At Startups, People Are ‘New Infrastructure’

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Infrastructure plays a crucial role in all life cycle stages of business, but probably unavoidable for startups which struggle to survive. People can be considered as “new infrastucture”, says Christopher Mims, technology columnist from The Wall Street Journal:

In an industry built, like Google, on the strength of an algorithm, the ranks of the billion-dollar startup club are swelling with something altogether different—companies predicated on the scale and power of their infrastructure. Here’s the crazy part—that infrastructure is made of people.

Uber, Lyft, AirBnB and companies like them are “the FedEx of the modern tech industry, if you think about FedEx as a massively complicated logistics organization that happens to get paid to deliver packages,” says Scott Kupor, managing partner at venture-capital firm Andreessen Horowitz.

It might seem specious to compare Uber with FedEx. One employs about 2,000 people, the other 162,000; one doesn’t own a single vehicle while the other recorded $3.5 billion in capital expenditures last year. But that’s the trick of what I call the New Infrastructure, and it’s the reason Uber is valued, premarket, 80% as much as FedEx.

t’s this act of “revealing infrastructure”—not the mislabeled “sharing economy”—that is at the heart of startups such as Uber, AirBnB, Roadie and Instacart, which pays people to pick up and deliver your groceries. America is awash in able-bodied and underemployed young people, motor vehicles and, in the case of AirBnB, homes that are less than fully occupied. It’s a combustible mix: Just add a coordinating mechanism, in this instance the always-connected pocket supercomputers known as smartphones, and what you get is a seemingly endless potential to put goods and labor to productive use.

“I think an area of tech that doesn’t get talked about as much but is really important is just how many people these companies need,” says Brian O’Malley, a partner at venture-capital firm Accel Partners. The New Infrastructure isn’t fiber optics or cell towers or data centers—though none of it could be built without that underlying kit.

And that’s perhaps the most remarkable thing about this movement: For the first time in decades, billion-dollar startups are being built not on gains in productivity made possible by eliminating humans, but by their wholesale recruitment.

The industries these aspiring entrepreneurs want to tackle tend to be things that haven’t been touched by technology in a long time—like the taxi industry—and, unlike startups in the Valley days of yore, labor-intensive, whether it’s cleaning houses or buying groceries.

Taking on these industries isn’t for the faint of heart, however. At the core of all of these businesses is what’s known as a two-sided market, in which companies must create markets for both labor (think Uber drivers) and customers.

Just getting one of these markets going can be daunting. “It’s the ‘cold start’ problem,” says John Horton, professor at NYU Stern and formerly the staff economist at oDesk, a site that pairs freelancers with employers. “In general, no one wants to come to your market if you don’t have the other side of the market,” he adds.

In its early days, AirBnB created a market by tapping into an existing one, letting would-be landlords cross-post their listings to Craigslist. Mr. Gorlin, founder of Roadie, says that a year before he launched his app, he started a field-marketing effort at college-football bowl games, just so people would be familiar with his brand.

Once the two-sided market at the heart of these New Infrastructure companies is in motion, with enough supply to feed demand and vice versa, balancing these markets is no less challenging. It’s both a problem for predictive analytics and behavioral economics, requiring a mix of data science and incentives.

“The way we think about this internally at Instacart is this is really a machine learning problem,” says Apoorva Mehta, CEO of Instacart. “We have models running at all times of day to predict how many shoppers are needed at any time of day, anywhere.”

All two-sided markets also need the ability to shape both demand and supply. Uber talks often about its use of surge pricing to get more drivers on the road, but Mr. Mehta says that raising prices is also a way to damp demand, persuading customers to buy at times when more shoppers are available.

The jobs created by the New Infrastructure are often derided as being insecure and potentially ill-paying—what’s known as the 1099 economy, after the tax form freelancers file. We live in a time when shrinking unemployment hasn’t led to increasing wages, so it’s worth asking just what kind of jobs these companies are creating.

Source: Forbes

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