At Startups, People Are the New Infrastructure

It won't go away. The notion that people are the source material, the root cause, the key ingredient for the new economy.

Whether they are referred to in glowing terms by CEOs who aver that their most valuable assets go home every night or celebrated as The New Infrastructure, we are continually subjected to a stream of rhetoric declaiming their unalloyed value to the contemporary enterprise.

And yet. Even as employment figures rise and the economy purports to expand, pay for the vast majority remains stagnant by every measure.

So how to account for the disparity between the almost embarrassing encomiums and the harsh reality of the compensation market?

There is little doubt that a few people who know how to use increasingly powerful computational devices of whatever size can move whichever needle you're watching. And this despite competition from the industrial legacies possessing mass and scale.

The issue seems to be that there are even fewer people who have the requisite skills to command the pay commensurate with their putative power. For everyone else, there's part-time work and contracting. And the reason is that the basic skills are now sufficiently widely distributed that there is more availability than demand. Despite their relative power as drivers of value, people are still an abundant resource.

The flip side of the Uber-FedEx comparison below is that the one needing only 2,000 people spurs the one employing 168,000 to figure out how to cut that number dramatically. The leveraging of existing assets is clever and efficient but the pressure on the denominator in the standard ROI calculation continues to squeeze people, not profits. JL

Christopher Mims reports in the Wall Street Journal:

Compare Uber with FedEx. One employs 2,000 people, the other 162,000; one doesn’t own a single vehicle while the other recorded $3.5 billion in capital expenditures last year. That’s the New Infrastructure, and it’s the reason Uber is valued, premarket, 80% as much as FedEx.
Silicon Valley of 2015 resembles nothing so much as the beloved Busytown children’s books by Richard Scarry. I don’t mean all the construction—though there’s plenty of that—but in terms of what businesses companies are pursuing. In an industry built, like Google, on the strength of an algorithm, the ranks of the billion-dollar startup club are swelling with something altogether different—companies predicated on the scale and power of their infrastructure. Here’s the crazy part—that infrastructure is made of people.
Uber, Lyft, AirBnB and companies like them are “the FedEx of the modern tech industry, if you think about FedEx as a massively complicated logistics organization that happens to get paid to deliver packages,” says Scott Kupor, managing partner at venture-capital firm Andreessen Horowitz.
It might seem specious to compare Uber with FedEx. One employs about 2,000 people, the other 162,000; one doesn’t own a single vehicle while the other recorded $3.5 billion in capital expenditures last year. But that’s the trick of what I call the New Infrastructure, and it’s the reason Uber is valued, premarket, 80% as much as FedEx.
“We just reveal infrastructure that already exists,” says Marc Gorlin, chief executive and founder of Roadie, a startup that aims to disrupt—what else?—FedEx. Roadie connects people who happen to be driving between two cities with people who have bulky or heavy items they need transported, the sort of thing FedEx and United Parcel Service can’t handle and that courier services charge exorbitant rates to move.
It’s this act of “revealing infrastructure”—not the mislabeled “sharing economy”—that is at the heart of startups such as Uber, AirBnB, Roadie and Instacart, which pays people to pick up and deliver your groceries. America is awash in able-bodied and underemployed young people, motor vehicles and, in the case of AirBnB, homes that are less than fully occupied. It’s a combustible mix: Just add a coordinating mechanism, in this instance the always-connected pocket supercomputers known as smartphones, and what you get is a seemingly endless potential to put goods and labor to productive use.

ENLARGE

“I think an area of tech that doesn’t get talked about as much but is really important is just how many people these companies need,” says Brian O’Malley, a partner at venture-capital firm Accel Partners. The New Infrastructure isn’t fiber optics or cell towers or data centers—though none of it could be built without that underlying kit.

Advertisement

And that’s perhaps the most remarkable thing about this movement: For the first time in decades, billion-dollar startups are being built not on gains in productivity made possible by eliminating humans, but by their wholesale recruitment.
“This is a very popular meme today in the Valley: If you talk to aspiring entrepreneurs in accelerators or earlier, it’s ‘We want to be the Uber for something or the AirBnB for blank,’ ” says Chuck Ganapathi, the founder of Tactile, which makes software that helps salespeople do their jobs better.
The industries these aspiring entrepreneurs want to tackle tend to be things that haven’t been touched by technology in a long time—like the taxi industry—and, unlike startups in the Valley days of yore, labor-intensive, whether it’s cleaning houses or buying groceries.
Taking on these industries isn’t for the faint of heart, however. At the core of all of these businesses is what’s known as a two-sided market, in which companies must create markets for both labor (think Uber drivers) and customers.
Just getting one of these markets going can be daunting. “It’s the ‘cold start’ problem,” says John Horton, professor at NYU Stern and formerly the staff economist at oDesk, a site that pairs freelancers with employers. “In general, no one wants to come to your market if you don’t have the other side of the market,” he adds.
In its early days, AirBnB created a market by tapping into an existing one, letting would-be landlords cross-post their listings to Craigslist. Mr. Gorlin, founder of Roadie, says that a year before he launched his app, he started a field-marketing effort at college-football bowl games, just so people would be familiar with his brand.Once the two-sided market at the heart of these New Infrastructure companies is in motion, with enough supply to feed demand and vice versa, balancing these markets is no less challenging. It’s both a problem for predictive analytics and behavioral economics, requiring a mix of data science and incentives.
“The way we think about this internally at Instacart is this is really a machine learning problem,” says Apoorva Mehta, CEO of Instacart. “We have models running at all times of day to predict how many shoppers are needed at any time of day, anywhere.”
All two-sided markets also need the ability to shape both demand and supply. Uber talks often about its use of surge pricing to get more drivers on the road, but Mr. Mehta says that raising prices is also a way to damp demand, persuading customers to buy at times when more shoppers are available.
The jobs created by the New Infrastructure are often derided as being insecure and potentially ill-paying—what’s known as the 1099 economy, after the tax form freelancers file. We live in a time when shrinking unemployment hasn’t led to increasing wages, so it’s worth asking just what kind of jobs these companies are creating.
Is the New Infrastructure made out of people because there remain tasks at which humans are superior to automation, or has the value of human labor finally sunk so low that it’s cheaper—or at least cheap enough—to use humans in startups that were previously unworkable? Furthermore, what do these jobs say about how we value certain types of labor, and therefore people, compared with those who build all the technology that enables these startups, and who can therefore afford to use them?