Scooter rental startups have been having their moment in 2018, and it's easy to see why. With viral images of scooters strewn about campuses and streets, an Instagram account dedicated to scooter vandalism, profiles of the often funny and sometimes cut throat job of charging scooters, and public outcry, the story has quickly developed into a tech journalist's favored beat. It's a story with many angles that's visual, funny, violent, political, and aspirational.

But it isn't just journalists who have scooter fever. Venture capital firms have been investing hundreds of millions into scooter rental companies like Bird, which doubled it's valuation to $2 billion in four months, and Lime, which reached a $1.1 billion valuation in 18 months.

Those skyrocketing valuations signal a bet on the longevity of Bird, Lime, Scoot, Skip, and Spin. But why? Are these companies the Uber and Lyft of scooters?

From my point of view, no, neither Bird nor Lime will be the Uber of scooters (not even if Uber acquires them). I anticipate scooter startups will suffer network growth problems as demand drops off a cliff in the near term. Here's why.

Why Investors Like Scooters

Before jumping into the negative, let's highlight why scooter rentals are a golden goose right now. Scooter rental companies benefit from pretty good unit economics.

Quartz did a lengthy break down of scooter rental unit economics, which is worth a read for the curious. In summary, the average trip costs $2.92. At 5.5 trips per scooter per day, that's $16 per scooter. Subtract the $5 charging fee scooter companies pay to gig laborers, and each scooter brings in $11 (before maintenance which averages at $15 per repair, which of course doesn't happen daily).

Most scooters come from one of two Chinese companies, Ninebot or Xiaomi, and Quartz estimates that scooter startups are paying, at most, $320 per scooter (and likely a lot less). Even at the $320 per scooter price point, each scooter (if it doesn't need repairs) pays for itself after 29 days.

Even without knowing the average lifespan of an electric scooter, I can see why investors like these numbers. However, I predict two things will happen: unit economics will erode, and, more importantly, demand will drop.

Unit Economics Gains Will Erode

As written above, repairs average $15 per repair, which while not very expensive, can add up as scooter vandalism becomes both nihilistic sport and a form of public outcry. From the Washington Post,

"Scooter haters claim their destruction is a form of righteous rebellion. The scooters are not "last mile" transportation solutions, they argue, so much as the greedy tentacles of Silicon Valley brands wrapping themselves around public sidewalks. Others consider the scooters symbols of a troubling shift from public to "private" transportation, a change that places important decisions about how cities operate in the hands of multibillion-dollar companies thousands of miles away.

For still others, destroying scooters offers a nihilistic release."

No scooter rental startup releases data related to vandalism, or (more benign but not uncommon) loss. Theft also occurs, because these scooters are easy to hotwire, but at a lower rate than bike theft. Nonetheless, as scooters need to be routinely repaired, or purchased to replace supply that is lost, the unit economics erode.

And this public outcry isn't limited to individual vandals. Municipalities are currently drafting scooter regulations to cope with this new reality. The Quartz article cited above runs the numbers on a proposed regulation from Portland, Oregon that would impose a "$0.25 surcharge per ride, in addition to permit fees of $5,250 ($250 to apply, $5,000 for the permit) to deploy up to 200 scooters for four months. ... that works out to an additional $26.25 in permitting fees per scooter, plus $1.25-$1.50 in daily ride surcharges."

Lastly, scooter rental companies pay contractors to scoop up scooters and recharge them. The contractors earns $5 per charge most of the time. However, hard to reach scooters, or scooters that are lost, have a bounty of $20 per charge. This has led to scooters chargers, who call themselves 'Bird Hunters', to hoard scooters for multiple days at a time to force the system to mark the scooter as lost. The bounty jumps to $20, and the hoarders collect the bounty, thereby driving up the cost of recharging scooter supply.

All of these issues - vandalism, loss, theft, regulations, and hoarding - currently threaten scooter startups' margins. However, they can be mitigated with enough time and money, which also puts downward pressure on margins.

Still, many investors may see that reality and say all businesses have growing pains, and smart companies find smart solutions. And they're right. However, there is a deeper threat to the demand side of the market.

Expect Demand to Drop

Risks to the margin alone won't burst this scooter bubble. The number one risk is a steep drop off in demand. Scooter startups target middle-class or wealthier commuters who can easily afford a scooter of their own. Not only are scooters cheap for the consumer, but they are collapsible and portable, requiring little to no storage or parking space. Bike and car rentals make sense for urbanites with limited storage space. However, scooters don't have the same storage requirements, because many electric models are foldable.

Up until now, scooters have largely been seen as a toy for children, or a budget version of the Segway, which was laughed out of the consumer market in the 2000s. If anything, Bird, Lime, Scoot, and other startups are normalizing scooter commutes for adults, essentially becoming public showrooms and brand reputation managers for electric scooter companies.

Once scooter commutes are accepted as a dignified option for urban adults, what's to stop commuters from buying their own scooters? In fact, it's much more cost effective for regular scooter users to buy their own ride.

The average scooter commuter spends $6 per day ($3 each way). Premium foldable electric scooters cost around $300. That means that after just 50 business days, or 2.5 months, a renter would have been better off buying their own scooter - likely sooner when you factor in rides for errands and leisure.

Which highlights a second point about these startups: scooter rental is actually quite expensive when compared to other rideshare options like bike share. For comparison, Citibike, the bike-sharing company in NYC, charges $3 per trip up to 30 minutes. The average $3 ride for scooters lasts 10 minutes. If you wanted to rent a scooter for the day, there is currently no special price. At 8 hours, it would cost $73 ($1 + 15 cents per minute). Citibike charges $12 for a day rental. However, Bird has announced it will offer day rentals starting in 2019 (no price has yet been released).

Network growth problems lead to platform problems

Given how cheap it is to buy, maintain, and store your own scooter, I expect scooter commuters to invest in their own ride, which means that scooters will be demand constrained (an outlier, as I've explained before, platforms tend to be supply-constrained).

Then again, these startups aren't really platforms. The scooter supply is provided by one party, the company itself, who outsources maintenance and scooter charging to gig laborers.

Bird plans to open up a platform (and defray costs and boost revenue) by letting entrepreneurs join Bird and manage their own fleet of scooters for a fee. That's a smart short-term move that likely impressed investors. However, no amount of platform design can save a platform with serious demand-side problems. If commuters abandon the platform, these companies will be reliant on recreational, tourist, and niche use cases which may not drive the network effect dynamics necessary to spur growth (see my network effects definition for a deeper understanding).

Remember the segway hype of the 2000s? Scooter rental startups may experience a parallel narrative. Segways still have their market, largely with mall cops and other niche use cases (e.g., Segway polo with Steve Wozniack), but no company is valued anywhere near Bird or Lime.