As part of Graphene’s commitment to transparency in the VC industry, I’ve shared my thoughts on why I decided to invest in Lyft. These thoughts are my own opinion and not those of Graphene’s.
Lyft recently closed another private financing. This was an unexpected and swift fundraise. I’m proud to say, Graphene Ventures invested again in this financing round.
Exec Summary / TLDR:
1. The market is enormous
The joys of car ownership are fading. The costs of owning a depreciating asset are being reconsidered. Increasingly, urban millennials see vehicle payments, maintenance, insurance, fueling, and parking costs as a burden. The move to Transportation as a Service (TaaS) has a $2.2 Trillion addressable market in the US alone. After home ownership, car ownership is the single highest spend for Americans averaging $9,000 per year.
Shifting any of that $750/month spend toward Lyft’s services-based model makes Lyft a relevant business for decades to come. And the initial data echoed that sentiment. The Land Econ Group’s survey in early 2015 showed 46% of respondents said they would avoid owning a vehicle because of Lyft. And McKinsey predicts $1.5 Trillion in new transport services – a 30% YoY growth over the next 15 years.
2. This is a multi-player market
Given the market size, I expect there will be many players in the TaaS market. Like other large industries (i.e. wireless industry, airlines, etc.), consumers will flock to companies for improved experiences, service differentiation, and brand affinity.
3. Lyft’s product and brand are well received and growing
Drivers prefer driving for Lyft and riders prefer the Lyft brand. In 2016, Lyft grew market share and tripled its ridership. Best of all, this growth was organic; incentive-led ridership declined.
4. Upside is massive & within reach
Lyft’s strong unit economics and fiscal discipline mean the public markets will welcome Lyft’s high-growth story. There’s also a few outlier cases where a large acquisition is a possibility.
For those that want more detail on what other factors Venture Capitalists consider, here’s my deep dive. Hopefully, this helps entrepreneurs better understand how VCs evaluate investment opportunities.
Lyft’s product innovation demonstrated the right understanding of the market.
Lyft was the first ride-sharing player to focus on the mass market. Other competitors initially focused on high-end black car services.
Lyft was the first to focus on the driver side of this two-sided marketplace.
Lyft first offered an option to tip, make same-day payouts (Express Pay), increase the payout amounts to drivers, and provide brand new vehicles for drivers to lease (Express Drive) from their partner and investor GM.
Product adoption grew organically.
In core markets, Lyft was increasing rides/user while offering less marketing incentives. This demonstrated that the product was well received and the unit economics looked attractive.
I expect Lyft will continue to be a product leader. I can see a day where monthly subscriptions are commonplace for Lyft riders.
Founders stuck to their original vision, despite market noise.
Since VC is a contrarian sport, then backing founders that are contrarian is paramount. John Zimmer and Logan Green demonstrated a resolute commitment to focusing on what they believe, even when it’s unpopular.
In tracking Lyft’s progress over the past several years, Lyft’s management made the right decision to prioritize the driver experience, to focus on a large domestic market, to be the first to partner with an automobile manufacturer (GM) rather than fight them, to only fundraise when needed, and to focus on unit economics and sustained growth.
Supporting management team is equally impressive.
I’ve had the pleasure to engage with several C-level and mid-level managers at Lyft. The consistency in character and commitment to Lyft’s values is impressive. When doing diligence, I’m always wary of companies with disjointed messaging or inconsistencies in personalities.
This Lyft management team demonstrated they can execute consistently and at scale. They had a strong focus on metrics, which they surpassed every quarter.
Those not intimately connected with the VC industry, often are skeptical of billion dollar valuations for companies less than 10 years old. However, valuations of any asset are always relative to the market. Lyft’s US addressable market is in the trillions (with a T). So, a $7B dollar valuation in a $2.2T TAM would be like a $7M valuation for a company addressing a $2B marketplace.
Additionally, Lyft’s Price to Sales and Price to Earnings ratios are in-line with similar companies that had Lyft’s growth trajectory at this stage.
Like any VC investment, high rewards means high risk. The two risks I considered the most were local regulations and employee classification. Overall, Lyft adds more jobs to the community and provides a much-needed option for supplemental & flexible income.
On the regulation side, Lyft has been very collaborative in working with regulators instead of always trying to fight them. Plus, with the continued population growth in cities, city infrastructure and costs need re-imagining. Lyft’s adoption and innovative approach bode well for its long-term prospects.
If Lyft simply executes on their current market opportunity (mostly consumer), the upside is massive. Consider that at the end of 2015 only 15% of the US had used a ride-share operator and only 51% had heard of the concept. This is still a nascent market.
Beyond that, into the next decade margin growth can come from autonomous driving, monetizing data assets, and transporting goods, not just people.