Lyft Inc., the ride-hailing underdog whose long-term survival was once in doubt, is revving up for its moment.
For much of the past decade—one in which ride hailing grew from nothing into an indelible part of transportation—Lyft played the part of an also-ran to Uber Technologies Inc. in an industry where many thought the winner would take all.
It was subject to a series of aggressive tactics by Uber, which tried to corner the capital markets and make it difficult for competitors to land cash to fuel their growth. Inside Uber, then-Chief Executive Travis Kalanick and top executives including business chief Emil Michael said their objective was to far outraise any competitor.
“There are going to be competitors. And we will kill them,” Mr. Kalanick, Uber’s co-founder, said in a 2011 podcast interview.
But Lyft didn’t die. Instead, it will beat Uber to the public markets Friday with a valuation well over $20 billion, as investors hungry for its shares far outnumber the amount available in the IPO.
Uber’s squeeze was at times so effective that even some Lyft investors worried there was a good chance the company wouldn’t survive. But Lyft was able to grow by seeking out unusual fundraising sources and capitalizing on key missteps by Uber that marred its brand.
By the time they launch their IPOs, Lyft and Uber will have each raised more venture capital than any U.S. startup that has gone public, according to Dow Jones VentureSource. While many early investors in the companies initially believed a dominant player would win and be able to make healthy profit margins, billions have been plunged into a war over market share with giant losses at both companies. Uber plans to kick off its own pitch to public investors for its IPO within a month of Lyft, in an offering that could value the company as high as $120 billion.
For this article, The Wall Street Journal spoke with more than a dozen people familiar with the companies’ capital-raising fight, including people familiar with Uber and Lyft’s strategies, investors involved with or witness to their fundraising efforts, and people familiar with both companies’ fundraising histories.
The early history of ride hailing as it largely exists today began with Lyft. Its founders, Logan Green and John Zimmer, ran an online ride-sharing board called Zimride that matched people for long-distance car trips.
In 2012, they began matching ordinary drivers with people who wanted rides. Drivers affixed bushy pink mustaches to their bumpers and greeted passengers with a fist bump. Uber, at that point dealing with licensed professional drivers of luxury cars, quickly started its own version called UberX.
Both saw huge potential in the business and thought it would have a single dominant player, boosted by network effects where more drivers meant more passengers. To get there, capital was critical in subsidizing rides to get passengers hooked. Lyft said in a fundraising-pitch slideshow that the industry was ripe for a “natural monopoly” in which a company could “set prices to maximize profits.”
By early 2014, Uber and Lyft had similar levels of funding from venture-capital firms—Lyft from Mayfield Fund and Andreessen Horowitz, Uber from Benchmark and Menlo Ventures.
Then Uber stepped on the gas. In one funding round after another, it scoured the globe for capital and raised it by the billions. Meanwhile, Mr. Kalanick had started a push to steer money away from the company’s competitors, especially Lyft.
Before looking at Uber’s financials, potential investors had to sign away their right to invest in Lyft or any other ride-hailing company for as long as a year. Investors said they had never seen another company ask for such an agreement.
When Lyft sought to raise more money in 2014, a pattern emerged. The company’s founders would pitch investors, and within hours or days, Uber’s team would call those potential Lyft investors, leading Lyft’s executives to suspect they were being followed. Indeed, Mr. Kalanick wanted investors considering Lyft to have a full picture of the ride-hailing industry and at least understand Uber’s financials.
The response from many of Lyft’s prospective investors was: We can’t proceed because we heard from Uber, and we were told we’ll be shut out of Uber if we continue to talk to you.
By the end of 2014, Uber was valued at about $41 billion and had raised roughly $2.7 billion, more than eight times as much as Lyft, according to PitchBook.
In early 2015, General Atlantic was talking with Lyft executives about a possible investment and was parsing the company’s financials. Near the end of deliberations, General Atlantic executives spoke to Uber’s team and ultimately eschewed taking part in Lyft’s next round. Uber helped garner a $200 million investment from General Atlantic by offering it common stock sold by one of its founders at a $30 billion valuation—$10 billion lower than the level at which Uber had recently raised money.
Debut Performance
How big tech IPOs have done in their first day and their first year
IPO price performance
ONE
YEAR
FIRST
DAY
Alibaba
JD.com
%
100
0
Tencent Music*
Palm
Pinduoduo*
Infineon
Snap
*Less than a year old
Source: Dealogic
Lyft also struggled to work with Wall Street investment banks as many were wary of helping the company for fear of losing out on potential work with Uber. A key exception: Credit Suisse Group AG , which is now one of the top underwriters on Lyft’s IPO.
Frustrated, Messrs. Green and Zimmer turned to unlikely corners and cleaned up their image. The pink mustaches—which often became brown from dust—were abandoned.
The two founders connected with Hiroshi Mikitani, the CEO of Japanese e-commerce company Rakuten Inc., who saw room for a second player and led a $680 million round in March 2015.
Less than a year later, while Uber was raising from Wall Street investors like Tiger Global Management and mutual funds that typically invest before IPOs, Lyft found another critical source of capital in Detroit.
General Motors Co. executives, particularly President Dan Ammann, had been hunting for ways to show shareholders they had a plan to be a big player in the future business of robot taxis. In November 2015, Mr. Zimmer gave a keynote speech on the end of car ownership at the Los Angeles Auto Show and Connected Car Expo.
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After watching Mr. Zimmer’s speech, Mr. Amman and his team sat down with him and Mr. Green at a Los Angeles hotel and started hashing out a plan to lead Lyft’s next investment round. Soon after, GM said it would put $500 million into Lyft as part of a $1 billion round that valued Lyft at $5.5 billion. It was the first time a major car maker joined forces with a ride-hailing company, an industry seen as a primary threat to auto makers.
In 2017, Lyft was aided immensely by Uber’s corporate woes, as a series of scandals ultimately led to Mr. Kalanick’s resignation as CEO. Uber’s image was tarnished, and Lyft’s brand benefited. Since then, Uber has replaced a large portion of its senior management team, who have emphasized a softer image and focused more on IPO preparations than raising more private capital.
“Nobody could have predicted what happened at Uber,” said Ben Ling, founder of Bling Capital and an early investor in Lyft. “There was definitely a time when people thought that Uber could crush Lyft.”
Lyft’s U.S. market share—15% in late 2016, according to Second Measure, which tracks credit-card transactions—surged at first and has since grown to around 30%. At that level, both companies tend to have similar wait times and service, investors in both companies say, giving Lyft a more secure seat. Uber has roughly 70% of the market.
When Lyft signed up underwriters in late 2018 for its IPO, it had more banks to choose from. Ahead of what was expected to be one of the biggest IPOs in recent years, Lyft was finally in a position to call its own shots. JPMorgan Chase & Co sought to have a role on the IPO of Uber and Lyft, but Lyft executives balked at that. They forced the bank to sign an 18-month agreement that prohibits JPMorgan from working with Uber during that time.
Last week, Lyft held its key meeting for possible investors in a ballroom at the St. Regis hotel in Manhattan attended by more than 400 people. Credit Suisse’s global head of equity capital markets syndicate, Anthony Kontoleon, introduced Messrs. Zimmer and Green. Before starting his pitch, Mr. Zimmer thanked Mr. Kontoleon for his loyalty.
Now, as one of the three lead underwriters on the IPO, Mr. Kontoleon and his team will help choose which funds can get in on one of the year’s hottest deals.
—Mike Colias contributed to this article.
Write to Maureen Farrell at maureen.farrell@wsj.com, Eliot Brown at eliot.brown@wsj.com and Corrie Driebusch at corrie.driebusch@wsj.com
https://www.wsj.com/articles/how-lyft-survived-a-cutthroat-money-raising-battle-with-uber-11553776934
2019-03-28 13:42:00Z
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