Why It Matters

Wake-up call for ride-hailing firms

The sudden demise of ride-hailing app Karhoo this week is yet another reminder of the thin ice that similar start-ups may well be treading on.

One moment you are on the top of the world, sewing up deals in major cities, and the next you are writing a protracted apology letter to employees for failing them and owing them salaries.

Karhoo was founded by British entrepreneur Daniel Ishag, 42, last year. It is said to have raised US$250 million (S$350 million), an amount that remains unverified. It aimed to take on ride-hailing app giant Uber, with what it calls an aggregator, which is supposed to allow users to compare cabs by price, proximity and vehicle type.

In September, three months after launching in London, it said it had 33,000 cars - more than what Uber had in the city. But barely two months later, on Tuesday, it wound up. It blamed "new management" and an inability to raise fresh funds for its collapse.

Karhoo's failure is a wake-up call to similar app providers who have raised millions - in some cases, billions - but have yet to show any profits. Uber, for instance, has raised US$15 billion to date. Despite reports of deep losses, it is valued at US$68 billion.

To anyone who remembers the 2000 dot.com bust, alarm bells should be going off.

There are differences, of course. For one thing, firms such as Uber, Didi Chuxing (in China) and Ola (India) are providing a real service, even if they seem to thrive on the weak transport policies and wide socio-economic gap that characterise many cities.

Investors who missed out on Facebook, YouTube and WhatsApp are also desperate to latch on to The Next Big Thing. The prospect of a public listing, and a potential windfall, is fuelling confidence. But the business poses a relatively low barrier of entry, which explains its proliferation since Uber appeared in 2012.

It does not, however, explain the exuberance of investors. Currently, each firm is spending a lot of money to try to outdo the other by dishing out incentives to drivers and commuters. Over time, we should be able to tell the unicorns from the asses.

A version of this article appeared in the print edition of The Straits Times on November 11, 2016, with the headline 'Wake-up call for ride-hailing firms'. Print Edition | Subscribe