Uber is not the only ride-sharing service attracting ridiculous amounts of venture capital. The New York Times Deal Book reported that Uber’s slightly more respectable competitor, Lyft, has raised $530 million (or over a half billion dollars) in its latest round of venture capital.
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One investor, the questionable Japanese e-commerce service Rakuten, has given Lyft $300 million. Nor is Lyft the only rider sharing outfit swimming in the venture capital dough these days: Uber has raised $5 billion, and two Chinese ride-sharing solutions, Kuaidi Dache and Dadi Dache, have each raised around $1 billion.
Now for the truly absurd part of the story. Nobody knows if either Lyft or Uber’s current business model is legal in the United States. An ongoing federal cause in California could literally pull the rug out from under both Lyft and Uber.
Two federal judges in California ruled that lawsuits that would force Uber and Lyft to classify their drivers as employees rather than independent contractors will go forward, CNET reported. Uber and Lyft wanted the lawsuits thrown out or a summary judgment; instead, the court cases will go forward.
If the courts rule for the drivers, these cases could literally pull the rug out from under Lyft and Uber because both companies would be forced to collect withholding taxes from their drivers. It would also require Lyft and Uber to follow state laws on such issues as the 40-hour work day and unemployment insurance, as well as pay the minimum wage, not to mention health insurance, as mandated by Obamacare.
Another problem is that Uber and Lyft would face far greater liability in lawsuits if their drivers were employees. It would be easier to sue them if a driver injured somebody or caused an accident.
A final reason why Uber and Lyft are afraid of this lawsuit is an obvious one. If the drivers were employees, they would have to provide car insurance for them. That could be expensive because the insurance designed for cab and limo drivers usually costs two to three times as much as regular vehicle insurance.
It’ll be interesting to see how the courts rule and if Lyft and Uber will be able to survive the ruling. One intriguing possibility is that they will have to come up with a new business model, perhaps some sort of franchising.
I have to wonder if these venture capitalists actually read the news. If they did, they might not be giving the ride-sharing apps any money, or at least investing in their U.S. operations.
One also has to wonder how valid the value estimations for these services are. Uber’s value is currently estimated at around $41 billion and Lyft’s at $2.5 billion, according to the Deal Book.