By Dan Eidell, Class of 2020
Stop me when this sounds familiar: A new method of transportation, powered by technological advances, is created and gains rapid adoption among consumers. In the battle over this new market, a concentrated group of firms emerges. These new entities fundamentally offer the same product at the same level of quality, meaning they must compete on a different dimension. When service, platform, and experience are the same, one option remains: price.
This is the story of Vanderbilt’s steamships, early railroads, and – most recently – Uber and Lyft. When Lyft went public on March 28, it was valued at $24 billion. On one hand, its valuation increased by over 60 percent since last summer, when it raised its final round of private capital at a $15 billion valuation. On the other hand, the company has never approached profitability and will not do so in the foreseeable future. Despite revenues of $2.2 billion last year and $5 billion in private investment (almost all of which came from either New York or San Francisco), Lyft lost nearly $1 billion last year. Its journey from pipe dream to public company presents a fascinating case study on the differences between the Coastal (i.e., San Francisco and New York City) and Chicago ecosystems.
Lyft’s rise could not have happened if all investors used the lens of Chicago VC. The company prioritized user growth over profit, and brand expansion over the bottom line. In Chicago, investors are, frankly, not attracted to this type of growth. They stress different metrics, focusing on positive cash flows and steady growth instead of writing a blank check with the faith that a company will grow exponentially. There’s nothing wrong with this model – it’s a unique approach that differentiates Chicago (and other cities) from New York and the Bay Area. Indeed, in this case, focusing on the bottom line may have been justified. If Lyft hasn’t discovered the path to profitability despite over 20 million users, $2 billion in revenue, and $5 billion in investment, the company may never find it.
Living by this lens, however, has drawbacks, and this focus may inherently limit the potential of our ecosystem. Companies are built by visionaries. As VCs, it’s our job to find the right founders and help them build great companies, not create obstacles and arbitrary goals. Focusing on the bottom line wears down founders, warps long-term priorities, and incentivizes early exits. As Chicago seeks to grow as a hub for entrepreneurship, our mindset must evolve.
The Coasts, however, need to adopt more of our approach. Amazon was notoriously unprofitable for almost two decades after going public but managed to stay afloat through a spirit of innovation that lived in each annual letter from Jeff Bezos. Investors bet on that spirit rather than the company’s fundamentals. The same could be said for Lyft; investors believed in what it could be rather than what it is. That ethos embodies Silicon Valley and is fundamental to much of the activity in the ecosystem.
At what point, though, do investors shift from looking at fluffy top line revenue to what matters, profitability? Certainly, by Lyft’s Series-I round last summer, investors should have been aware of the company’s performance and asked how (or if) they planned to become profitable. How does any investor justify putting $1 billion into a company knowing that that company will burn all of it in the next twelve months? Sky-high valuations, money chasing bad deals, and armies of bros in vests and Allbirds are topics for debate; but surely, we can agree that a bit of common sense is a good thing,
Time will tell if Lyft ever turns a profit. Shareholders are less forgiving of losses than early stage investors and may force a behavioral shift. Regardless, Lyft’s journey from startup to IPO creates a perfect opportunity to assess the strengths and weaknesses of the Coasts and Chicago alike.
Dan Eidell (’20) is an MBA Associate with Lightbank and previously worked as a Venture Partner with VU Venture Partners in San Francisco, CA. You can find him on Twitter at @OEA_Blogger.