Imagine if you wanted to transfer vast amounts of money from wealthy, cashed-up individuals to hard-working middle- and low-income workers.
You could raise taxes, found a charity or hand out food stamps.
Or, you could start a ride-sharing company.
Didi Chuxing's latest $4.5 billion equity-funding round takes the total amount raised in the sector to more than $20 billion , according to Bloomberg calculations based on data from consulting firm CB Insights. Uber dominates with $11.5 billion, followed by its Chinese rival at $8 billion. Collectively, the amount is up there with the charitable foundations of Silicon Valley's philanthropists.
Beyond sovereign wealth funds and venture capitalists -- themselves wealthy, cashed-up groups -- funding rounds are becoming increasingly populated with wealth-management firms that look after the money of well-heeled individuals.
While startup cash is usually meant to rapidly build barriers to entry by funding infrastructure, products, intellectual property and customer lists, ride sharing is a little different.
Uber CEO Travis Kalanick and Didi Chuxing's Jean Liu may disagree, yet the reality is their businesses have few barriers to entry. The infrastructure, IP and products (their apps) are all easily replicable, while their customer lists are by no means secure.
That's where the funding comes in. According to one analysis, China's ride-hailing companies spent $50 million per month at the height of the country's taxi wars, both on passenger subsidies and driver tips. Of course, those subsidies end up in the pockets of the drivers anyway.
"User acquisition on both the rider and driver side is probably where they're going to be spending most of their money in China." -- CB Insights CEO Anand Sanwal
Witness the taxi wars in the U.S. and China to see just how disloyal both groups can be. To land the passengers, companies need to lure the drivers. And there's only one way to lure drivers: cash.
So when wealthy, cashed-up groups of people buy stakes in ride-sharing companies, all they're really doing is transfering money to a growing line of taxi drivers with their hands out.
One way to pour water on this burning pile of cash is to merge. That certainly worked, to an extent, when Didi Dache and Kuaidi Dache combined in February last year to form Didi Chuxing. And it's a theory being posited to end the battle between Didi and Uber.
But it would be a stupid move.
Customers like choice, and in the ride-hailing business, barriers to entry are too low for any player to think they can monopolize the market without others seeking to join the party. It would simply mean more cash flowing from the wealthy to the workers. And we know what that's called.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the editor responsible for this story:
Katrina Nicholas at email@example.com