Why Did Sidecar Fail?

By February 10, 2016July 28th, 20206 Comments


    Harry here.  It wasn’t a huge surprise when we heard that Sidecar was going out of business, but less competition is never a good thing for drivers.  I for one was a big fan of Sidecar but I always felt that they were a little too ahead of their time.  

    They had some super driver friendly features like back to back rides, set your own rate and favorite drivers years before Lyft and Uber started implementing these features.  But they failed when it came to delivering a flawless passenger experience.  Uber passengers were able to hail a ride with one click while with Sidecar you had to enter your destination, filter through a bunch of different drivers with different prices and it was just too much work for the passenger.  

    Today, RSG contributor John Ince explores the history of Sidecar and why they failed.

    Sidecar Driver On the road

    Why Did Sidecar Fail?

    On December 29, 2015, Sidecar announced it was ceasing all operations, and followed that on January 19, 2016 with a much more interesting announcement – General Motors had acquired Sidecar’s assets and intellectual property, and hired its CTO and 20 other employees.

    It’s easy to think of Sidecar’s demise as a very simple matter of not being able to compete with the big, bad Uber monolith.  But there’s a lot more beneath the hood here that deserves closer scrutiny, since it’s very instructive about the underlying dynamics of the industry.

    To recap Sidecar’s history briefly, it was founded by Sunil Paul (CEO), Jahan Khanna (CTO) and Adrian Fortino late in 2011, just after the time Travis Kalanick and team were launching Ubercab, what is today known as Uber.  Sidecar quickly established operations in  San Francisco, LA, Seattle, Philadelphia, later expanding to Boston, NYC, Washington DC, Chicago, San Diego, and Oakland.

    They had a blue chip investor class including Union Square Ventures, Avalon Ventures, Lightspeed Venture Partners, Google Ventures, and Sir Richard Branson.The company also raised $10 million in Series-A funding from Google Ventures and Lightspeed Venture Partners in a 2012.   With a promising cast of characters like this, what happened?  Why did Sidecar fail?

    Industry Dynamics

    First, Sidecar’s demise illustrates one of the key dynamics of the rideshare industry – network effects.  The inventor of Ethernet, Robert Metcalfe, summed it up best years ago.  Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2).  In the context of rideshare, the value of a TNC – Transportation Network Company – like Uber, Lyft or Sidecar increases exponentially in direct proportion to the number of drivers and passengers using the network.

    In a nutshell, that’s why Uber is worth $62 billion and Sidecar’s remains were shoveled into the trunk of the GM-mobile.  Or think of Facebook with 1+ billion members and a market cap somewhere north of $250 billion, while its predecessor social network, Friendster, is a now footnote to tech history. This applies to basically any network in the sphere of modern technology.  The more people who are on your network, the more convenient it is for them to use whatever technology your network employs to bring people together.  In the case of Sidecar, Uber and Lyft, it’s the app and the rides that can be arranged through it.

    Network Effects

    In ridehailing, the network effects are especially pronounced.  In numerous interviews, Uber CEO, Travis Kalanick has described his “ah-ha” moment when it dawned on him that this app that his team had created works a lot more efficiently when there are more drivers on the road, because potential passengers get picked up faster and drivers don’t have to go as far to pick them up.  Hence, TK’s near obsession with recruiting more drivers – the huge bonuses etc.  and the incessant fare cuts that as drivers we have come to know and love (not).

    The Sidecar saga is but one of the side effects of Uber’s take-no-prisoners strategy. Kalanick and his investors are so convinced of the network effects in ridehailing that they were willing to sustain $870 million in losses during the first six months of 2015.

    But wait – there’s a subplot here that just might give this story legs into the future.  Sidecar’s sale of its assets to GM throws a huge wrench into Uber’s plans, because it brings another deep pocketed competitor into this space.  Uber, for all it’s bravado, simply isn’t going to steamroll GM into oblivion – the way it did to Sidecar –  especially when GM now has license to what may be the keys to the kingdom – the key patent in ridesharing.  GM is betting big on this industry with its $500 million investment in Lyft, its acquistion of Sidecar’s assets and its anticipated launch of Maven, its own ridehailing brand.  And GM isn’t the only automaker that’s making bets in this space. Ford Motor Co is working on its own ride-sharing service and Daimler AG acquired RideScout and Mytaxi in 2014.

    The Technological Advantage

    Okay, now let’s step back and take a few deep breaths and consider the big picture here.  Sidecar’s founder, Sunil Paul, and his team developed an app that in many was was superior to Uber’s app – at least from the perspective of drivers.  It had and still has some nice bells and whistles, including the ability for drivers set the price they were willing to accept for their labor.

    But Sidecar never had the financial resources to build out their network of drivers and passengers.  In business vernacular, the Sidecar “brand” never caught on with the public.   It just never became part of the modern transit vernacular – despite Sidecar’s technological superiority.  You didn’t hear people saying “I’m going to Sidecar this or let’s Sidecar home.” Paul briefly tried business to business delivery services, but nothing seemed to work, because they couldn’t build out that all important network.

    The Balance Sheet Differential

    All this underlines the importance of finance and marketing in the tech world.  While Uber has raised $8 billion, and Lyft has raised well over a billion, Sidecar only raised a measly $37 million.  So while Sidecar arguably had better technology, it was unable to compete with Uber and Lyft on the balance sheet.  Ah, the important balance sheet where numbers are all powerful.

    So let’s take a closer look at this balance sheet issue, because it’s where the Sidecar story gets really interesting.  One of the defining characteristics of the ride-hailing industry is that the key players own almost nothing.  We can’t actually look at Uber or Lyft’s balance sheet, because they’re both private companies and have guarded their financials like the gold in Fort Knox.  But we can deduce that the asset side of their balance sheet is very short on tangible assets and top heavy on intangibles.  In other words, Uber’s $62 billion valuation won’t look much like GM’s balance sheet.  Auto companies like Ford, GM, have a big number in the P&E (Plant and Equipment) column.  The numbers are not as big as they used to be, as automakers have outsourced more of their business, but auto companies actually own something tangible that would have value in the event of a liquidation event.

    Now what does Uber or Lyft or Sidecar own?  Almost nothing.   They lease their offices.  Their Customer Management teams are almost all independent contractors.  Interesting sidenote here:  I recently gave a ride to a woman who used to work in CM for Uber.  She said that Uber hires its CM reps as independent contractors like they do drivers.  And get this: she said, Uber fired almost everyone in her “class” – several hundred people – en masse when they shifted their CM operations off-shore to India or someplace. And she said, CM quality quickly took a dive.  Sound familiar?  So almost all their value is tied up in intangibles – brand, human capital, drivers and CM reps who can be fired, de-activated or bolt any moment, and so called IP or intellectual property.

    The Potential Power of the Patent

    The IP is the key here.  Included in it are the patents and trademarks that GM likely valued above all else in the acquisition of Sidecar’s assets.   When the former Google (now Alphabet) bought Motorola, they were willing to pay several billion for it because they got thousands of patents in the deal as a wall of defense in potential lawsuits.  GM was more than willing to buy Sidecar’s assets because they got one huge prize in the deal, a license to use US Patent #6356838 for “a System and method for determining an efficient transportation route.” Sidecar also had other patents pending and they were thrown in as kickers in the deal along with twenty or so employees who likely will end up somewhere in acquisition limbo.

    Given that Uber owns no cars, and has very few tangible assets, this patent could be a huge bargaining chip, and the license to use this patent now resides with GM. GM is a company that has the wherewithal to compete with Uber where Sidecar couldn’t.  With GM’s related announcement that it’s launching a ridesharing subsidiary called Maven,  GM could potentially play the role of patent troll and throw another legal wrench into Uber’s plans for world domination.  They certainly have the resources to mount an extended legal challenge to Uber’s for patent infringement.  Or they could align their Maven with the Lyft that they just invested $500 million in.  This plot just got very interesting.

    So to wrap this up – despite the apparent “failure” of Sidecar, we needn’t shed any tears for its founder/owner, Sunil Paul.  While figures for the sale of assets to GM have not been disclosed, we do know that the price GM paid is less than the $37 million Sidecar raised from investors. So while investors may have suffered a loss,  Sunil Paul and his co-fouunders certainly cleared at least a few million in the deal.  Not bad for a few years work, and certainly better than what drivers have have made during the same period.  The takeaway: if you want to get rich in the tech world, get equity.  Everybody else just gets chickenfeed.

    Drivers, what do you think about the Sidecar experience?  Did you ever drive for them and why do you think they failed?

    -John @ RSG

    John Ince

    John Ince

    John Ince is a former Fortune reporter and Wall Street banker. He has about 1,000 rides under his belt driving part time for Uber and Lyft.  He’s writing a book about his experiences entitled:  Travels With Vanessa:  A Rideshare Driver Tries To Make Sense of It all - For a sneak peak visit the link above.