Why Uber and Lyft Are Forcing Investors to Pick a Side

Adam Berry/Getty Images

Adam Berry/Getty Images

The competition among startup companies is always steep, especially when two companies are competing within the same industry. But the unprecedented number of people wanting to ditch taxis and traditional transportation in favor of Uber or Lyft services has made the competition between the two startups especially fierce. The companies might both be in the same sector and have headquarters in San Francisco, but the two aren’t willing to share investors.

In fact, both companies have made moves that the Wall Street Journal calls “rare” in venture-capital investing, in which investors interested in taking a look at either company’s financials must first sign an agreement stating they won’t also seek investment opportunities with the rival company. It’s not a normal move, especially because most startups don’t have the sort of leverage required to be quite so audacious. “I’ve never heard of a company doing this,” Rett Wallace told the Journal. Wallace is chief executive of Triton Research LLC, which does research on private companies. “But it’s not like it doesn’t make sense. There have to be some benefits of being private, including not showing your numbers to people you don’t want to. If a company has the leverage to do it, then there’s no reason why they shouldn’t.”

For all intents and purposes, Uber has much more leverage than Lyft at the moment. Though both companies are private and don’t release financial information publicly, the breadth of Uber’s company dwarfs Lyft by comparison. Uber has raised $4 billion to date, according to a February report by The New York Times, and has a valuation by investors at over $40 billion. Lyft, in comparison, has raised just over $300 million. Not bad for a 3-year-old company in steep competition, but not quite the shock and awe that $40 billion can have.

Justin Sullivan/Getty Images

Justin Sullivan/Getty Images

But while Uber is focusing on global growth, Lyft’s founders have pointed out that they’re only looking to grow in the United States right now, which will take less capital and could be more appealing to certain investors who want a tightly-focused business model. And despite the smaller numbers, Lyft co-founder John Zimmer claimed in late January that the company was gaining market share on Uber, and also growing 500% per year in ride count and revenue.

Growth could affect what fundraising looks like for both companies during the rest of the year. As of December, Uber CEO Travis Kalanick wrote on the company’s blog that Uber drivers are now in more than 250 cities and 50 countries, up from just 60 cities and 21 countries in 2013. With the steeper competition, it’s difficult to imagine that Lyft could have the same type of growth in 2015, but who’s to say it isn’t possible, especially if Uber truly didn’t learn its lesson from the public relations nightmares of late 2014?

But with Kalanick vowing he and the company are more humble than before, and investors attempting to predict when Uber will decide to go public, 2015 could change the way investors interact with the companies. Paul Bard, director of research at IPO-focused Renaissance Capital, told Forbes that an Uber IPO will likely come in 2015 or early 2016. If the company goes public this year, it could be the most sought-after offering of 2015, according to the Zacks research firm. The structure of Uber’s company — the transportation and mobile Internet and real-world engineering components — make it one of the “best IPO candidates for 2015,” the firm wrote.

It’s not that investors who want to play both sides won’t have a chance — the companies can’t expect to guard against competing funds forever. And in the Wall Street Journal article, sources told the publication that the agreements only prevented investors from giving money to both companies for a period of six months to a year. According to the Journal, some of Uber’s investors include venture firms such as Benchmark and First Round Capital, as well as Chinese Internet company Baidu Inc. Lyft’s investors include Mayfield Fund and Andreessen Horowitz, as well as Chinese e-commerce giant Alibaba, which coincidentally had the largest IPO of 2014, raising $25 billion.

Follow Nikelle on Twitter @Nikelle_CS

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