11.04.19 | A note on Lyft.

By Jessica Sier 11 April 2019 3 min read

Ride sharing - despite the fact so many of us use it - is still an unproven business model.

The model is: you download a free app, plug in your credit card details, get served up an interactive map where you connect with people driving their own cars, they take you somewhere, you pay the driver a fee, and an app provider (like Lyft or Uber) clips the ticket on that transaction.

That’s largely how they make money.

There are surge pricing structures (cool dynamic pricing technology!) and there are different classes of cars on the platform, but clipping the ticket by facilitating a driver and a rider connection is the fundamental business model.

The thing is, the amount of tickets Lyft is clipping is not really enough to cover the costs of maintaining the app and the network and the customer service and the driver insurance and the lawsuits and the thousands of employees and everything else.

It’s not enough by a long shot.

Lyft lost $US911 million last year, which is more than any other US startup in the 12 months preceding its IPO, according to S&P Global Market Intelligence.

They had a revenue of $US2.16 billion in 2018, but this doesn’t count the companies expenses or the cost of running the business.

And Uber isn’t doing much better.

Uber in 2018 lost $US1.8 billion before taxes, depreciation and other expenses.

Its revenue for the year was $US11.3 billion and ride bookings were $US50 billion.

To understand why they haven’t managed to build a path to profitability yet we need to look at the industry they are disrupting.

The reason taxis became profitable at all was because they were in a regulated industry. The authorities kept an eye on pricing, and by making taxi licenses so expensive they kept the drivers (supply-side) under control.

Uber and Lyft don’t control the supply side; anyone can be a driver. And the more drivers are around, the cheaper the rides become.

Great for us as passengers! Not great for Uber and Lyft (or drivers) who are clipping tickets on smaller and smaller amounts.

And because it’s really easy to switch to another provider, no matter how many riders and drivers they get onto the app, it’s really hard to keep your customers loyal. I can download a competitor's app (and so can a driver), jump on the platform and use it within minutes.

It’s kind of a race to the bottom.

And even though Lyft is tentatively expanding internationally, Uber is already in around 70 countries, and revenue is expanding, it’s not really getting closer to profitability.

Because they are in a perpetual race to the price-bottom, trying to take each other's business, they don’t have a firm customer base to monetise. Those profits may remain elusive while they are locked in a constant battle with their competition.

Now, it’s possible I’ve got all of this wrong in thinking that Lyft is about selling car rides. If you look at the recent letter from the founders, there’s a slide called Our Life’s Work.

And it begins, “It’s time to redesign our cities around people, not cars.''

This seems like a counterintuitive slogan for a company that sells car rides, but not if you’re part of the modern tranche of technology companies who are mission led rather than...money led.

But as we saw in last month’s Lyft IPO, public investors kind of are about the profitability side of things.

If you invested in Lyft privately, before the IPO, you did great.

If you bought shares during the IPO and then sold them as soon as Lyft started trading, you also did great.

If you bought shares once they started trading publicly - the first time retail investors were able to buy it - you did badly.

That’s because the share price at which the company was listed has gone down from what the company priced them at.

Public markets are generally harsher when it comes to revenues and profits than, say, venture capitalists.

Generally, public investors want to see where the future revenues and profits are going to come from, whereas sometimes venture capitalists don’t mind that much.  
And as we’ve discovered many times with technology firms, the financial benefits of entrenching your company into everyone’s digital lives are so big that losing even billions of dollars to get there can be worth it.

We are still on the fence about whether Lyft or Uber are actually going to make that flip to profitability.

We'd be interested in your thoughts.

Spaceship Voyager does not hold an interest in Lyft.

Enjoy your week.

P.S. This header features the Jaguar E-Type Zero, a zero emissions electric car modelled after the Jaguar E-Type 1968 Series 1.5 Roadster. A car we look forward to Lyft and Uber drivers utilising.

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist. Prior to that she led content at Spaceship and was a reporter at the AFR where she discovered that breaking down financial jargon was a public good.

11.04.19 | A note on Lyft.