Andreessen Horowitz chooses its horse in the increasingly competitive car-hailing and ride-sharing space. Here's why it put $60 million behind Lyft.
Lyft, the San Francisco-based ride-sharing start-up known for its pink mustache hood ornaments, announced today it has raised $60 million from venture capital firm Andreessen Horowitz, bringing its total capital raise to $83 million.
John Zimmer, the start-up's 29-year-old president, says the company plans to use the capital to expand globally, open offices overseas, and continue to hire employees. Today, the company has 55 employees, but Zimmer expects to double the headcount by the end of 2013. "We didn't start this company to raise money," Zimmer says. "But this investment gives us the resources we need to grow this company globally as well as strengthen our community. We realize we're just getting started."
Founded in 2007 by Zimmer and co-founder Logan Green, Lyft's business model is fairly straighforward, even if it operates in a legal gray area: The company recruits and (background-checks) city car owners to become become part-time taxi drivers, who set the hours they wish to work. Drivers are paid through "donations" from passengers.
Customers, using an iOS or Android app, can "hail" a Lyft driver and hitch a ride. In heavily populated areas such as San Francisco's Mission District, wait-times can be less than two minutes. And payment, which is technically optional, is delivered directly to the driver through the app--and (here's a key to the business model) Lyft takes a 20 percent cut.
So far, the service has been a major hit in the Bay Area. While getting into a stranger's car and giving them a fist-bump (sort of a cultural hallmark of Lyft's service) isn't for everyone, Lyft has amassed almost a cult following. Zimmer says the company has "hundreds of thousands of users," and tracks about 35,000 rides each week. The company does not disclose revenue.
Right now, the service operates in four cities--San Francisco, Seattle, Los Angeles, and Chicago. Zimmer was tight-lipped when asked about company plans to enter specific markets (New York? London? Portland? Boston?) but he said city population, population density, and transportation alternatives will factor in to their expansion road map.
With this Series C investment--Founders Fund invested $15 million in its Series B in 2012--Lyft becomes the most well-funded transportation alternative start-up in this increasingly competitive space. SideCar, its most direct competitor also based in San Francisco, has raised $10 million, while Uber, the extremely fast-growing on-demand taxi, car, and sedan service, has raised nearly $50 million.
Despite that these companies are trying to shake up a lucrative $11 billion U.S. transportation industry with no dominant players, it's a notably risky investment. In October 2012, the California Public Utilities Commission sent Lyft, along with several other ride-sharing and car-hailing companies, cease and desist letters. The PUC argued that Lyft lacks "the required charter party carrier permits that make sure drivers are properly licensed, screened and insured to carry commercial passengers."
Zimmer is well aware of the challenges ahead, and says he and his team are working with both internal and external counsel to do the legal research needed when expanding to new markets. "We are going to face hurdles," he says. "We knew that when we started this. But in the end, [ride-sharing] is better for the consumer. It's more efficient."
Scott Weiss, a general partner at Andreessen Horowitz leading the Lyft investment, admits that the regulatory issues were a legitimate concern for the venture firm, but his confidence in Zimmer won out.
"One of the primary risks in this type of investment is regulatory," Weiss says. "But I think we have an advantage because we are on the right side. They take trust and safety extremely seriously."
Weiss notes that Andreessen Horowitz partners have met with teams at Sidecar and Uber, but what set Lyft apart, and ultimately earned the investment, was their strong community and transparency.
"These guys have figured out how to crack the trust barrier," he says. "They forced everybody, the drivers and the riders, to Facebook-connect. They have proprietary ways of making sure you are a real person."
Weiss was also attracted to the company due to its diversity of drivers and passengers--and its reputation as a trustworthy, safe, service. For instance, the majority of Lyft riders in San Francisco are women.
"You have to think getting into a strangers car--a lot of women might not do that," Weiss says. "Their driver screening is I think the best in the industry."
Now, about that pink mustache. It's a nice branding tool, but will it actually fly, say, on the streets of Paris?
"The mustache will go global," confirms Zimmer. "It's important to us that we understand the local communities. Everything we do should not be a one size fits all. We'll want to do that research."
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