Uber's $1 bn India investment means it has enough cash to burn and will fight back

If your competitors are spending, you must spend too- This seems to be the driving mantra in the start-up space these days.

Just days after news of taxi-haling app Ola raising another $500 million made headlines, US-based rival Uber has announced plans of pumping in $1 billion (Rs 6,400 crore) into India, thus signalling an escalation of the war between the two companies in a cut-throat market.

This basically implies more cash burning and chasing of market share rather than profitability by both companies. While Ola is rumored to soon be valued at $4.5 billion, Uber's worth is $40 billion. But such cash-intensive startups are at risk of flopping as they maybe unable to survive in an adverse environment. Will these companies ever make enough money to justify the sky-high valuations?

But it appears Uber's massive expansion in over 300 cities globally is at the cost of heavy losses. Investors have given a lot of money to Uber, and Uber is burning this cash to buy market share all over the world. An Uber driver, on condition of anonymity told Firstpost that each Uber driver in India gets an additional Rs 150 per ride as well as more incentive for ferrying passengers during the day and in the evening. Ola too pays  extra cash to drivers for doing more rides, but doesn’t pay drivers to keep its app open and nor do they get paid additional money on every ride they undertake.

A story in Mint last year suggested that Uber and Ola are absorbing more than 50 percent losses on certain journeys to build their brand among consumers. In addition, drivers claimed that, beyond a standard bonus for taking a certain number of trips per day, Uber rewards them with cash just for keeping its app open all day.

A convertible bond offering seen by Bloomberg recently revealed that Uber is losing more money than it is generating. According to Bloomberg, Uber had revenues of $415 million and an operating loss of $470 million for an undisclosed time period. It also says that the document “touts 300 percent year-over-year growth.”

And in India since there is no clear market leader, there is room for both Ola and Uber to prove themselves, which perhaps explaining the numerous eye-catching promotions both companies offer their users every now and then.

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This raises the  basic question of how hard Uber will have to work—and how much it will have to keep spending—to maintain its hold on the markets it’s trying to capture? At some point it will have to generate real profits and sustain the company without the largess of  PE capital.

Uber's $1 billion spending drive in India includes expansion into tier II and tier III cities as well as a target of 1 million daily rides by March 2016. Uber is currently operational in 18 cities in India and does approximately 200,000 rides daily. Its revenue run rate stands at about $250 million. The investment, which will also go into improving operations, developing new products and payment solutions, is likely in the next six to nine months.

"Uber has grown exponentially in India, a global priority market for us, which has also quickly become the largest market geographically for Uber outside the US. We are continuing to see robust 40% growth MoM and with more investment in product, hiring, and payment solutions, we expect to grow at an even faster rate. With this investment and the strong rate of growth we are seeing, we expect to hit over 1 million trips per day in the next six to nine months," the company said in a statement.

Clearly its strategy is aggressive since this massive expansion announcement comes just weeks after it committed an   investment of  $50 million (Rs 317 crore) in building a response and support centre in Hyderabad, the largest international office for Uber outside San Francisco.

One of Ola’s financial backers was quoted by The Financial Times as saying Uber's $ billion investment is an attempt to intimidate potential investors in Ola’s next round. "But it won’t work. Ola is going to have plenty of money to fight back.”

So Uber wants to become the Google of transport, and India is its fastest growing market given the  sheer size of its population. So while Ola continues to raise funds after funds and doubles its valuation in less than six months, Uber's $ 1 billion announcement is nothing but a hidden message to Ola: We are always one step ahead. We have the money and are not going to to back down.

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Updated Date: Jul 31, 2015 11:44:58 IST