Tech

Disruption – Scaling an Application

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Today in the NYT they had an article about an online dating app called “Raya”. This tool is designed to let exclusive rich / celebrity folks match rather than being mixed in with everyone else on Tinder.

From my perspective, the interesting fact isn’t what the application is “about”, but how easy it is to build a scale a worldwide tool with all necessary functionality. From what I can gather in the article:

  • The entire company is run with only 13 people, including technical staff
  • The platform is exclusive to Apple iOS, and costs $7.99 / month (if you are accepted, which is rare), with additional up-charges
  • This world-wide, fully functional app was built with limited investment and seed funding
  • The app was built and launched quickly, in likely a year or so (based on the dates provided in the article)
Let’s look at how modern platforms and capabilities have enabled this sort of rapid delivery, scaling and enabling of a business model.  In the past, building a business such as this would have been a large-scale project.  By building it on the Apple iOS platform, however, the developer is able to tap into a huge amount of existing infrastructure, including:
  • Apple basically provides distribution through the iPhone, operating system, and entire infrastructure of the App store which includes billing 
  • Increasing power of the phone itself (likely all these rich and famous folks are on the latest models) enables advanced features and fast responses, as well as a consistent experience for users
  • The platform and embedded capabilities allow for rapid builds and prototyping, upgrades and security
It is astonishing that such a ubiquitous and enabling platform exists, with the ability to scale to an essentially infinite degree, with little (to no) up front investment.  This platform and environment facilitates rapid prototyping, the ability to grow quickly (if there is demand for your app), and provides an entire environment for notifications, customization, etc… that you can leverage.
If someone would have told you ten years ago that you could
  • Build a piece of software that can reach customers around the world
  • Scale up at a rapid rate with little or no upfront investment
  • Have billing, notifications, user experience, etc…. mostly done for you “out of the box”
You’d think that they were dreaming.  And yet it is here, today.
What are the implications of this?  I think that a lot of the assumptions that we make about how strong incumbent positions are, how fast challengers can emerge, and how low the barriers to entry are for many markets are incorrect.  Since the key demographics are already all mobile (and the majority of the highest income US consumers are on iOS), you can jump quickly into Apple and evolve rapidly.
Since many companies today make little or no profits and “value” is the stream of future cash flows (when presumably the company will be profitable and able to capture and hold market share and customer revenues), the fact that competitors can rapidly come into your space with little incremental investment should make long-term investors shudder.  
Cross posted at LITGM

Extremely Cool, but…

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A Gloster Meteor in flyable condition–the Meteor being Britain’s first operational jet fighter–has come to the US on a permanent basis.  The jet has been purchased by the World Heritage Air Museum, which is located near Detroit.  It will be at the EAA Oshkosh show this July, along with two other early British jets.

The prototype Meteor first flew on March 5, 1943, and the type’s first use was against the V-1 cruise missiles that plagued London.  Meteors were sent to the Continent in early 1945, they were restricted in their operating area for fear of having downed aircraft captured by the Germans or the Soviets and were used for airfield defense and ground-attack missions.

I believe this was the only flyable Meteor in the UK except for two owned by the Martin-Baker company and used to test ejection seats…as working aircraft these planes probably aren’t available for public display very often, if at all.  It’s great to have a Meteor in the US, but I would have thought that given this airplane’s historical significance, someone in the UK would have raised the money to keep it flying there.

Disruption – Online Ordering

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The retail restaurant industry already is an area of fierce competition. Just think of all the restaurants in your community vying for your attention and business. And this is also an industry with slim margins and a high mortality rate – even after a couple years’ away from Chicago, many of the local restaurants we used to patronize have turned over in one form or another.

Since I’ve lived in a “big city” environment for decades, I am used to just walking over to a nearby restaurant to eat or potentially pick up a delivery. However, that isn’t an option for everyone, and digital delivery through various methods is now an important differentiator between chains and individual firms.

The NYT had an article titled “App Takes Orders for Mom-and-Pop Pizzerias” about a company called Slice that offers a tool for small, individually owned pizza restaurants to offer sophisticated ordering capabilities in multiple methods in order for them to compete with chains like Dominos which run a significant portion of their business through online ordering. Small chains typically cannot build their own specific tools and will need to purchase these capabilities as a service.

Slice sends customers’ online orders to the restaurants through their preferred method — email, fax or phone. Restaurants deliver the meals with their own couriers. For each order processed, Slice receives a $1.95 commission, or around 6 to 7 percent of order totals on average, Mr. Sela said. In contrast, GrubHub charges up to 18 percent of the order to process online sales for its clients.

In a business with small margins, giving up 18% or even 6-7% of revenues off the top line seems to be a very significant cost, but at least it allows these restaurants to “even the playing field” with larger chains.

Read more

An Interesting and Timely IPO

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I’ve been aware for some time of a company called Avalara, which is in the cloud-based tax-compliance business.  In the US, Avalara keeps track of the vast array of sales tax rates, which are imposed not only at the state level but often also at municipal and county levels.  Avalara integrates with a number of electronic commerce platforms, which can pass destination address info to the system and thereby obtain the appropriate tax rate in real time and include it in the end customer’s charges at checkout.

The company did its Initial Public Offering on June 13, and AVLR quickly jumped from its IPO price of $24 to about $45 , putting its market capitalization at about $2.9 billion.  Yesterday, the Supreme Court issued a decision that has great implications for Avalara’s business…as well as for the businesses of hundreds of thousands if not millions of on-line retailers and the consumers who buy from them–and as of this moment AVLR is trading at $52.16, with a market cap of $3.32 billion.

What the Court apparently ruled is that states can impose sales taxes on on-line transactions (and, I would presume, classical mail-order transactions as well) even when the seller does not have a physical “nexus” (such as a warehouse, and office or a factory) in that state. (And you can be sure that most of them will take advantage of this opportunity.)   This is really “just” a cost problem for very large on-line merchants such as Amazon, but the compliance issues for smaller businesses are going to be considerable.  Avalara seems well-positioned to help with this problem, but the ruling is still going to be far more burdensome to the smaller on-line merchants than to the large ones.

See discussion of the sales tax issue at the Instapundit post.

Regarding Avlara, I have not analyzed this company as a potential investment and am not giving an opinion on it for that purpose either pro or con, certainly not giving investment advice here.