Lyft and the coalition of the billionaires who didn't invest in Uber

By Sarah Lacy , written on May 15, 2015

From The News Desk

Here was a fun Friday surprise: Carl Icahn has invested $100 million in Lyft as part of a new $150 million expansion of its series E.

World's most notorious sharp-elbowed, combative, activist shareholder invests in.... Silicon Valley's most cuddly startup?

As a reminder, mustachio'd Lyft has eschewed all the scandals and tough guy tactics of its arch rival Uber, refusing even to make hay as Uber was embroiled in scandal after scandal last year. Back when Lyft was trying to raise a Series A, some potential investors actually feared was too "nice" to make it.

But that's not the only strange combination that comes with this deal. It reunites Marc Andreessen (disclosure: a Pando investor) and Icahn-- last seen fighting via CBNC over Icahn's push to spin PayPal out of eBay. Icahn said Andreessen had "screwed more people than Cassanova" and Andreessen chalked the comments up to Icahn's "inner six year old." Said Ichan today: "I never said he wasn’t a smart guy. To hold a grudge on wall street, you have to be a fool.”

Lyft's motley rank of investors also boasts Valley contrarian Peter Thiel (disclosure: also a Pando investor), top Valley super angel Mike Maples, hedge fund turned late stage VC Thomas Laffont from Coatue (who is also in Snapchat and Box), and Alibaba among many others. Some like Maples and Thiel invested early on, but many of the late comers are joining ranks because they couldn't get into Uber, they see Lyft as a "bargain" compared to Uber (Icahn's public reasoning), or they have their own incentives to bolster any viable competitor who isn't Uber.

Call it the coalition of the willing billionaires. The enemy of Uber is my friend coalition. The coalition of everyone else not on Uber's cap table. It's like that special episode where Skeletor and He-Man have to work together to vanquish the new threat of Evil Seed and his toxic strangling vines.

Both Thiel and Maples have publicly stated their disgust at Uber's tactics in the market, with Thiel saying on stage at TechCrunch Disrupt that Uber is "the most ethically challenged company in Silicon Valley." Andreessen looked at, but didn't invest in Uber-- and there are disputed accounts of what happened. His recent New Yorker profile says his firm passed for many "good reasons" including a deadline of just hours to decide.

Meantime, China is the one market where Uber isn't running the table-- and Alibaba wants to keep it that way. Earlier this year Alibaba-backed Kuaidi Dache and Tencent-backed Didi Dache announced a formidable merger. Combined they have more than 99% market share in China. So, enter Alibaba on the side of Lyft in the US.

And, now, here's Icahn.

On one hand, everyone explaining their investment in Lyft via their own baggage/relationship/disgust with Uber is a bit like dating the arch-enemy of the girl who just dumped you just to spite her. On the other hand, Lyft should absolutely hoover up every billionaire who comes out of the woodwork wanting to give it money-- no matter the reason. Because this is an absolute arms race of expansion, grabbing drivers and grabbing riders, and Uber has already shown it will play dirty when it comes to Lyft's fundraising efforts. This is why an investor like Coatue was so important early on, and why Lyft is fist-bumping so many hedge fund guys who have even more connections to more hedge fund cash.

How much is enough? Lyft has raised over $1 billion now, but Uber is rumored to be raising up to $2 billion, more. As a recent "leaked" memo showed Lyft is growing and generating a huge amount of revenues, but it's spending heavily to do so. It is forecasting some $2.7 billion in gross sales, with nearly $700 million in net revenue. That's double last year. But in 2015 Lyft expects to spend $150 million to acquire new riders and another $50 million to acquire new drivers.

The war is about more than these two companies. The Valley hasn't seen a gigantic global market with this kind of immediately lucrative business model sprout up in a long time. The second generation of ecommerce companies have mostly looked more like merchandizing businesses than the online travel agents and eBay-like marketplaces of the late 1990s. It's almost like the baggage of retail and fashion have been eating software, not the other way around.

And, sure, cloud computing is exciting, but these companies grow slowly and mostly require high marketing costs. Workday took eight years to go public, and most of the recent IPOs aren't profitable. Spotify and Pandora have paying customers... but not nearly enough to be in the black. LinkedIn has one of the few freemium models that works at a large scale, but it took a decade to become remotely sexy.

And nearly all the rest have been ad plays: Build a big audience and hope there's a way to turn that into revenue eventually.

What we are seeing with Uber and Lyft is something we haven't seen in a while. A new model of vertical, real-world commerce where the scale and speed is thrilling and terrifying at once. And as a result Lyft has been forced into Uber's aggressive growth strategy-- much as Living Social was forced to keep up with Groupon's growth.

This is a much different market than coupons, but it's still scary when you're spending and raising money to keep up with someone else's expansion plans. That said, it's the best play Lyft has. It's like they thought they were heading to a party and wound up in a war. You either leave the battlefield or pick up a gun.

One savvy difference: Unlike Living Social which felt pressured to follow Groupon around the globe, Lyft's president John Zimmer said they would stay focused on the US even with this new cash infusion, deepening Lyft's footprint here while Uber pushes for global domination.

I agree with a lot of Lyft's investors who say there is plenty of room in a gargantuan market like this for a strong number two. As I wrote earlier, Lyft Line is actually carving out a new part of the transportation market in competing with bus services. But that's not how Uber sees it. Uber wants it all. Lyft isn't going to be able to coast into a number two position simply by existing. There's no inertia here. They've been throwing everything they have at the market, and growing, but seemingly not denting Uber's lead. My guess is some of the next moves will be some major bolsters to the management team. I bet Lyft will do more of something Uber hasn't done at all: Growth by strategic mini-acquisitions. Let the Voltron-ing of the anti-Ubers continue.

The Lyft founders have been criticized for not being aggressive enough in this battle. Let's see if Icahn will change that.