Riding Out the Regulatory Turbulence
While many investors have been caught up in the post-election so-called “Trump Rally”, private-market tech investors should be considering a longer-term government issue, which could affect the growth trajectory of several major pre-IPO tech companies including popular names such as Airbnb, Didi Chuxing, Instacart, and Uber, amongst others. As the new “gig economy” and “sharing economy” increases the connective power of the internet and the community, the government and regulators will inevitably begin to step into the space, deeply intertwining public policy’s connection with these companies’ growth trajectories, injecting a degree of risk to these investments where regulatory risk to investors had previously been restricted largely to M&A activity and antitrust laws.
Many key aspects of Uber’s business model, including its labelling of drivers as contractors rather than employees and power to deputize anyone with a car that meets the company’s standards as a taxi driver, are all subject to potential intervention and disruption by regulators. Notably, a New York judge ruled in October that two former Uber drivers should be considered eligible for unemployment claims. These battles are not confined to the United States. Currently, another high-visibility case is ongoing in the European court system, with a debate over whether the service is a transportation service or merely a digital platform that connects independent drivers with passengers. In China, Didi Chuxing, which acquired Uber’s Chinese business, is at risk of most of its drivers being ruled ineligible due to strict migrant worker restrictions. According to some experts, these restrictions could bring the pool of Didi drivers in Shanghai down to 10,000 from 410,000.
Airbnb has also been engaged in high-profile legal battles of late, including a dispute with New York City over a law that would subject owners of properties to fines if they habitually rented out their properties on a short-term basis of less than 30 days. Airbnb had attempted to launch a suit against the city over the legislation, but decided to drop the suit upon receiving “clarification” that they would not be the ones being fined in connection with the regulation, but rather it would be the individual owner of the property that would be fined. Along with a decision to restrict the number of nights each year that users can rent out their homes in London and Amsterdam, perhaps this is an indicator as to what the outcome of many of these cases will look like.
Despite some of the recent concessions, these “gig economy” companies have not been rolling over without a fight. In 2015, the DeBlasio administration was seeking to impose a cap on the number of new vehicles being added to the platform in New York., blaming the increased congestion in midtown Manhattan on the surge in ridesharing vehicles on the road (estimated at 2,000 vehicles a day). Uber harnessed the power of its platform and user network, adding a “DeBlasio Mode” to the app for a short period, displaying a 25-minute wait time and no rides available when a user would first launch the app, and then explaining via a pop-up message that this was a simulation of what the effects of the DeBlasio cap would look like. Users were able to send a message of opposition to the Mayor’s office with the click of a button, overwhelming the office. In the end, the city did not pass a cap, instead deciding to commission a study into the congestion, which found that other factors were the cause of the increased congestion and that the ridesharing was largely just a substitute for previously existing taxi usage. As companies like Uber bulk up on lobbying staff and public policy advisors, it is likely that they will continue to remain a formidable force, counterbalancing the regulators. Given this dynamic however, what will the net effect of these efforts be for investors?
Overall, it is highly unlikely that these cases against Uber, Airbnb, and the other companies in the space, will have devastating effects on these companies’ growth, and in turn, their valuations. Certainly, it appears that their growth will be slowed in some key markets, but nonetheless, in the aggregate, the growth will unquestionably continue at a rapid pace. A key area which will likely be an area of dispute for some time going forward includes the ongoing dispute over the contractor versus employee distinction. The regulatory risk should be viewed differently for companies where key elements of the business model are subject to the risk of slower growth as a result of regulation, like Uber or Airbnb, as compared to companies where regulator and intelligence agency involvement is more of a concern on the periphery, like Google or Facebook. Investors should continue to closely monitor the developments in these regulatory disputes and model in the potential risk associated with them, during their investment process.
Infrastructure Investment Benefits Go Beyond the Industrial Sector
As the industrial sector and metals rallied following the election of President-Elect Trump, investors quickly moved to capitalize on the perceived likelihood of increased infrastructure investment in the United States. Infrastructure investment would certainly be a boon to the industrial sector and the middle class, but one would be remised to fail to realize that infrastructure investment would be a massive opportunity for the technology industry.
One of the first areas in which there is an opportunity for tech companies to capitalize on the increased potential for investment is in the digitization of infrastructure, bringing the power of the Internet of Things to America’s infrastructure Among the companies featured at the German-French Digital Conference held in Berlin on December 13th, 2016 was KONUX, a Munich-based tech startup focused around building smart sensor systems, providing maintenance intelligence. The company proudly posted a picture to their Twitter page, featuring German Chancellor Angela Merkel and the President of France, François Hollande, meeting with KONUX leadership, discussing the digitization of the German and French railways. KONUX’s sensors have been integrated into the German railway already, claiming to have decreased maintenance costs by upwards of 25%. As the far-too-may Amtrak, NJ Transit, Washington Metro, and Metro North incidents have shown of late, America’s railways would stand to benefit greatly from a digitized infrastructure which could prevent deadly crashes and mechanical failures from occurring and save lives. Opportunities for digitization of infrastructure go beyond merely railways, extending to roadways and intersections for traffic management, as well as a power grid that is more resilient to cyber attacks and more efficient at the handling of power needs.
The second major area in which there would be an opportunity for tech companies in a period of infrastructure investment can be found in innovative and advanced manufacturing processes. As 3D printing has advanced beyond merely novel applications, an increase in infrastructure investment presents a prime opportunity for companies to prove the feasibility of their procedures and products in real-world applications. From components to be used in the manufacturing of larger pieces of infrastructure to robotics that help assemble sophisticated and complex infrastructure, advanced manufacturing processes would certainly play a key role in a modernized, 21st century, digital American infrastructure, with American jobs being created as a result.
The third major area which presents an opportunity for tech innovation in infrastructure investment is the modernization of America’s communication infrastructure. Infrastructure goes beyond railways, roadways, sanitation, power grids, and airports. In today’s age of supercomputing in the cloud and an increased appetite on the part of consumers streaming large amounts of high-quality video, audio, and other forms of data, upgraded metro fiberoptic networks and eventually satellite communications are critical to enabling the internet of things to thrive and reach its greatest potential. At present, the transition from 40 gigabit to 100 gigabit fiberoptic components is underway and accelerating across the globe. Taking a holistic view and investing in all of America’s infrastructure, not just roads and bridges, would greatly accelerate this transition.
While these are only a sampling of some of the areas in which tech would benefit from a potential increase in infrastructure investment in a Trump administration, investors should keep these areas in mind and explore other potential ancillary industries that will benefit, going beyond the headlines to identify sectors where potential growth from increased investment is not already priced in.