Pando

Sources: Shuddle’s collapse was the fault of Shuddle, not the investment climate

By Sarah Lacy , written on April 19, 2016

From The Sharing Economy Desk

Last week, kids’ ridesharing company Shuddle abruptly shut down.

The shutdown was widely covered, with most reporters agreeing on the same narrative:  A difficult and more expensive to scale version of regular ridesharing just couldn’t get traction with new investors in this climate.

It’s a believable version of events, and one that Shuddle CEO Doug Aley was keen to push. As the Chronicle put it:

The news underscores how tight venture capital has become, especially for younger startups that haven’t grown quickly enough. The on-demand sector, once a darling of investors, is particularly challenging for fundraising, Aley said. “My world has been colored by on-demand apocalypse headlines that littered the news over the past six to eight weeks when we were trying to raise rounds,” he said.

Shuddle’s investors agreed. In an email to Pando, Forerunner’s Kirsten Green wrote: “[There was a] perception it was a 1% problem. I think with scale prices could have come down. In the meantime, the choices are: You can give away the product for cheap as you strive toward scale if you had millions and millions to chase the opportunity or you can charge a fair price that enables drivers to be paid. Right now investor appetite for heavy investment early on is less than it was prior.”

Even CB Insights “Mosaic algorithm” which purports to tell you how well companies are doing weighed in with similar analysis: “With Shuddle, an Uber for kids, shutting down, now all eyes should turn to competitor HopSkipDrive which raised money more recently but whose Mosaic score momentum doesn't seem that impressive.”

Nothing to see here. Just a trapped company in a difficult sector in a rough fundraising market. HopSkipDrive could even be next.

Or so Shuddle and its investors would like everyone to believe. But that’s not exactly the whole truth.

I’ve spent several days speaking to people close to the situation and many of them are adamant that Shuddle’s problems had less to do with the funding climate and more to do with Shuddle itself. The company’s burn rate was far too high, and a change in CEO from founder Nick Allen to Aley was potentially too little, too late.

It wasn’t just new investors that were worried about putting money into Shuddle. Sources with first hand knowledge of conversations tell us that the existing investors also washed their hands of the company refusing to put in more capital. If true, that’s a sign of more than a challenging fundraising climate.

Additionally, one source told us that a few weeks ago, the board approached at least one competitor, HopSkipDrive, saying Shuddle was running out of money in about two weeks and essentially offered to give the company away for next to nothing. The most surprising part, according to our source, was that the competitor didn’t take them up on the offer. Part of the reason? Shuddle’s burn rate, which was significantly higher than HopSkipDrive’s.

I reached out to Shuddle via its PR firm, and to several of its investors. I also contacted HopSkipDrive. None of the parties denied this account, although it should be emphasised none would confirm it either or comment on any talks that took place between the two companies. Shuddle’s former management refused to speak to us at all once we detailed what we’d heard, despite the company doing widespread press interviews last week.

HopSkipDrive’s co-founder and CEO Joanna McFarland did speak with us, but only about the impact on her company and how it is still managing to survive and raise funds in the exact same climate, exact same sector, that Shuddle claims is irreparably damaged.

McFarland drew two distinctions between her company and Shuddle. The first is that HopSkipDrive is founded by three mothers who actually use the service to transport their own children. To them, the company isn’t an “experiment” or the result of identifying a juicy market opportunity. It’s something they need, and it’s something that has to be good enough for their kids.

I don’t entirely buy the idea that you have to be a mother in order to build a service for kids. But in this case, there were clear differences between Shuddle and HopSkipDrive.

For example, despite Shuddle insisting its background checks were industry leading, the company was criticised by California regulators for refusing to submit drivers to fingerprint background checks. A lawyer for Shuddle told the Examiner that fingerprinting was too “costly” and time consuming.

In 2014, Shuddle also received a cease and desist letter from California regulators when it failed to register with background check service TrustLine. Autoblog reported, that last year the company had still not taken action despite the former CEO Nick Allen’s assurances to the contrary.  

HopSkipDrive on the other hand, believed that fingerprinting was a must if kids were involved. “Receptionists in child care facilities are fingerprinted,” McFarland said. “Receptionists in office buildings aren’t. It’s just different when kids are involved.”

Ultimately it came down to philosophy: HopSkipDrive has always described itself as a child care service, a way to essentially facilitate a nanny share for transportation. Shuddle was repeatedly positioned as a ridesharing service for kids.

But the bigger difference between the two companies and their fates was even more simple: Burn rate. Despite Shuddle telling reporters fingerprinting would be too expensive, it spent far more money per month than HopSkipDrive, sources tell us.

As an LA based company, HopSkipDrive wasn’t born in quite the free spending negative gross margin environment that Shuddle was born into. The company had to do more with less early on. “We were very scrappy and efficient. We had to be,” McFarland says. “We raised later than Shuddle and we raised less. That forced us to make smart decisions. We got to the same place with a lot less money.” Simply put: It never had the luxury of so many Bay Area startups to just throw money at the problem.

Some stats she shared with me yesterday: On average users use HopSkipDrive two times a week and heavy users use the service six times per week; thousands of families use the service and hundreds of drivers are signed up. So far they are just in LA and Orange County.

Before last week, HopSkipDrive didn’t have any plans to enter the San Francisco market anytime soon, but that changed as a result of Shuddle’s closure. McFarland told me yesterday that the fact that there are so many drivers who have already been TrustLine’d and want to do this work, and thousands of families who suddenly don’t have a solution to this problem, made it too good of a market opportunity to pass up. HopSkipDrive now plans to enter San Francisco next month.

I wouldn’t be surprised if it bought some of Shuddle’s assets to facilitate the move so quickly, although McFarland wouldn’t comment on that. It’s one thing to not want to swallow a company’s entire burn rate, rent, salaries, and baggage. Purchasing individual assets may well be more attractive.

Just as Shuddle spun its shut down as a mere casualty of the times and its sector, HopSkipDrive too may be spinning how well it’s doing. But the most important stat of all is that HopSkipDrive raised $10 million in capital in January. That’s right: In the exact same funding environment that Shuddle’s investors and CEO said made it so impossible for them to raise. This despite Shuddle having the advantage of being located in San Francisco.

I’m not saying Shuddle had startup sins on the level of Zenefits. There was a lot of pressure in 2015 to use freely available capital to grow faster, and the world did change abruptly. Shuddle won’t be the first or last startup to go through this. And my intention certainly isn’t to dance on the grave of a shuttered company.

But the fate of Shuddle, and of the wider category, is important. Working parents desperately need a solution to this problem. And without a company in the market with stricter background checks that approaches this problem precisely for kids, families will put their kids in Ubers. As a mother, that terrifies me.

Uber may be safer than taxis. There’s never been anything to prove that well-worn claim, but let’s assume it’s true. But it’s an irrelevant argument when we are talking about young children being alone in these cars -- because no one should be putting small children alone in cabs or sending cab drivers to sign their kids out of school either.

We all know Uber’s background checks have failed in the past. Maybe it’s a small percentage of the whole, but they have failed. And the company has mostly shrugged when that’s happened saying no service is 100%. It’s all part of running a platform. Shit happens, right?

It’s one thing if you are an adult, you read all the stories of assaults that happen in Ubers, and you want to take that risk. But the idea of young children being put in that position horrifies me. Just one child getting hurt may seem the inevitable cost of doing business at the scale of Uber, but imagine if that one child was your child.  

Most parents don’t even realize: Kids riding in Ubers alone is against Uber’s own terms of service. What protections do you think you’ll have should the unimaginable happen? Would insurance even cover it? These are all unanswered questions.

I get why Shuddle wants to save face and excuse its own missteps as merely the fault of a doomed sector in an impossible fundraising climate. That the economics just don’t work. But unfortunately, it sends the message that this is simply an untenable category, when that doesn’t appear to be the case, judging by the fact that HopSkipDrive did raise funding in the same climate and is expanding.

Such a message is irresponsible if they ever believed in this mission. Because it could cause parents, other investors, even employees and potential drivers to write the whole category off for one company’s mistakes. That isn’t fair. And the stakes for what these companies are trying to do are just too great.

I wrote in the earliest days of covering both of these companies that I thought this was a brutal category that would require slow growth, thinner margins, and very committed investors. The things I want it to do as a mother who may one day use the service, is the opposite of everything they should do as venture-backed startups. I have no illusions that HopSkipDrive’s continued survival will be easy. But Shuddle should be own up to the mistakes they made that landed them in this position, and not try to take the sector down with them.