New York: It is not an easy thing to be an independent ride-hailing company these days.
For one, it takes billions of dollars and hundreds of employees to spread to new cities, to market the service and to recruit drivers. Legislators and local laws are often not in your favour. And rivals with deep pockets from all over the world are waiting to cheer if you happen to fail.
Lyft, the second-biggest ride-hailing company in the US behind Uber, is grappling with those forces—but has found that its options are limited.
In recent months, San Francisco-based Lyft has held talks or made approaches to sell itself to companies including General Motors, Apple, Google, Amazon, Uber and Didi Chuxing, according to a dozen people who spoke on the condition of anonymity because the discussions were private. One person said it was Lyft who was approached by interested parties.
Lyft’s discussions were most serious with GM, which is one of the ride-hailing company’s largest investors. Still, GM never made a written offer to buy Lyft, said the people, and in the end, Lyft did not find a buyer.
Lyft is not in danger of closing down and has a cash cushion of $1.4 billion, some of these people added, so it will continue as an independent entity.
Still, the talks underline how difficult it has become to operate in the ride-hailing market, where people can book rides from drivers through a smartphone app.
While ride-hailing companies do not own their own fleets of cars and instead rely on drivers who have their own vehicles, the business is highly capital intensive. Venture capitalists and other investors have poured billions of dollars into the companies.
Tensions have escalated in the industry in recent months as some ride-hailing companies have worked to figure out what to do with their most expensive operations.
This month, Uber, which has raised far more money than Lyft, agreed to sell its Chinese subsidiary to Didi, the biggest ride-hailing company in China. The deal freed Uber from a cash-sucking battle for dominance in the China market.
But the move also disrupted a global alliance that Lyft had earlier struck with Didi and others to fight Uber. Lyft has not stated whether it will continue working with Didi, but the dissolution of a partnership could stymie Lyft’s growth prospects.
Representatives from Lyft, Google, Amazon, Apple, GM, Didi and Uber declined to comment on talks.
Lyft, a 4-year-old company co-founded by Logan Green and John Zimmer, sprung out of an early long-distance carpooling programme, then called Zimride, in 2007. The goal, the two co-founders have said, was to create a new kind of social ride-sharing, an attempt to decrease the number of cars on the road and to improve congestion, reduce humanity’s environmental footprint and create more efficiency in transportation.
That idea has turned into a global movement, as companies worldwide—like Grab in South-East Asia, Ola in India, BlaBlaCar in Europe and Uber—look to upend the global transportation infrastructure.
The effort to sell Lyft was aided by bankers at Qatalyst Partners, the boutique investment bank founded by the veteran Silicon Valley banker Frank Quattrone, said the people with knowledge of the talks. Qatalyst declined to comment.
Lyft failed to find a buyer partly because of cost, the people said. Lyft was valued at $5.5 billion after an investment round by GM and others in January, making it one of the more pre-eminent unicorn companies in Silicon Valley. Any sale would most likely have to fetch a premium from Lyft’s last valuation to be desirable to the company and its investors.
Lyft also struggled to find a buyer because of the challenging economics of the ride-hailing business. Companies like Lyft and Uber typically take 20-25% of the cost of each ride. With Lyft drivers expected to pick up an estimated $2 billion or so in fares this year, that meant Lyft’s annual revenue would be about $400 million, according to a person familiar with its financials.
That $400 million shrinks after marketing costs are factored in. To win loyalty from drivers who can also work for Uber, Lyft also sometimes lets drivers keep that 20-25% of some rides, so the company effectively earns no revenue in those situations. And in some cases, Lyft provides drivers with additional cash incentives simply to get out on the road, adding to its costs.
The economic realities of the industry have set in for a number of ride-hailing players. Sidecar, an app that competed with Uber and Lyft, shut down in December, citing a “significant capital disadvantage” compared with others in the market.
“One of the challenges for these firms is to figure out how to grow and sustain that latent demand for these businesses, but also to eventually become profitable,” said Susan Shaheen, co-director of the Transportation Sustainability Research Center at the University of California, Berkeley. “Part of the challenge in evolving those services is just balancing out those factors. And that’s not an easy task.”
Lyft is not profitable, said a person briefed on the company’s finances. Yet, it has a $1.4 billion cash hoard, the person added, and the company thinks that will shield it as it works towards achieving profitability.
Shaheen said an acquisition might still make sense for ride-hailing companies that needed more resources. “There isn’t a single company that has all of this expertise—software, manufacturing, ride-sharing—under one roof,” she said. “That’s where acquisition comes in.” ©2016/THE NEW YORK TIMES