The Hard-Knock Life of Start-Ups

Snap and Blue Apron highlight broader woes among companies trying to take on behemoths like Amazon and Facebook.

For periods of time, being a start-up company can hold glamour and riches for those involved in the early stages, but it seems it is getting harder and harder for newer companies to carve out niches in spaces that are being dominated by entrenched players like Amazon and Facebook.

Take Snap for example. The company owns the popular SnapChat app that was launched in 2011 and claims more than 170 million daily active users. The company reported earnings Thursday evening which showed that year over year its revenue had increased by more 150% to $182 million for the three months ended in June to $182 million. That puts the company at an annual revenue run rate of more than $720 million compared to just $59 million as recently as 2015. But, if the company is prospering, no one has yet told Wall Street. Shares today are trading down close to 11% on the report. Since selling shares to investors in an initial public offering in March, the stock has declined from $17 per share to $12.33 – a change representing a market value of the company from more than $22 billion to about $16 billion.

What’s the culprit of investors tepid reaction? In the latest quarter, it seems the disappointment was tied to the number of active users. The company a little more than 7 million while investors were looking for 8 million. More broadly, though, it seems that many are no longer so sure that Snapchat can effectively compete with Facebook and its Instagram unit. Snapchat was once valued by its users because of its disappearing image feature which helped erode privacy concerns. It also introduced a “My Story” feature that allows users to share a stream of images compiled together with friends. As it turns out, these features are not that hard to copy and Instagram has. It’s “Stories” feature – similar to Snapchat’s – now has 250 million active users and with the advantage of a larger ecosystem is there a meaningful reason why new users would continue signing up for Snapchat at explosive rates?

Another example of the difficult terrain for start-ups is Blue Apron. It was founded in 2012 and delivers foods to it customers that can be combined in recipes. Combining healthy ingredients with the convenience of delivery and the appeal of a home meal, the company soon one converts. In its most recent quarter, Blue Apron fulfilled more than 4 million orders from 940,000 customers and its revenue of $238 million was 18% higher than last year. But, its stock too was punished when it reported earnings. After listing at $10 per share on June 29th, the price of the stock has already been cut nearly in half to $5.07, valuing it at close to $1 billion. For Blue Apron, its Amazon that observers worry about.

Amazon recently announced plans to purchase Whole Foods for $13.7 billion and it also filed for trademark registration the phrase “We do the prep. You be the chef.” Should Amazon move in a big way onto Blue Apron’s turf, would it really have the resources to match Amazon on pricing? Probably not.

Innovation powers the economy forward and companies like Amazon and Facebook have provided plenty of it to the world. But, if we’re moving into a new period where it gets harder and harder to find niches in which to compete against broader ecosystems are we in danger of an unprecedented concentration of corporate power in the hands of a few companies? Only time can answer.

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