Limits to Uberizing – Luxe’s Flexibility Challenge

Luxe

Luxe is a valet parking service provider that offers a cheaper parking solution on demand in big cities. How it works is as follow: A driver tells where she is going through the Luxe app when she gets into the car, then the system tracks the driver using GPS on her phone and gives the information to available agents so that one of the agents meets her at the destination just in time. In short, Luxe’s business model is basically to uberize the valet parking service in big cities. Although this uberizing business model has been attractive to many investors, it faces various operational challenges as a startup to become the next Uber. One of the main challenges is how to manage its capacity flexibilities. Flexible capacity allocation in terms of geography and time is required to provide timely service to customers – how many agents should be allocated in a certain time and location. However, as a startup firm that has limited reputation and resource, it is not always easy to secure a certain level of capacity without additional expenses. As efforts to deal with this challenge, Luxe has implemented surging pricing, just as Uber did, to increase the agents’ discretionary participation in the peak time. Yet, this pricing policy is not enough, particularly for a startup, to secure a certain capacity level when the demand is very high, so the firm also decided to hire full-time agents as employees whose capacity it actually can control.

However, could the buildup these two flexibilities to address the demand management create an investment tradeoff, especially early in the life of a startup like Luxe? There is another angle that is unique to the underlying startup problem: growth and its link to firm valuation. Luxe, for instance acquired $20M in new funding in 2015 to invest making on-demand valet service available in other cities around the U.S. Does such a startup scaling strategy (across multiple geographies) exacerbate demand uncertainty, and in turn make the ability to manage of multiple flexibilities a central issue in establishing successful shared economy startups?

Paradox of 10X: Develop Technology & Ops before Markets?

Nitin Joglekar (BU), Sinan Erzurumlu (Babson) and Jane Davies (Cambridge University)

The U.S. Department of Energy has followed a strategy of becoming a catalyst for the development of transformational technologies (a.k.a. 10X technologies – where the delivered technical or cost performance of a component technology is nearly an order of magnitude superior to the conventional solutions) through its ARPA-E program.  Since 2009 ARPA-E has invested approximately $1.3 billion in more than 475 projects through 30 focused programs and three batches of open solicitations.

ARPA-E

A bulk of these awards have gone to universities (41%) and small businesses (32%). The types of technologies ranged over a gamut of alternatives from electricity generation, storage and grid to biofuels. For instance, the Transportation Energy Resources from Renewable Agriculture (TERRA) related robotics projects seek to reduce the current cycle time from 8 Hours to minutes, while increasing the resolution from 1M to 1cm. A transition of these technologies into commercialization is now underway: 45 ARPA-E projects have attracted more than $1.25 billion in private sector follow-on funding; 36 projects have formed new companies to commercialize their technologies and 60 projects have partnered with other parts of DOE or other government agencies to further advance their technologies.

We have analyzed design and market risks for the earliest generation of projects (Erzurumlu Davies and Joglekar 2014 *) and observed that the funding process had rewarded proposals startup firms that exhibited deployment feasibility while discounting the effort to focus on product markets. In order to illustrate this point, it’s worth examining one of the awardees (FastCap Systems – see http://www.fastcapsystems.com/about-us/). In 2010, their technology development began with a novel ultracapacitor technology for powering electrified drivetrain vehicles. Since then FastCap has focused on technology growth and broken four performance records related to the power and energy density of its cells. It has also “gone on to achieve an additional world record related to its work in geothermal energy system development.” The initial public disclosures within the ARPA-E application focused on 10X technical growth goal, and did not specify targeted product markets. Today, FastCap’s website identifies aerospace and energy exploration as its target markets.

In such cases, initial operational excellence (aimed at technology push) has been followed by market pull.  Such a trend is counter to conventional wisdom in the technology commercialization literature.  Some ARPA-E firms seem to have traded off rapid technological growth with uncertain market focus. Are 10X technologies to be managed by a different norm when it comes to their commercialization?

 

ARPA-E Data in the first paragraph of this blog taken from Dr. Eric A. Rohlfing’s Talk at Boston University 3/2016. http://www.bu.edu/ise/files/2016/03/Rohlfing_BU_Mar_15_2016.pdf

*Related paper is available at:  http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=6750724