A Victory For California's Ride-Sharing Startups

August 15, 2013

Last month, we discussed the plight of FlightCar, a California car rental startup, currently involved in a lawsuit with the City of San Francisco. The City alleges that FlightCar, which rents out vehicles parked at the San Francisco International Airport by their traveling owners to other airport travelers, is undercutting rental car companies at the airport by acting like a rental car company but ignoring the regulations that govern them. The case of FlightCar highlights the situation facing three other California startup companies involved in the business of "ride sharing."

Ride-sharing companies are in the business of providing vehicles-for-hire. The services basically use mobile-phone applications to connect people in need of a ride with everyday drivers. In California, the three largest startup companies providing the service are Uber, Lyft, and SideCar.

Uber is a venture-funded startup based in San Francisco and founded in 2009. The company makes a mobile application that connects passengers with drivers of luxury vehicles such as Lincoln Town Cars, Cadillac Escalades, and BMW 7-Series. Customers reserve a car by sending a text message or by using the mobile application. By using the app, a customer can track the location of their reserved car. Price is calculated based on distance or time, depending on the speed of the hired car, and the complete fare, including tip, is billed to the customer's credit card. After each trip, the passengers and drivers rate each other. Since launching, Uber has expanded from the San Francisco Bay Area to other major cities such as, New York City, Los Angeles, Seattle, Chicago, Boston, Atlanta, and Washington D.C. In 2010, Uber received venture funding from a group of "super angel" investors including Chris Sacca. In early 2011, Uber raised more than $11.5 million in Series A funding led by Benchmark Capital, and in late 2011, the company raised an additional $32 million in funding from several investors, including Goldman Sachs, Menlo Ventures, and Bezos Expeditions. And, word on the street is that the company is close to raising a new round of funding of between $150 million and $200 million from Texas Pacific Group that will value it at $3.5 billion. The company plans to expand its services by partnering with local taxi commissions and offering non-luxury vehicles such as Toyota Prius hybrids.

Lyft and SideCar, both launched in 2012, also provide vehicles for hire via a mobile application, but their services cost less and do not require luxury vehicles. Lyft and SideCar drivers do not charge fares like Uber but, rather, rely on voluntary donations from passengers. As of June 2013, Lyft had raised $83 million from Andreessen Horowitz, Founders Fund, Mayfield Fund, K9 Ventures, and Floodgate, and SideCar had received $10 million in seed funding from numerous investors, including Spring Ventures, Huron River Ventures, Mark Pincus, and Lerer Ventures. Lyft and SideCar have operations in other major cities as well, such as Chicago, Los Angeles, Seattle, and Boston.

Lyft operates in the following manner: A passenger downloads the Lyft app to their iPhone or Android-based phone and then signs in through Facebook with a valid phone number and credit card details. When a ride is needed, the passenger opens the app, which displays a map of the closest Lyft drivers. The passenger taps to request a ride and then is able to view the driver's name, photo, and his or her rating by past passengers. Shortly thereafter, the driver arrives to pick up the passenger. At the end of the ride, payment is made through the app. Before requesting another ride, the passenger must rate the driver. The company takes a 20 percent cut of the fare.

Last summer, all three companies received cease-and-desist orders from the California Public Utilities Company (PUC) for operating unlicensed charter party services. According to the PUC, the companies were operating without the "appropriate licenses, permits and approvals from the San Francisco Municipal Transportation Agency, as well as without the necessary licenses and approvals from the California Public Utilities Commission." All three companies reached interim agreements with the PUC, allowing them to continue operations while the PUC evaluated the situation.

Two weeks ago, in what is being called a "huge victory" for the ride-sharing companies, the PUC issued a proposed set of rules that would grant state licenses to the companies and allow their vehicles to remain on California roads. The proposal creates a new category called the Transportation Network Companies and requires ride-sharing companies to apply for a license to operate in the state. The new rules would require the companies to hold a $1 million per-incident insurance policy (limousines are required to hold a $750,000 insurance policy) and mandate vehicle safety inspections, background checks for drivers, a no-tolerance policy for drugs and alcohol, and driver training programs.

The companies are praising the decision. SideCar announced that it was "very pleased with the decision because it's going to allow ride-sharing companies to expand in Northern California and beyond." Taxi companies, on the other hand, are less than pleased, claiming that the proposed rules will put them out of business.

What the California ride-share companies have experienced over the past year certainly raises many questions about the laws and regulations surrounding startups in California as well as the difficult issues facing startups. If you have questions about startups in our area, an experienced business lawyer can answer your questions. Don't hesitate to contact us today.