Steering Lyft’s IPO: What Investors Will Weigh During the Roadshow

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breakout of the recruitment cost per driver. Lyft says 91 percent of its drivers provide rides for fewer than 20 hours per week. It’s possible that some of those drivers are also working for Uber and other ride-hailing services.

Lyft and Uber are trying to offer safe, standardized, on-demand rider experiences for mass populations, while depending on a casual workforce in a period of very low unemployment in the United States. Meanwhile, their competitive rivalry maintains downward pressure on fares.

Investors who are interested in how much drivers are paid won’t find those figures broken out in Lyft’s filing. The company subtracts driver payments before it reports its revenue.

Faith in Network Effects

Silicon Valley often values user growth above other measures of a startup, based on the belief that growth yields “network effects” that make a service more valuable to all participants as each new user is added. Walter Frick, a deputy editor for HBR.org at Harvard Business Review, says these network effects won’t work as well for Lyft and Uber, compared with companies such as Google and Airbnb, because of two factors identified in an analysis by the Harvard Business School:

—Clustering: Ride-sharing outfits compete in geographic clusters, and a small local competitor in a particular city can take away market share, even from a leading nationwide or global company.

—“Multi-homing”:  Lyft doesn’t really “own” its network. Both drivers and riders use Uber as well as Lyft. This “multi-homing” often happens when the cost of adopting a new platform is low, such as simply downloading another app. “When multi-homing is pervasive on each side of a platform (both riders and drivers), as it is in ride hailing, it becomes very difficult for a platform to generate a profit from its core business,” as Frick quotes the Harvard Business School writers’ view in their earlier article.

Governance

Among Silicon Valley startups, it’s not unusual for founders to try to maintain control of a company by issuing themselves greater voting rights compared with outside investors. But Wall Street investors may be turned off by such a provision, found in Lyft’s proposal. Outside shareholders after the Lyft IPO would have little control over Lyft’s governance, as Recode explains. The founders’ shares come with 20 votes per share, while investors in the IPO would receive one vote per share.

Regulation 

Silicon Valley supported Lyft and Uber during their early days, when both companies claimed that their novel services weren’t bound by regulations that applied to more traditional transportation businesses, such as taxi operators. But shareholders in Lyft as a public company may see its value eroded by the cost of new regulations from government agencies that are catching up to the impact of the ride-hailing model on traffic, workers’ rights, safety, and other factors. For example, in December, the New York City Taxi & Limousine Commission passed new regulations that would institute a minimum wage of $17.22 after expenses for drivers dispatched through ride-hailing apps such as Lyft and Uber.

Another potential thorn in Lyft’s side is U.S. officials’ dawning realization that consumers need more stringent data privacy protection.

“I think consumer data is a big piece of Lyft’s perceived value,” notes Brugeman of the Center for Automotive Research, adding that she’s not sure how successful the company has been at monetizing that data so far.

Big tech companies like Google and Facebook (NASDAQ: FB), which derive much of their value from the vast amounts of consumer data they hold, have essentially gotten a free pass from stateside regulators. That is changing rapidly in Europe, and the same is expected to happen eventually in the United States. This could be detrimental to Lyft’s future prospects—a note of caution that the company sounds in its prospectus.

In 2016, the consulting firm McKinsey noted that the treasure trove of data collected about travelers in connected vehicles was creating a host of new “value creation models,” from entertainment to targeted advertising. Rakuten, a Japanese e-commerce platform with a market data division called Rakuten Intelligence, holds a 13 percent stake in Lyft.

Future Autonomy and Shared Mobility

According to TechCrunch, VCs and other investors so far have poured $5.1 billion into Lyft as one of the vanguard companies that have redefined transportation as an online service. Lyft’s task in the roadshow will be to persuade investors that as a pioneering company with an “open platform initiative,” it can earn an important role in the growing mobility business ecosystem—even if that role can’t yet be foreseen precisely.

For example, Lyft might one day be able to replace human drivers with vehicles that pilot … Next Page »

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