy to friction, says Jonathan Knee of Columbia Business
School and the author of a book entitled “The Platform Delusion”.
The network effects in fact have proved much weaker than expect
ed. Many users switch between Uber and Lyft. Drivers also flit be
tween them, or to delivery apps, depending on which model offers
the best pay. This bargaining power from both sides means the
system does not become selfreinforcing after all.
Technology, too, has turned out to be less beneficial than ex
pected. Data collected by the firms help optimise their operations,
but are not the decisive factor some had hoped for. Regulators
keep pushing back. In London they have forced Uber to pay drivers
minimum wages and pensions. In San Francisco they capped the
fees DoorDash can charge restaurants for delivering their meals.
Uber’s tortuous path to stemming losses should temper inves
tor optimism. It eked out a profit of $8m on revenues of $4.85bn.
That excludes expenses that are unlikely to disappear, such as
stockbased compensation. The company has crawled out of its
sea of red ink mostly by slashing costs, shedding technology as
sets such as its autonomouscar unit, charging higher prices and
increasing its “take rate”, the share of the fares it keeps. As a result,
an Uber is now no cheaper—and often more expensive—than con
ventional cabs, plenty of which can be hailed via apps these days.
What is more, the company, which has a market capitalisation
of $85bn, is now more of a delivery service than a ridehailing app:
Uber Eats generates more than half of sales. DoorDash’s own pun
chy valuation, of $65bn, rests on revenue that has grown more
than fourfold since the last quarter of 2019, albeit during a time
when people dined at home more often. But it also bakes in suc
cess in new markets that it has recently entered, including grocer
ies and pet food.Circular economy
Real business flywheels do exist. Software makers have managed
to lock users in and thus generate gross margins typically above
70%. Venture capitalists are hoping against all hope to find new
ones. They are already pouring money into the next generation of
flywheel contenders: instantdelivery startups, which offer grati
fication in 30 minutes or less. Couponcollecting consumers in
cities such as New York now get at least a week’s worth of groceries
for nothing from such services as Buyk, Fridge No More and Go
puff. Eventually, these firms’ champions promise, their econom
ics will be far better than those of an Uber or a DoorDash.Inthe fly
wheel economy hope and hype spring eternal, at leastaslong as
interest rates remain low and capital is essentially free.nSchumpeter
Uber, DoorDash and similar firms can’t defy the laws of capitalism after all