Big valuations for Bite Squad, WeWork were never realistic

Maybe it's hard to imagine what could have changed so much that what made financial sense not even a year ago — spending about $336 million for the food-delivery company Bite Squad or investing in WeWork at a $47 billion valuation — can seem silly now.

The reality, of course, is that nothing changed. Those deals were silly then, too.

The recent massive write-down in value for the Minneapolis delivery company Bite Squad by the company that bought it earlier this year is just another part of the same collapse of magical thinking that buried the proposed public offering of WeWork's parent.

Capital had flooded into these companies based on their plan of growing as fast as possible, hoping to make money … someday. A reckoning was inevitable.

It's always hard to know why hype triumphs over prudence for a long time, but telling the difference when you are in the market seems difficult for even the best thinkers. But from a distance it never made sense that companies could be valued like explosively growing technology firms when they still relied on a lot of cars, expensive office space or people who needed to get paid.

It's clearly possible to make money in a service business that pays for thousands of people driving around in thousands of individual vehicles. That's pretty much what Ecolab Inc. does, for instance, and it's thriving. But it's not fundamentally a technology business.

The We Co. was so eager to mask that its WeWork rented out office space that it ripped off a concept from software and called its business "space as a service."

That's one way to think of a business idea called operating leverage, a measure of how much the profits will increase as sales grow. Growing software firms need more code writers to work on version 2.0 and customer-service people to handle more problems, but at some point a new software customer can be added at an additional cost of near zero.

The boss can come in Monday morning and find that 100 new customers got some questions answered by a chat bot over the weekend and then downloaded the software and started a paid subscription.

No employee lifted a finger. Nothing shipped. The company could have been unprofitable at the close of business on Friday and profitable on Monday morning.

You can see how a race would get going in this niche. Spending a lot now to grab customers might make sense, because as the market matures and the operating leverage really kicks in the rewards will go disproportionately to the biggest player.

That idea of getting big, fast, obviously infected the thinking of We Co. leadership in the short-term office rental market. But unlike in software with its favorable operating leverage, each incremental jump in growth for WeWork required a costly new office suite.

The business of delivering meals seems to have a similar challenge, as it's a people-intensive service business.

The industry is so new that in doing research the graphs only seem to go back to around 2010. Back 10 years ago, at least in our region, hungry customers could get a pizza delivered and that was about it. It was absurd to think anyone would use a car to deliver a hamburger and fries.

Yet the business boomed, and the creators of Bite Squad deserve our respect for building one of the winners. In January, the Louisiana-based company Waitr Holdings Inc. closed on its acquisition of Bite Squad.

About $197 million of the $336 million was paid in cash to Bite Squad's owners. Waitr also paid about 10.6 million Waitr shares, valued at $11.95 each. Because there were so few real assets for Waitr to buy, by far most of the purchase price was allocated to "intangibles" like trade names or customer lists and what's called goodwill.

Last week Waitr said it was writing down the carrying value of intangible assets by $192 million, just coincidentally about what it paid in cash for the deal.

But it's an industry problem, not just a Waitr problem.

What Chicago-based Grubhub talked about after its own disappointing quarter was its strategy of being an advertising arm for restaurant owners, not just a delivery service. But from reading the trade press you can see how those owners think of delivery as a mixed blessing. The orders are often disruptive for the kitchen, the fees feel like gouging and it's not clear what a delivery service does for building customer loyalty.

The reality is that growth is slowing and there's not nearly enough to differentiate these services. And because of all the costs of the people in these operations, the boom seems to be ending before these companies have gotten consistently profitable.

Earlier this year executives of unprofitable Waitr announced a program they called the "Path to Profitability." Among other things that has meant shedding employees in Minneapolis.

Making money sounds great, of course, but I've worked at a place where even proposing that we pitch investors on some sort of plan to make money someday might have gotten me fired. The job is to earn a profit today.

The fun now seems to be over. This week Bloomberg reported that Grubhub has become the most profitable "short" sale in the stock market this year, meaning the trade that makes money if the share price declines.

Only the rosiest of tinted glasses would make Grubhub shares look like a buying opportunity now — although I guess by the valuation ratio of price-to-Grubs, Grubhub's stock might never have been cheaper.