Introduction

In Mexico, for two years, the legendary late-night snack spot El Moro relied on Uber Eats to deliver its churros and hot cocoa to takeout customers across the capital. Then, in late 2018, it dumped Uber for an exclusive deal with rival delivery startup Rappi.

• The Colombian company offered to make deliveries for 10% of the price of an order, compared with Uber’s 30%.

Uber is under siege in Latin America amid a bruising price war where its ostensible rivals are Rappi and China’s Didi Chuxing Technology. But here’s the twist. All the combatants have as their biggest owner the same tech investor, Japan’s SoftBank, which has injected a total of $20 billion into the three.

• $7.7 billion in Uber in early 2018,
• $1 billion to Rappi and
• nearly $12 billion to Didi.

What does this mean?

Startup investors typically don’t back competing companies. SoftBank has poured so much money into popular tech categories that it created a sort of circular firing squad in which SoftBank-backed companies use SoftBank cash to attack one another.

• The SoftBank-funded fight is “just bad business,” said Chris Sacca, founder of Lowercase Capital. “When an investor infuses multiple direct competitors with money to spend in a race to the bottom, it’s just a waste.”
• Former managers of all 3 delivery companies say they were frequently baffled by the amount of money the companies were willing to spend to compete.
  • Uber lost $8.3 billion in the 12 months through September.

SoftBank’s Latin America spending shows how messy it can be when a torrent of investment money overwhelms a modest startup market.

• In recent years, SoftBank has deluged the tech industry with spending from its flagship $100 billion Vision Fund, the largest tech investment fund ever.
• Now, as it tries to lock down funding for a second Vision Fund, it has instructed its companies to focus on becoming profitable, reversing prior guidance to prioritize growth.
• Soon after SoftBank launched the Vision Fund in 2017, the company began investing enormous sums, including in office-leasing startup WeWork, which turned into an investment flop.

Softbank’s intention was to fund promising startups, not to trigger a three-way war between portfolio companies.

• Nevertheless, SoftBank executives believe emerging markets such as Latin America and Southeast Asia have enough untapped growth potential that they can support multiple winners.

The war

After Uber started operating in Latin America in 2013, it quickly overtook local competitors to become the region’s dominant player, enabling it to charge high fares and take hefty commissions.

In late 2017, SoftBank led a more than $4 billion investment into Didi, which had long harbored ambitions to expand beyond its home base China.

• Shortly later, Didi bought a majority stake in the struggling Brazilian ride-hailing service 99, Uber’s main competitor in that country, for $900 million. 
• Then it expanded into Mexico, first into the smaller cities of Toluca, Guadalajara, and Monterrey, then into the capital.

With the Mexican market now in play, both Didi and Uber began spending money on the fight.

• To gain share, Didi inundated consumers with free and heavily discounted rides and offered double or triple the normal pay for drivers who signed up.
• Didi has blanketed the city in orange billboards and bombarded consumers with text messages offering daily deals. It believes it has a market share of about 30% in both Mexico and Brazil.
• Uber was slow to react, so it responded with targeted discounts. It eventually agreed to increase incentives for drivers and lower some prices.
• Uber executives were mystified by SoftBank’s decision to fund a rival, especially because that was hurting Uber’s attempts to reduce losses in preparation for its IPO.

Food delivery service

In November, Didi took aim at Uber Eats, launching its own restaurant delivery service in Mexico City called Didi Food.

• Meanwhile, Uber Eats already was engaged in a bruising battle with Rappi.

In April 2019, SoftBank committed $1 billion to Rappi. The investment “emboldened” Rappi to compete with Uber Eats by picking off more of its rival’s most popular restaurants, as it did with El Moro, and making them exclusive Rappi offerings.

• Rappi has seen sales growth in Mexico of 20% a month for the past 2 years and has nearly pulled even with Uber Eats in terms of market share in Mexico.
• Downloads of Rappi’s app in Mexico surged 141% in 2019 to an estimated 5.9 million. Downloads of Uber Eats were up 45% to 6.2 million.

Rappi has modeled its expansion on Asian “super apps” such as Grab and Go-Jek, which offer a range of services from payments to scooter rentals to grocery delivery.

SoftBank executives believe each market can have multiple winners. “Border skirmishes” sometimes occur because SoftBank’s model offers founders free rein to operate as they see fit. That sometimes leads startups to offer incentives that cut into profits.

• Before agreeing to contribute capital to Softbank’s Vision Fund in 2017, Saudi Arabia’s sovereign-wealth fund made SoftBank promise to keep other ride-hailing investments out of the Vision Fund.
• Until SoftBank finally overcame those objections last year, it kept its big stakes in Didi,  Grab and  Ola either on its own books or in a sister fund.
  • In food delivery, SoftBank portfolio companies Uber Eats and DoorDash are rivals in the U.S.
  • In ride-hailing, Uber is competing with Ola in its home market of India as well as in the U.K. and Australia.

The SoftBank-backed battle for market share appears to be hurting Uber. In the first nine months of 2019, revenue in the region fell by 11% from the year-earlier period, while Uber’s revenue from the rest of the world grew by 26%.

• Chief Executive Dara Khosrowshahi told he thinks revenue growth in Latin America will “accelerate to pretty darn healthy levels.” Uber’s shares are down nearly 20% since its May IPO.

Content source: Whelan. R., Brown. E. (2020) SoftBank Is Funding Every Side of a Bruising Startup Battle. The Wallstreet Journal. Available from: https://www.wsj.com/articles/softbank-is-funding-every-side-of-latin-americas-bruising-startup-battle-11580398900?mod=lead_feature_below_a_pos1&fbclid=IwAR3som7N1gFcunmQPSrsXvX50KOu-hnE6pf8CGGpMtyM4_RScqAKwwVccrI [Accessed 30 January, 2020]