Scooters Are Cool, But Not $1 Billion Cool

(Bloomberg Opinion) -- I've always had an interest in electric scooters. I started researching them in 2002, when I had to walk from the Port Authority Bus Terminal in New York at the corner of 42nd Street and 8th Avenue to my job at Lehman Brothers on 49th Street and 7th Avenue. I figured an electric scooter would get me there faster, zipping me through all the filth on 8th Avenue.

I wanted to buy something called a Zappy Turbo manufactured by a company called ZAP, but it weighed about 30 or 40 pounds and would have been a hassle to bring on the bus. Plus, the traffic laws surrounding scooters were a bit hazy ( and still are). You couldn’t ride them on the sidewalk and you’d get creamed if you rode them in the street. The last thing I wanted was to spend a few hours a month in traffic court for the inevitable tickets I would get, so I abandoned the idea. Plus, it was a bear market and riding an electric scooter to a Wall Street job was probably a firing offense.

There's no denying electric scooters are cool. They are more environmentally friendly than cars and fun. I've always thought that they might be a solution to congestion in cities. Fast forward about 15 years and electric scooters are all the rage. Last week, an electric scooter-sharing startup known as Bird achieved a $1 billion private valuation by raising $150 million funding. 

Bird draws comparisons with Uber, but there are key differences, the main one being that Bird actually owns the scooters. This means that the (theoretical) profit margin on scooter rental is pretty low, with estimates of about 10 percent. If you figure that Bird might make around $2.50 per ride in revenue, there are some estimates that Bird might make $14 million a year. But after paying for maintenance, charging and overhead, there might only be $1 million left. 

There must be a lot of optimistic people in California, because a $1 billion valuation at some reasonable multiple assumes that Bird might one day have 75 times as many riders as it does currently. That implies Bird will expand to every U.S. city and achieve a nearly 100 percent adoption rate. That doesn’t take into account all the fines and logistical issues that Bird encounters along the way. So the $1 billion valuation is, to be blunt, kind of dumb. In situations like this, venture capital more closely resembles crowdfunding than actual investment.

Bird is very much an old-economy business (to use a term from the turn of the century) with a new-economy veneer. You use an application on your phone to locate a scooter (they have a global positioning system, or GPS), scan a code, rent it and ride it. Ask yourself, what would Bird be without the internet? What would it be if it were just a store where you could rent scooters? 

We have such a store where I live in Myrtle Beach, South Carolina, called Go Fast Scooters. It rents mopeds on Kings Highway South. Its owners make most of their money in the summer renting mopeds to tourists, but there is a brisk year-round business serving folks who were convicted of DUI and people whose credit is too bad even for the subprime auto dealers. This is an old-economy business. But it is surely profitable! It has to be, because it is not backed by venture capital. This is essentially what Bird is, without the app.

I am not saying VC-backed companies can’t have a period of time when they experience losses in order to make much greater profits in the future, but I think Bird is one of many "unicorns" that don’t have a realistic hope of being profitable at any point in the future.  

Uber lost $4.5 billion last year, and I'm doubtful Uber will ever become meaningfully profitable. They can’t pay drivers less and they can’t charge more. It is an intractable problem. In fact, 76 percent of the companies that went public last year were unprofitable, the highest percentage since 2000. It almost seems as if unprofitability is a badge of honor. There are companies such as Robinhood Markets Inc., the online brokerage that lets users trade for free. But, Robinhood has an almost $6 billion valuation  and its founders are billionaires

Simply put, there are times when investors care about profits and times when they don’t. Right now, they don’t. We’ve seen this before. In 2000, one day, nobody cared about profits, and the next day, they did. It was like flipping a switch. Venture capital-backed companies received $84 billion in financing last year which is the most since you-know-when. Even after markets peaked in a frenzy of speculation in January, venture capitalists continue to shovel money into startups.

Whatever happened to ZAP? Its shares trade for around a penny each, down from a peak of about $100 in late 1999.

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