Why So Many Tech Startups Misbehave
When their business models are iffy, survival can depend on cutting corners.
Bloomberg, February 11, 2020.
It’s hard to miss how many technology companies engage in increasingly questionable — and occasionally reprehensible — conduct. This is something beyond the unsavory frat bro behavior of people like Uber Technologies Inc. founder and former Chief Executive Officer Travis Kalanick. No, I mean companies whose very business models seem to be built around elements of fraud, deception and abuse of employees, partners and clients.
Maybe it is a sign of what happens when too much capital sloshes through too few startups. 1 Whatever the underlying cause, one cannot help but notice some of the awful behavior in the venture-funded tech world. Consider these recent headlines:
— “Court Rules It’s Totally Cool for Yelp to Extort Businesses”
— “Grubhub’s new growth hack is listing restaurants that didn’t agree to be listed”
— “Delivery apps like DoorDash are using your tips to pay workers’ wages“
There may be any number of reasons these companies might engage in such shoddy behavior, but the most obvious one seems to be that their business models are so lame that they must do shady stuff simply to keep the lights on.
Disruption is a consequence of true innovation; that isn’t the issue here. No, this points to something deeper and more troubling about the startup landscape.
Let’s consider a few of these companies:
Grubhub: The food-delivery company is in hot competition with other startup delivery companies. One of the things it’s done: buy up domain names of its restaurant partners without their permission or even knowledge, thus making it hard or impossible for a restaurant to establish its own website without Grubhub’s blessings. (Grubhub’s defense: It’s in our contract’s fine print.) The company also published shadow websites and misleading phone numbers of its restaurant partners to pull web traffic and phone orders away from them.
I imagine Grubhub being pitched as the Uber of food delivery (though Uber also is in the food-delivery business). One key difference: There was no entrenched local monopoly similar to taxis. Instead, there are tens of thousands of local restaurants, many of which already deliver or offer takeout. Uber and Lyft used technology to break the monopoly: Grubhub and its related divisions — Seamless, Eat24, MenuPages and AllMenus — instead insert themselves as middlemen between restaurants and consumers. This seems to be true regardless of whether the restaurant is a willing participant or not.
Maybe it’s the big decline in Grubhub’s share price that has led the company to stoop so low: the stock has fallen about 65% from its high in 2018.
Yelp: The review site seems to have morphed into what its critics sometimes characterize as an extortion racket. The company has been accused by restaurant owners of hiding positive reviews unless those establishments advertise on Yelp.
Business owners have challenged this model, with some even winning in small claims court.
A broader class-action case was dismissed, with the Ninth Circuit Court of Appeals ruling that it was fine for Yelp to manipulate positive and negative reviews of its restaurant clients. As for the claims of the plaintiffs that Yelp functionally extorted them, the court said too bad; Yelp was under no obligation to be even-handed or fair.
Lots of outrage over this eventually led to a Kickstarter campaign to fund a documentary, “Billion Dollar Bully.” The problem has caused Yelp so much reputational harm that the company felt compelled to set up a page on its website with the headline, “Yelp Does Not Extort Local Businesses or Manipulate Ratings.”
Nevertheless, the market has mounting doubts about Yelp and its business: the shares have declined 65% from their peak in 2014.
DoorDash: How well does the gig economy pay? That was what a New York Times reporter wanted to find out. So he started working as a food-delivery man for some of the more popular apps, including DoorDash. He discovered that the pay wasn’t great — as little as $5 an hour to as much as $20 for “Jedi Masters” — and it’s falling as the apps attract more delivery people.
It also turned out that DoorDash and others were keeping the tips — all of which employees were supposed to get — and using them to subsidize workers’ base pay. The subsequent uproar over the Times article led DoorDash and others to change tipping policies.
DoorDash also was sued for using a fake In-N-Out Burger logo on its website and offering unauthorized deliveries for the fast-food chain.
One thing becomes obvious when looking at these companies: they are all in hyper-competitive, low-margin businesses where economies of scale are either minimal or don’t exist.
But more to the point, it makes you wonder if these companies actually solve a consumer problem. There are reasonably credible review sites online such as Zagat, so why does anyone need to turn to suspect reviews on Yelp. As for restaurants that already offer meal delivery — and there are many — third-party delivery apps are superfluous.
In other words, these are businesses that are responding to market signals the wrong way. Instead of bending the law and trampling all over ethical standards, they probably should rethink their business models — or just close their doors.
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1. The self-dealing sweetheart arrangementsof Adam Neumann, WeWork’s founder and former CEO, was a special case, the result mainly of a weak and conflicted board of directors.
Previously:
The Review Factory (August 21, 2011)
Yelp Going Public; Billions to Flow to Reviewers (February 17, 2012)
Amazon Changes its Review Policy (but not enough) (December 23, 2012)
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I originally published this at Bloomberg, February 11, 2020.. All of my Bloomberg columns can be found here and here.
