Little Lyft Gets Big Alliance Partners and Beats Uber in Going Public

In the spring of 2019, Ubers valuation before its initial public offering (IPO) was $82 billion, making it the most valuable privately held company ever. Serving approximately 600 cities in more than 60 countries worldwide and with 100 million monthly users, Uber dominates the global ride-hailing app market. However, Lyft, coming in second, is Ubers closest competitor in the United States and managed to beat this market leader in the IPO race. On March 29, 2019, Lyft became the first U.S. ride-hailing and sharing service to sell its shares to the public with a valuation of more than $26 billion at the end of its first trading day. In 2017, Lyft was worth less than one-tenth of Uber (some $7.5 billion). Within this brief span of time, Lyft increased the number of its active riders from 6 million to almost 20 million, thereby gaining market share vis--vis Uber. How did Lyft beat Uber to an IPO and more than triple its valuation within a mere two years? (Uber had its IPO on May 10, 2019, and was valued at $76 billion at the end of its first trading day).

Lyft is clearly the underdog in the fiercely competitive ride-hailing industry. A shrewd strategy is about getting more out of a situation than the starting balance of power would suggest. As when dealing with a schoolyard bully, it helps to have strong friends. Lyfts cofounders, Logan Green and John Zimmer, appear to have paid close attention to this idea. To pursue their underdog strategy against Uber, they allied Lyft with some powerful friends.

Strengthen Competitive Position. Strategic alliances with powerful partners enabled Lyft to strengthen its competitive position against Uber. Lyft formed two important alliances: In 2016, it formed an equity alliance with GM (one of the largest car manufacturers globally), which invested $500 million in the startup. A year later, Lyft announced an alliance with Waymo (a subsidiary of Alphabet, the parent company of Google), an autonomous car technology venture. Why did these firms enter strategic alliances with Lyft?

Waymo happens to be a fierce rival of Uber in the development of self-driving car technology. When Lyft announced its alliance with Waymo, Alphabet and Uber were entangled in a lawsuit, wherein Alphabet alleged that Uber stole proprietary technology when acquiring Otto, a self-driving technology company. Otto was founded by a former Waymo engineer that headed its self-driving car efforts. Thus, the alliance with Waymo allowed Lyft to strengthen its competitive position vis--vis Uber. Having autonomous vehicle technology succeed is critical for both Uber and Lyft because human drivers are the biggest cost factor in offering rides. Moreover, autonomous driving technology is also expected to be safer than human driving, resulting in fewer accidents. In addition, since smart traffic guidance can be employed much more easily with self-driving cars that can run 24/7, 365 days a year, traffic congestion is expected to be much less and delays much fewer, if any.

Enter New Markets. GMs alliance with Lyft allowed the firm to tap into the second largest mobile transportation network in North America. The goal was to deploy GM cars on Lyfts network, ideally as self-driving vehicles. GMs equity alliance with Lyft allowed GM to enter into the mobile transportation and logistics market.

Hedge against Uncertainty. GMs equity investment in Lyft also allowed GM to hedge against uncertainty. With network effects supporting winner-take-all dynamics, it is likely that only one or a few mobile transportation companies will survive in the long run. GM also wants to be in this new market because the age-old private car ownership model is likely to shift in favor of fleet ownership and management. Consumers will rent a car for a specific ride, rather than own a car as a fixed asset. Noteworthy is that private cars in the United States are used only about 5 percent of the time, and sit idle for most of the day. Car owners have the fixed costs of purchasing a car, buying insurance, and maintaining the car. All this goes away with the new business model that is likely to emerge.

Learn New Capabilities. Lyft may need to learn how to manage large fleets of carsa capability that GM, a key supplier to many large car rental companies, can provide. In addition, Lyft may want to learn some of the self-driving technology that Waymo can provide. In turn, this might motivate Waymo to learn more about how to establish and maintain a large mobile logistics network that it can then leverage into more precise target advertising for its Google partner division, or other new services it might want to offer one day.

Despite its successful IPO, however, Lyft is facing a number of challenges on its road to profitability. First, Lyft continues to lose a lot of money. In 2018, Lyft lost almost $1 billion in subsidizing fares, incentivizing drivers, bringing on new modes of mobility such as scooters and bikes, and paying high insurance costs, among other expenses. This is the largest loss for any U.S. startup in the 12 months preceding its initial public offering. Second, the threat of local regulation is ongoing as many cities in the United States and around the globe are starting to restrict ride-hailing services and require minimum pay for drivers.

Finally, Lyfts archrival Uber, which also went public in 2019, could be better positioned for growth because it offers a more diversified service portfolio with Uber Eats and its long-distance freight service. Lyft remains a ride-hailing service only. Moreover, Lyft is geographically restricted to the United States and Canada at this point, while Uber is global. Thus, many view Uber as the likely victor in the winner-take-all competition among the U.S. ride-hailing platforms. As a consequence of all these combined threats, Lyfts market cap has fallen from $26 billion (on the day of its IPO) to $16 billion just a few weeks later. By the fall of 2019, Lyfts valuation had fallen further to $13 billion, while Ubers had fallen to $52 billion. Although Lyft was smart in allying with strong partners and to beat Uber to the IPO goal line, the race is far from over.

One other strategic reason Lyft entered alliances with GM and Waymo is access to critical complementary assets. Both Lyft and GM bring critical complementary assets to bear in this alliance. GM has upstream core competencies in manufacturing cost-competitive and reliable cars at a large scale. Lyft, in turn, has downstream competencies as the second-largest mobile transportation network globally, and with it the data that allow Lyft to deploy AI in order to develop proprietary algorithms to have cars at the right time and at the right price.

Alphabets Waymo, moreover, is an early leader in autonomous vehicle development. Where Waymo lags Tesla in driverless car technology, however, is in miles. In addition to Tesla owners accruing mileage by driving the cars themselves, they also accrue mileage by using Teslas innovative autopilot featureallowing Tesla to rack up billions of miles. As more miles are accrued, more data are collected, which allows the self-driving software to learn and update, making the autopilot feature even better. In addition, Tesla is planning to roll out a fleet of robo-taxis (autonomous-driving Tesla vehicles) by 2021, contingent upon regulatory approval. This rollout will further increase Teslas wealth of data accrued through the miles driven by its vehicles.

Much like Googles Android mobile operating system for phones, Waymo provides the software that is the brains behind the self-driving car technology, but lacks an opportunity for large-scale deployment, which constrains testing and learning. The alliance with Lyft allows Waymo to deploy its self-driving car technology on a large scale. The goal is to create a fleet of autonomous GM vehicles on Lyfts network, driving with Waymos autopilot technology.

1. Describe the reasons Lyft entered strategic alliances with GM and Waymo. Are some reasons more important than others? Why or why not? Explain.