Morning Markets: The narrative surrounding scooter startups has molted over time from hype to viability concerns; Venture capitalists, however, seem undeterred. Scooters are here to stay, it seems.
TechCrunch and the New York Times reported this week that Bird, a popular scooter startup, will raise a new round of private capital as expected. The new funding event will be led by Sequoia, a previous investor in the company.
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For Bird, then, the game is still afoot. And for critics of the scooter boom and its corresponding scooternomics, the round will likely prove some combination of baffling or surprising.
The new money values the firm at “slightly above the $2.3 billion,” according to the Times, or “at a $2.5 billion valuation” according to TechCrunch. Both publications agree that there’s new money coming, it puts the sticker-price of Bird at around its preceding valuation, and that Sequoia is taking point.
This backs up prior reporting from The Information, which broke news of the round.
Some regular Crunchbase News readers have written in, asking questions about the workings of scooter companies, especially concerning how they calculate certain costs. In honor of the emails let’s try a summary of sorts.
We’ve recently mulled the vagaries of the business model of scooter companies, wondering if their operations will prove viable and lucrative over time. The back-and-forth goes something like this, starting with the negative take and closing with the correlating1 positive argument:
- As scooter companies take on the purchase and maintenance and fuel costs of scooters, their margins will prove worse than the unprofitable ride-hailing companies. Thus, they will struggle.
- Scooter companies generate more net revenue per ride than ride-hailing companies, and through technology investments now generate more contribution margin than ride-hailing companies on a per-ride basis. Thus, they will thrive.
Recall that scooter contribution margin is effectively equivalent to gross profit at a software company; gross profit is revenue minus costs of revenue, or, in the case of scooter shops it’s gross ride income minus the costs of the scooter and its operation. Roughly.
So does Bird generate enough gross profit to fly?
Recall that Bird claims that it generates $1.27 in contribution margin per ride on one of its new scooters; that hardware variant now makes up the bulk of its fleet, allowing us to use it as a stand-in for all Bird machines.
At $1.27 in effective gross profit, how much gross profit did Bird rack up during its good quarters?
Recall that The Information reported that Bird posted $40 million in gross revenue in the fourth quarter of 2018. That figured was shaved to $25 million in net revenue due to now-discontinued rider discounts. But let’s not quibble. Let’s instead be generous and pretend that we can apply Bird’s present-day (and improved) economics against the full $40 million figure.
That works out to 9.37 million rides. And, at the company-provided $1.27 in per-ride contribution margin, Bird’s Q4 2018 gross profit would have come to $11.9 million. Of course, the actual figure was lower as Bird’s fleet makeup was different at the time (giving different economic results; recall that Bird had to write down $100 million in inventory the following quarter), and the firm was providing discounts that limited its net revenue result.
This allows us to estimate with reasonable confidence that Bird’s gross profit (the sum that it could deploy against its corporate costs) was under $10 million in the fourth quarter of last year. And we know that the figure dropped sharply in the first quarter of 2019 when the firm’s revenue fell to $15 million.
This brings us as up to date as we can be. Bird’s Q2 2019 results are unknown, so far at least. But the above result set was good enough for the company to, it seems, raise a few hundred million more.
Here’s my guess as to why. I’d bet you $1 that Bird’s new scooters do have encouraging economics compared to their two-wheeled predecessors. And that so far, the operational math checks out when it comes to ride spend and ride margins. With the new math, that Bird is raising another venture fund worth of cash could mean that the firm will have enough cash to buy enough scooters to build out enough supply to grow its top line to generate enough gross profit to pay for its operating costs. Or at least get close.
So, the scooter boom shall continue provided that the round closes. And that’s pretty good, at least where I live. There are lots of Birds and Limes and Jump Bikes here in Providence, and they seem pretty popular. It would be too bad if they all went away.
There should be a word like “correlit” that I could use in the following way: “and we’ll close with the positive correlit.” That would be cool.↩