I think most people underestimate what it takes to turn an idea into a real business. I know, because I get a lot of pitches about the latest and greatest rideshare companies to hit the scene but, more often than not, they’re more of an idea than an actual company. Turning an idea into a business is where the real challenge begins.
I can’t tell you how many people have e-mailed me about their cool new company that is going to put Uber out of business. But when I go to their website and Google their name, all I see is a landing page. Putting a landing page up is not the same thing as starting a company.
How To Start A Rideshare Company
So let’s say you agree with my line of thinking and you’re ready to start the next Uber competitor – how would you do it?
Define Your Niche
Now that the rideshare market is a few years old, it wouldn’t make a lot of sense to create a company exactly like Uber and try to compete with them. If you have nothing to differentiate yourself by, there’s no reason for customers or drivers to use your service.
But when companies like Uber get big and bloated, it often creates opportunities for faster, more agile start-ups. Uber prioritizes growth above all else, and that means they’re going to have to re-allocate resources away from anything that isn’t central to their current mission. One big example of that would be in the ‘Uber for kids’ niche.
There’s a huge market in metro areas like Los Angeles and San Francisco where busy parents have to spend a lot of time driving their kids around. Even David Beckham once joked that his kids make him feel like an Uber driver. But it’s actually against Uber’s Terms of Service for minors under the age of 18 to travel by themselves on an Uber ride. Sure, it still happens all the time, with some drivers in LA telling me that 10-20% of their rides these days are unaccompanied minors (get a dash cam if you’re going to do these rides). But there are also a ton of parents with kids out there who refuse to put their kids in an Uber because they’ve seen news stories or understand how lax Uber’s background check requirements can be.
Uber could easily create an option for kids and require increased screenings for those drivers, ability to schedule pick-ups, etc, but it’s just not a priority for them. That’s why you have a company like Hop Skip Drive that’s able to raise $10 million to serve this very need.
Hop Skip Drive allows parents to schedule rides so that when their kids get out of school at 3:15 pm every day and have soccer practice at 5 pm, the ride is already there. Additionally, they meet every driver for an in-person interview and perform fingerprint-based background checks. Obviously, these added safety measures are there because it makes parents more comfortable, but it also differentiates themselves from Uber.
Determine Your Market Strategy
Uber has taken a very passenger-centric approach to the rideshare industry, and it’s worked out pretty well so far. They’re worth $62.5 billion and are far and away the market leader despite lots of competition. One of their core tenets early on was to provide a frictionless experience for passengers and to always put the customer, not the driver, first.
But instilling a culture of passenger-centric thinking creates two big problems. First, it alienates your drivers since, although it might be convenient to not have to leave a tip as a customer, it annoys drivers. Second, it makes it harder to reverse course later on. Even though Uber is still in growth mode, they’re anything but a start-up. They have 6,700 employees, but that means they also have the bureaucracy of 6,700 employees – things move a lot slower once you get this big and even a small change has to be approved by many different people, since it could potentially affect many different groups.
Conversely, you have companies like Juno who are taking the exact opposite approach. They’ve recognized there is a big problem with driver sentiment toward Uber, and Juno is aiming to build a company that treats drivers better. One example of that is Juno’s approach to self-driving cars. It’s pretty obvious self-driving cars are coming, but Juno is reserving half of the founder’s shares for drivers so that at least when drivers are out of a job, they’ll own a piece of the company. (Update: Juno has been acquired).
Do You Have A Competitive Advantage?
This somewhat ties in to market strategy, but when you’re considering starting a company, you have to have some type of advantage over others. People always ask me to sign NDAs and keep things confidential, which I do, but that’s also a red flag for me. The execution matters way more than the idea.
Just look at the history of rideshare. It wasn’t Uber that first had the idea for rideshare as we know it today, it was actually Sidecar and then Lyft. They were the first proponents of the ‘friend with a car’ model, and they were the ones who actually had dominant market share while Uber was doing black car rides for tech bros in the Marina. But once Uber set its sights on the ‘UberX’ market, the rest was history, and a lot of that has to do with a superior team, not a superior idea.
We’re currently seeing this play out in China with Didi Chuxing and Uber. Right now, Didi is a much better bet than Uber because they have more cash, more market share and a big competitive advantage because they are a local Chinese company and Uber is not. US tech companies have struggled to navigate the politics of China and it’s no secret that the Chinese government would rather see a Chinese company become the dominant rideshare player as opposed to a foreign one like Uber.
Uber’s competitive advantage in the US is its market share and cash, but it doesn’t have either of those in China. In fact, it’s actually losing a billion dollars in China, and Didi is doing significantly more rides than them. It somewhat makes Uber look like the Lyft of China 🙂
Legal Requirements of Starting a Rideshare Company
Everything we’ve talked about so far is important to getting a rideshare company off the ground, but it’s not essential to operating. I wouldn’t recommend starting a company without all of that down on paper, but here are the things you’ll need to figure out before you give your first ride:
From a legal standpoint, there’s actually not a lot that goes into forming a rideshare company. The rules and regulations vary by state but at its most basic level, you’d want to form some type of business entity like an LLC to establish yourself as a real business, provide liability protection and so forth. A name probably would help too but a good name is not a requirement of a good business – it just makes it easier.
From there, new TNCs need to register with the public utilities commission in their state. A few years ago, when rideshare companies first popped up on the scene, regulators really didn’t know what to do with them and who was supposed to regulate them. But these days, it generally falls under the responsibility of the Public Utilities Commission in your state. So if you’re looking to get approved, that’s a good place to start.
Uber is also licensed in all 50 states, so you could always look and see what they’ve done/where they registered instead of combing through government websites.
- A smartphone app to facilitate transportation of passengers in the driver’s personal vehicle.
- TNCs are not permitted to own vehicles themselves used in their operation or own fleets of vehicles. However, there is no limit to the number of drivers that utilize the app under one permit.
- TNCs can only do rides on a pre-arranged basis or, in other words, no street hails!
- Filing fee of $1,000 (permit is valid for 3 years).
- 0.33% of a TNC’s gross California revenues, plus a $10 administrative fee, will be collected by the CPUC on a quarterly basis.
- TNCs must establish driver training programs.
- TNCs must perform national criminal background check including the national sex offender database on drivers utilizing their app.
The requirements actually aren’t that cumbersome since you’d want to do a lot of that anyway to run a successful rideshare company.
In California and most other states, a big financial requirement is maintaining commercial insurance:
- Insurance during Period One: TNCs shall have primary insurance of at least $50,000 for death and personal injury per person, $100,000 for death and personal injury per incident, and $30,000 for property damage. The TNC shall also have $200,000 in excess coverage (per occurrence).
- Insurance during Periods Two and Three: TNCs shall have primary commercial insurance of $1,000,000 for death, personal injury, and property damage. In addition, TNCs shall maintain $1,000,000 of uninsured motorist insurance from the moment the passenger enters the vehicle until the passenger exits the vehicle.
These requirements still leave drivers without collision coverage during period one, but a host of personal insurers have stepped in to fill that gap coverage (check out our insurance marketplace here). For most companies though, the commercial insurance requirement is a big one and I’ve heard that Sidecar was actually spending 25% of their revenue on insurance to give you an idea of just how much it costs at a fleet level. No wonder these companies don’t want to cover period one!
The CPUC requires that each TNC keep their insurance certificate on file and here are the companies that each of the big ones use in CA:
- Uber – James River Insurance Company
- Lyft – Steadfast Insurance Company
- Hop Skip Drive – United Specialty Insurance Company
In the past, James River was really the only option for fleet-wide commercial TNC insurance but as the years have gone by, quite a few new players have started offering products.
Building An App
The last requirement that I’m going to talk about is the app. I think a lot of people underestimate what it takes to build a rideshare app that will work as well as Lyft and Uber’s. As drivers, we like to complain about the Uber app from time to time, but I’ve tried others and they’re just not as good. Most new rideshare companies actually build their apps from scratch and have to devote entire teams to these projects for months at a time.
I was surprised to find that there’s no open-source rideshare app that can be licensed to new companies. I actually think it’s a big opportunity for a savvy group of developers to build a generic rideshare app, since all of these apps essentially do the same thing but they’re all being built independently. Seems like a lot of wasted time, energy and money if you ask me.
Update (10/2016): I was able to find a well-established mobile app development company that has worked with several on-demand companies. They have rideshare software that is native to iOS and Android ready for licensing/purchase – contact me if you’d like more info on this.
RSG Consulting Services
If you need help launching a rideshare company, we offer rideshare consulting packages to help you get started. We specialize in everything from assessing the competition and potential market share to pricing and marketing strategies and business plans and investor decks.
Drivers, what do you think about everything it takes to start a rideshare company? Is it more, less or the same than what you were expecting?
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-Harry @ RSG
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