On the rise of unproductive entrepreneurs like Travis Kalanick

Financial Times:

Entrepreneurs are universally celebrated, but what if modern day entrepreneurship is creating ventures that do more harm than good?

piece this week in Harvard Business Review by Robert E. Litan and Ian Hathaway reminds us of this point by citing the work of William Baumol, who passed away last month.

Baumol’s overarching theory is fantastically compelling. It suggests the number of entrepreneurs in an economy is essentially fixed and what influences a nation’s entrepreneurial output is how those entrepreneurs are incentivised.

As per our own longstanding argument that innovation should not be treated as a universally positive phenomenon — since innovation comes in both good and bad forms — the view here is that the underlying incentive structure of the economy in which an entrepreneur operates dictates whether ventures are productive or unproductive.

As HBR’s Litan concludes:

If the U.S. is going to tackle its many problems, we are going to have to find ways to encourage would-be entrepreneurs to start innovative, productive businesses, rather than dedicating their efforts to co-opting government in order to secure economic advantage.

It should be noted that no company exemplifies this unproductive practice more than Uber.

Hence it’s worrying that amidst all the focus on Uber’s horrible corporate culture, very little attention is still being paid to the underlying non-viability of the business model, which is mostly based on undercutting the competition via free giveaways, exploiting drivers and/or adjusting the rules of the regulatory framework to suit the company’s own monopolistic agenda.

Thank goodness then for Hubert Horan, who’s bucking the trend with another scathing analysis of what’s really the issue with Uber.

As he notes in Naked Capitalism on Thursday:

Uber’s strategy was always to skip the hard “create real economic value” parts of this process, and focus strictly on the pursuit of artificial market power that global dominance would provide. As noted, Uber’s $13 billion investment base was used to fund the predatory competition needed to drive more efficient competitors out of business. This was 1600 times the investment funding Amazon needed prior to its IPO because Amazon could fund its growth out of positive cash flow. By contrast, Uber’s carefully crafted “narrative” allowed it to pursue predatory competition for seven years without serious scrutiny of its financial results or whether its anticipated dominance would improve industry efficiency or consumer welfare.

And if that doesn’t persuade you perhaps the following will (our emphasis):

Kalanick’s management culture, while repulsive on many levels, was actually brilliantly aligned with its business strategy and its investors’ objectives. Companies that can make money in competitive markets by creating real economic value do not have to create ruthless, hyper-competitive cultures where there are no constraints on management behavior as long as they are totally loyal to the CEO’s vision and can rapidly capture share from more efficient competitors. None of Uber’s bad behavior was aberrant—it was a completely integral part of its business strategy. Without this culture, Uber would have never grown as rapidly as it has, and would have never had any hope of industry dominance.