Government-centered startup business models, part four

posted: January 24, 2021

tl;dr: A final set of examples where government is crucial to the success or failure of startups...

(continued from part three):

Here’s a final (for now) set of quick takes on various high tech startup companies, and a few industries, where government is crucial to the business model.

Airbnb, VRBO: lodging

At what point does a simple private room rental become a “bed and breakfast” (BNB), and at what point does a BNB become a hotel? Online services such as Airbnb and VRBO challenge these definitions, which actually are legal classifications in many jurisdictions. States have innkeepers laws, to define the legal obligations and liabilities of entities that rent rooms and their guests. Municipalities often levy substantial taxes on room rental fees, thinking that this is a great way to raise money from people who don’t reside within the municipality, instead of taxing residents. An aside: often the travellers are visiting residents of the municipality or a business within the municipality, so the taxes make it more expensive for residents and businesses to welcome visitors, which actually is detrimental to them.

When Airbnb first got started, the issues of legal obligations and taxes were brushed aside. The position taken by the companies offering services or platforms to connect buyers to sellers is that they are merely facilitating communication: they are not the actual buyer or seller. They claimed it was up to the actual sellers to comply with all obligations and collect and remit taxes. Few sellers did so, initially. Dodging lodging regulations and taxes gave Airbnb a price advantage when compared to traditional BNBs and hotels. Over time, municipalities have had to pass laws regulating and taxing online services such as Airbnb.

Uber, Lyft: taxi services

If Airbnb was a way to dodge hotel taxes and regulations, Uber and Lyft were even more directly a way to dodge taxi regulations and taxes. They like to describe themselves as “ride sharing platforms”, as though their only use was to make it easier for college kids to share car rides back to a remote city for Thanksgiving break. When I was going to Cornell, located in idyllic, isolated Ithaca, New York, the primary student union, Willard Straight Hall, had a ride sharing board with small holes labeled with the names of various cities, such as “Boston”, “New York City”, “Philadelphia”. If you had spare capacity in your car and wanted riders to help pay for gas, or if you were searching for a ride home for break, you could read the notes in the appropriate hole or you could leave your own note. I’m guessing that this artifact is long gone, or perhaps still present but only for sentimental reasons.

What Uber and Lyft actually are is an automated taxi dispatch service, tightly integrated with mobile phones. Traditional taxicabs are highly regulated by most municipalities. Drivers need to get special licenses, and the cabs themselves are often subject to regulations and limits. New York City, for example, places limits on the number of yellow cabs by requiring them to have a taxi medallion to operate legally. The taxi medallions provide revenue to the city and help drive up the costs of hiring a taxi by limiting the supply.

Uber and Lyft dodge these regulations, taxes, and fees, which gives them a cost advantage compared to traditional taxicabs. That, plus the convenience and availability of their services, has made them popular and caused a major hit to the government-regulated taxicab business. Taxi drivers in Paris have staged strikes to protest Uber, smashing cars and burning tires to get their points across.

It is also very easy for new drivers to join the Uber and Lyft platforms: download an app, answer some questions, and then start accepting rides and payments. This highlights the other aspect in which these companies are challenging the government: employment regulations in the gig economy.

Uber, Lyft, Doordash, Instacart gig economy

This is the issue that stimulated me to write this series, namely California’s AB5 bill and Proposition 22. Companies such as Uber, Lyft, Doordash, Instacart, and others make up what is often called the “gig economy”. Their platforms and services cater to both consumers and individuals who want to make some money by providing services to those consumers: so-called “gig workers”.

The gig workers use the company’s app to sign up to offer services, and then accept gigs through the app. It can be an easy solution for an individual who wants to moonlight for some extra money. But for gig workers who rely upon these apps for their sole or primary source of income, it can look like the company is dodging employment regulations by refusing to classify these workers as employees. This allows the companies to avoid providing benefits which are required by law to be offered to employees.

Even with the passage of Proposition 22, this is far from a settled debate. There’s a reason why the companies behind Proposition 22 spent around $200 million to promote it: California’s AB5 represents an existential threat to gig economy companies. If these companies have to use full-time employees to provide the services offered by their platforms, they would either be much smaller or out-of-business entirely.

Amazon e-commerce

Amazon was revolutionary in many ways: as an e-commerce company, a business-to-consumer platform, and a technology leader. AWS, which is effectively a spin-off of Amazon, is far and away the leader in cloud computing services. But it is also true that, in the early years of Amazon’s growth, dodging sales taxes gave the company a competitive advantage versus traditional bricks-and-mortar retailers. I wrote about this in my post Why Jeff Bezos should choose Chicago for Amazon’s HQ2, and why he won’t, so I won’t repeat myself here.

The point of this series is not to state my opinions as to whether these startup companies are somehow “bad” or “good”, or whether the government should favor or disfavor these startups. It is merely to point out how times have changed, and how government preferences or regulations are of crucial importance to the business models of many recent startups. The government is much more involved in the startup game than it was early in my career.