Do bronze medals ever make sense for unicorns?

Published August 5, 2021

Last week, Deliveroo made news when it announced it was preparing to leave the Spanish market. The recently listed Deliveroo couched its explanation in market terms, noting its market position in Spanish on-demand delivery wasn’t sufficient to warrant continued investment. Left unmentioned: A Spanish legal change requiring companies that previously depended on freelance couriers to hire their delivery staff.

Race Capital’s Edith Yeung helped explain the Deliveroo choice to The Exchange, saying the Spanish market doesn’t have a very large population, which may mean that the “potential upside for being #1 in Spain has [a] ceiling.”

While she noted that she doesn’t have access to Deliveroo data, her statement jibes with the company’s own comment that Spain made up less than 2% of its aggregate gross transaction value (GTV) in the first half of 2021.

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One company exiting a market is not a big deal, but we were curious about Deliveroo’s comments regarding the need for market leadership — or something close to it — to warrant continued investment. Is this the common reality for startups battling for market position, no matter if those markets are cities or countries?

Some startup markets have trended toward monopolies or duopolies. The Uber-Didi battle in China led to the companies agreeing to stop competing. Uber also recently sold its Uber Eats business in India to Zomato. In the United States, Uber and Lyft’s smaller competitors have long been forgotten and both the American ride-hailing giants continue to battle for dominance.

There are other familiar examples of this trend of consolidation. The food delivery game is concentrated amongst leading players. Postmates failed to survive as an independent company, winding up as part of Uber’s operations. Perhaps Gopuff will manage to claw out a spot in the market, but DoorDash and Uber Eats together accounted for 83% of the U.S. food delivery business in June this year, per Second Measure data.

It’s no surprise that some startup markets lean toward monopolies or duopolies. Many countries protect intellectual property via patents that can constrain new innovation to one or two players for an extended period of time. Monopolies can also arise when a new technology or method of business is invented — Google’s internet parsing search tech led to a nigh-monopoly in many markets, for example.

In businesses where efficiencies of scale have a large effect, monopolies can form when leading players consolidate smaller competitors until just one or two companies remain. Standard Oil is the canonical example of this process.

What’s interesting about the on-demand delivery market is that it is both incredibly expensive but isn’t very technologically difficult to get into, which has meant that many companies have jumped into the sector around the world. This means on-demand delivery is the opposite of other patent-protected markets from which we might expect monopolies to form or competition to be extinguished past the top two players.

Yet, it’s also an industry where economies of scale can play a key role in profit generation, and increased competition can lead to price wars and advertising tussles. It’s a ripe market, then, for consolidation, even if it lacks an exploitable IP base.