Featured Article

Uber, Lyft and the challenge of transportation startup profits

Transit has always required subsidies — can Uber and Lyft escape history?


Image Credits: duuuna (opens in a new window) / Getty Images

How much does transportation cost you?

In most cities, bus or subway fare might set you back $3 or so. A tank of gas, maybe $30 or $40 depending on your car. An hour of street parking? Sometimes it’s free, sometimes it’s a few bucks. And you can usually snag an economy seat on a round-trip U.S. domestic flight for less than $300.

These numbers probably ring true for most people. There’s just one problem: Everything you know about the cost of transportation is wrong.

Despite a massive infusion of venture capital into the transportation sector over the past few years, mobility startups are starting to learn what every transportation business has known for generations: transportation profits are elusive, and the system is mainly held together by subsidies. Will this be the first generation of transportation businesses to escape history?

New mobility is on fire

First, let’s set the table. Since last year, multi-million and even billion-dollar investments in new mobility have become so commonplace we almost don’t notice them in the rush of headlines.

Automakers are planning to spend more than $300 billion on electric vehicles in the next five to seven years. Just one self-driving-car company raised $5 billion in 2018 alone. Scooter company Bird, not even two years old, is valued at $2.3 billion. Uber is shooting for an IPO with a valuation of at least $70 billion, and perhaps as high as $120 billion.

Speculation, largely fueled by the promise of autonomous vehicles happening sooner rather than later, has the mobility market in overdrive.

Dan Hoffer, a founder of Couchsurfing and presently an investor with Autotech Ventures, is focused on the mobility marketplace. In an interview, he summed up the VC firm’s raison d’être:

“We believe that ground transportation is going through the biggest disruption right now than it has in the last century, and the rate of innovation is increasing faster than ever before and the changes that impact consumers are taking place faster than ever before,” Hoffer says.

“And when there’s massive transformation and disruption,” he adds, “there’s also the potential for massive returns to shareholders.”

But is that really true, specifically when it comes to transportation?

Subsidies make transportation go ’round

New mobility companies are entering a game with a deeply uneven playing field. A big reason for the disparity is subsidies.

People often think of subsidies in terms of public transit, but in reality almost everything that touches transportation is partly funded by public money.

“The big distinction is that public transportation is overtly subsidized — it shows up as a dollar figure, whereas automobile transportation is subsidized in a hidden way, by having all these unpriced roads and a bunch of subsidized parking,” says Todd Litman, the founder and executive director of the Victoria Transport Policy Institute in Canada.

If we zoom out, we can see that intercity buses, airlines, automakers, transportation manufacturers, railways, energy companies, freight transportation and the entire road network are all subsidized to some extent. It may surprise you to know that only half of the money spent on the U.S. road network comes from gas taxes and other user fees, and that global subsidies to fossil fuel companies reach into the trillions of dollars.

These subsidies conspire to keep the cost of delivering transportation artificially low — and that’s not all bad news. We subsidize transportation and its auxiliaries for valid reasons. In some instances, subsidies exist to promote job growth and stimulate the economy. In others, it’s to support equitable access to mobility.

“At a very, very high level, most governments — especially in advanced economies — view transportation as a necessity,” says Regina Clewlow, a leading transportation researcher and the founder of Populus, a technology company that facilitates relationships between cities and private mobility operators.

Many subsidies are accompanied by rules that promote equitable access, she continues. “Public transit authorities are required to meet certain accessibility measures. They need to deliver it in neighborhoods and during times of day where there’s basically no way to make a profit.”

Meanwhile, new mobility companies — many of which are subsidized by investors, and not governments — aren’t beholden to rules about accessibility. In fact, they’re built on the premise that people who can pay more for premium services, will. They’re not wrong; it’s just that they’ve made some miscalculations about what “more” means to consumers who’ve only ever been exposed to artificially low pricing.

The great convergence

Image via Flickr / Austin Transportation / https://www.flickr.com/photos/austinmobility/41536051644/in/album-72157669223418248/

Providing transportation is capital-intensive and low-margin by design.

Because the cost of buying, maintaining and operating equipment — trains, buses, airplanes, car-sharing fleets, dockless bikes, scooters — is so high, and because people are sensitive to transportation pricing in general, it’s not uncommon for transportation providers to operate on razor-thin profits, or even at a loss.

The so-called “sharing economy” was supposed to alleviate some of that. The thinking was that companies like Uber and Lyft could circumvent equipment costs by using people’s private vehicles as for-hire cars. They passed the lower costs on to consumers, destroying the taxi industry in the process and creating a new pricing norm that was pegged far below the actual cost of delivering the service.

Uber and Lyft are still struggling beneath the weight of that pricing scheme. Recently we learned that Lyft lost $1 billion in the year leading up to its IPO. Seven years after launching in earnest, the companies — or more aptly, their investors — are still subsidizing rides.

The hope was that autonomous cars would swoop in to save the day; that not having to pay a human to drive a car would be what finally brought these companies into the black. But despite the industry’s best efforts, fully driverless cars operating independently on public roads are still far off.

“The only time I get my back up is when somebody says, ‘We’re going to have fully autonomous cars in three years,’ ” says Grant Courville, head of product management for embedded and autonomous systems at BlackBerry QNX, which provides global automakers with mission-critical security software. “I don’t care who says that… I’ll look at them right between the eyes and say, ‘No they’re not. I guarantee they’re not. Give me any amount of money [and] I’ll bet you they’re not.’ Level 5 is still a few decades out.”

So these ride-hailing companies are now exploring multimodality solutions (among other revenue streams) as a stop-gap. A pessimist might say the goal of a multimodal offering is not to altruistically provide people with more service options, but rather to own transportation in a market outright and ideally gain greater control of pricing as a result.

If that’s true, the timing is right. Cities are already overwhelmed by the sudden influx of bike- and scooter-share companies. At city hall, administrators and representatives are trying to build regulatory frameworks to contain these new mobility companies and install better infrastructure to support them. As for residents, how many mobility apps and accounts can one person truly have?

The great convergence is coming. Rules will be established, RFPs issued and contracts signed — and only a few winners will come out on top.

“I think the way that most scooter and bike companies will be profitable is for there to be a regulated oligopoly,” says Clewlow. “What I mean by that is, you want to constrain the number of players in the market. You want to have more than one ideally, but you don’t want to have more than three or four depending on the size of the city. Then, you put in place reasonable and flexible constraints on the number of vehicles.”

Sound familiar?

It is perhaps a sad irony that this may ultimately look like the taxi industry once did.

There’s no business like the transportation business

Transportation is a market fraught with anxieties and inefficiencies, which have made it a prime target for disruption. As consumers themselves, entrepreneurs and VCs have personally experienced how frustrating bad transportation can be. You’re stuck in gridlock. The subway breaks down like clockwork. The 15-minute walk to the bus is annoying when you’re in a hurry.

More money and better technology feels like the right solution.

But making transportation better isn’t uniquely about being more profitable or more efficient; it’s also about being more equitable. That’s the pact our society made. We agreed to subsidize transportation because we believed it was a necessity, and even a right.

We still believe it, even if we’ve internalized a tiered system that promotes the idea that people who have more money get better service. Entrepreneurs and investors are all too willing to withhold equity on the roads in their pursuit of equity on the cap table.

Take the NYC subway. It moves more people in an hour than an Uber can in 100 years. But it has been neglected for years, and now it needs somewhere around $19 billion to be whole again. That’s a drop in the bucket considering the trillions being tossed around in the sector. Transportation investors could fund this in a heartbeat. But instead of fixing an existing system whose repair would benefit millions of people a day while generating a steady, moderate, long-term ROI, we’d rather play fast and loose on Hyperloops and high-speed sleds for rich people’s private cars.

So, can transportation actually generate the massive returns investors are hoping for?

Courville from BlackBerry QNX suggests the real money is in sensors, software, automation and other technologies that will power new mobility. “It will likely be about the services they can monetize by virtue of having that mobile platform,” he adds, offering car subscriptions as one example.

As for the vast majority of B2C transportation providers, the answer is “probably not.” Because of how resource-intensive it is to create and operate a customized solution and because of how price-sensitive consumers are, margins would probably always be thin — or non-existent.

As bike- and scooter-sharing companies learned the hard way, being decently profitable requires growing local ridership, especially in historically car-dependent markets. That takes time, education and major infrastructure investments in roads, bike lanes and better traffic signaling. It would take years, and maybe even decades, to pay off.

This probably won’t stop investors from believing there’s a magical multimodal unicorn in the mix, and throwing around billions to root them out. It’s no skin off their nose; as Litman notes, “Silicon Valley is used to companies going bankrupt.”

That’s the cost of the new mobility.

More TechCrunch

Founder-market fit is one of the most crucial factors in a startup’s success, and operators (someone involved in the day-to-day operations of a startup) turned founders have an almost unfair advantage…

OpenseedVC, which backs operators in Africa and Europe starting their companies, reaches first close of $10M fund

A Singapore High Court has effectively approved Pine Labs’ request to shift its operations to India.

Pine Labs gets Singapore court approval to shift base to India

The AI Safety Institute, a U.K. body that aims to assess and address risks in AI platforms, has said it will open a second location in San Francisco. 

UK opens office in San Francisco to tackle AI risk

Companies are always looking for an edge, and searching for ways to encourage their employees to innovate. One way to do that is by running an internal hackathon around a…

Why companies are turning to internal hackathons

Featured Article

I’m rooting for Melinda French Gates to fix tech’s broken ‘brilliant jerk’ culture

Women in tech still face a shocking level of mistreatment at work. Melinda French Gates is one of the few working to change that.

19 hours ago
I’m rooting for Melinda French Gates to fix tech’s  broken ‘brilliant jerk’ culture

Blue Origin has successfully completed its NS-25 mission, resuming crewed flights for the first time in nearly two years. The mission brought six tourist crew members to the edge of…

Blue Origin successfully launches its first crewed mission since 2022

Creative Artists Agency (CAA), one of the top entertainment and sports talent agencies, is hoping to be at the forefront of AI protection services for celebrities in Hollywood. With many…

Hollywood agency CAA aims to help stars manage their own AI likenesses

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

3 days ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

3 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies