This article is an excerpt from the Shortform book guide to "The Upstarts" by Brad Stone. Shortform has the world's best summaries and analyses of books you should be reading.
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Curious about how Uber and Airbnb grew from seedlings to internet juggernauts? What was the common denominator of their success?
Uber and Airbnb completely revolutionized the traditional ride-hailing and lodging markets respectively. Yet, neither of the companies was the first to come up with the concept.
Keep reading to learn the commonalities between Uber and Airbnb and how they rose to their success.
The Rise of Uber and Airbnb
Uber and Airbnb both started as unassuming side projects, looking for the next big idea.
At Uber, Camp and Kalanick had both recently had their companies acquired. From incorporation, over a year passed before they hired a CEO and invested real time.
At Airbnb, Chesky and Gebbia started it as a way to pay rent. It’s months before they really pick it as their main idea.
Both companies were far from the first to have the concept. Uber had the following companies as precursors and competitors:
- Food delivery startup SeamlessWeb launched Seamless Wheels in 2003 as a way to book and expense town cars. Investors balked at black cars being niche and primarily an NYC product. They also received a threatening call, fearing that the Russian mafia was running the black car service. Without smartphones, coordination between drivers and riders was janky. SeamlessWeb was acquired in 2006 and Wheels is shut down.
- Failure diagnosis: timing was too early
- In fall 2005, Zimride was founded to enable carpooling (literal ridesharing). With Facebook’s recent rise, they established real identities to overcome the trust barrier. Popular in college campuses, users used it mainly to carpool on long-haul rides.
- In summer 2009, they took funding from Floodgate. Their model was to sell custom versions of the app to universities and companies.
- By 2011, they realized Zimride wasn’t going to be huge. Most users didn’t use Zimride more than a few times a year. Carpooling on commutes or long hauls just wasn’t frequent enough.
- In early 2012, they pivoted to allow short-distance travel within cities. Seeing a giant orange mustache in a cubicle, they gave each driver a pink mustache to stand out and look friendlier. They became Lyft.
- Lyft and Sidecar were actually earlier to market with ridesharing (unlicensed drivers with their own vehicles). They paved the way in regulation for Uber with UberX in 2013.
- Taxi Magic
- Taxi Magic began in 2007 to allow booking taxis on-demand. In June 2008 (when the iPhone launches), Taxi Magic received tens of thousands of downloads a day. Instead of disrupting cabs, it worked with them, integrating into their software (thus handicapping Taxi Magic from having accurate locations). It expanded to 25 cities in 2008, 2 years before UberCab launched in SF.
- Unfortunately, their main partners – fleet owners – were indifferent about riders, since to riders the cabs were largely commoditized and thus didn’t have brand loyalty. The fleet owners were also incentivized flatly, since they were paid a flat fee by drivers to rent a medallion or car.
- Service also suffered – rides were assigned to the driver who had waited longest, not the closest one Cabs might ignore the dispatch to pick up a pricier fare.
- In summer 2009, Bill Gurley offers to invest $8MM at $32MM, but Taxi Magic turns it down.
- They bet on partnering with taxis because they believed that the regulatory environment would hold. They weren’t aware the rules had changed to allow popular consumer support to override protected interests.
- In fall 2009, Cabulous launched from a Best Buy incubator. The goal was to empower taxi drivers to boost earnings. It allowed riders to see cabs on a map and hail cabs. Riders still paid drivers manually.
- However, Cabulous didn’t control supply of drivers and thus couldn’t scale with demand. In peak times like Friday night, drivers wouldn’t even turn on the app.
- In late 2009, Cabulous raised less than a million dollars (later realized to be too little to compete).
- They had several conversations with Uber, but Cabulous insisted on regulation and taxi rights. The founder argued with Graves about using the iPhone as a taximeter and flouting laws.
- In 2011, the founder left. Cabulous was rebranded Flywheel.
- Hailo recruited London cabbies to book cabs electronically. It charged no extra commission from the riders.
- By early 2012, Hailo had 200,000 downloads and 2,000 drivers.
- After raising $17MM from Accel in Mar 2012, Hailo announced a plan to expand to US cities – Chicago, Boston, New York. Uber felt threatened and quickly launched a taxi service on April 18, 2012, beating Hailo by months.
- Hailo and Uber had philosophical differences. Hailo wanted to use existing supply of taxis and make cabbies more productive, believing it was enough to meet demand (given that many drivers were actually idle much of the time). Uber wanted to build a new network of professional drivers, believing the supply of medallions was artificially restricted, and real demand was going to grow.
- Uber ended up being more correct – with rides more convenient, people stopped driving their cars, and yellow-taxi apps couldn’t keep up with demand.
- Ridesharing was a standalone category in Craigslist and in TaskRabbit, where rides to the airport made up 10% of early traffic.
- Sidecar, launched in Feb 2012, pioneered ridesharing.
- Couchsurfing opened in 2004 with pure motives to allow travelers to sleep cheaply and meet people. It began as a nonprofit run largely by volunteers and receiving fees from new members. By 2008, they had become outdated and the experience suffered compared to other web standards.
- They realized Airbnb was a threat – Chesky remembered being unimpressed. “There could be fifty companies that makes chairs but it doesn’t matter. The one who wins is the one who makes the best one.” Comparing couchsurfing and Airbnb was “like saying every piece of furniture is the same.”
- In 2010, Couchsurfing lost nonprofit status and had to raise capital. After Benchmark invested, they fired most of the staff, and it was downhill from there.
Both were rejected early on with a failure of imagination. Uber’s potential investors often questioned the size of the black car market, not predicting how it could actually grow to the taxi market and even bigger. Others knew Uber was going to run into hostile local transportation laws. Others were worried about how uninvolved the founders were.
Airbnb investors were concerned about the size of the market, designer founders who didn’t fit the Silicon Valley engineer-founder mold, the legal liability of injured guests or destroyed homes, and concerns about whether anyone really wanted to sleep in strangers’ homes.
- Instead, with a more ambitious imagination, Airbnb can be defined as the larger “eBay, but for spaces,” or “the largest hotel chain in the world, without actually owning inventory” or “transforming a massive illiquid asset – space – into a peer-to-peer marketplace.”
Both set up playbooks for new office expansion. Both Uber and Airbnb had to expand methodically in each new city, and they created their own proprietary playbooks for how to get traction quickly.
- Set up a triumvirate structure for each city:
- General manager was accountable for overall growth.
- Operations manager grew driver supply.
- Community manager stimulated demand in riders.
- Recruit drivers through Yelp listings, online directories, or airport waiting lots.
- Launch party should bring together media and local celebrities.
- A celebrity should be the first rider and be promoted in a blog post.
- With restricted driver supply, use the SoHo strategy of breaking up the city into microcities/neighborhoods (like Upper East Side and SoHo) and incentivizing drivers to pick up in those areas.
Airbnb provided tools to monitor the local business and gave an “office in a box,” containing props like a portable Ping-Pong table and the book Delivering Happiness.
Both grew virally, exhibited network effects, and kicked off powerful flywheels. Uber had natural local virality – back then if you stepped out of a black car in front of your friends, they’d wonder what you were doing.
- More drivers caused less wait time and cheaper fares, which caused more riders to join and more rides to be taken, which stimulated more drivers.
Airbnb had natural international virality built in. Travelers who used the service would consider listing their own places.
- More users encouraged more inventory which encouraged lower prices which attracted more users.
Both built trust into the network, neutralizing the advantage of incumbents. In the early days, a major reason people preferred taxis and hotels was the trust in their standard of quality. If a bad event happened, recourse could be possible.
Uber and Airbnb both built trust into their system, through the form of reviews and reputations. The star rating on both services neutralized the trust advantage that incumbent taxis and hotels had.
Both seeded the market with hacky growth tactics. Both companies leaned on aggressive marketing tactics to gain market share and deal with competitors.
Uber called competitor cars en masse, sent them invitations to join Uber, then canceled rides.
In 2009, Airbnb used Craigslist, one of its main implicit rivals: 1) email anyone who posts a rental property on Craigslist asking them to join Airbnb; 2) in the reverse, allow Airbnb users to cross-post their listing to Craigslist frictionlessly. Craigslist eventually sent a cease-and-desist in 2012.
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Here's what you'll find in our full The Upstarts summary :
- How Airbnb and Uber started as side projects before becoming the giants they are now
- How virality helped both Uber and Airbnb grow
- Why circumventing local laws was essential to growth