Scoot Over: A Two-Wheeled Gold Rush in Silicon Valley - WSJ

The hottest investment in Silicon Valley today looks like a kids’ toy, has only been tested in a few cities and is unsafe to use in heavy rain.

Venture-capital investors are pouring money into shared electric scooters at an unprecedented rate in the already fast-moving tech hub. They’re making a sizable bet that these motorized two-wheelers will reshape how millions of people travel around cities.

The headfirst dive into a business that didn’t exist a year ago has rattled cities and comes with numerous risks and unknowns that make large-scale success anything but assured. The funding frenzy is reminiscent of the early days of ride-hailing, when Uber Technologies Inc. and Lyft Inc. slugged it out for capital, riders and drivers while battling local regulations.

This time, the money is speeding faster, even as local regulators are more aggressively imposing restrictions that limit growth. Two companies, Bird Rides Inc. and Lime, have reached $1 billion valuations less than a year and half after they were founded, raising $400 million combined in recent weeks, according to people familiar with the matter. That makes them the fastest U.S. startups ever to reach that valuation, according to research firm PitchBook.

Both are in the process of raising additional funding. Bird is set to be valued at $2 billion with this additional infusion, one of the people said.

Meanwhile, Uber and Lyft are each plotting an entrance into the scooter world, applying for permits last week to operate them in San Francisco.

Like children’s Razor scooters, these vehicles have a platform attached to small wheels and a handlebar but are souped up with electric motors. The business is rather simple. Users locate and unlock scooters on an app, paying at least $1. Riders can hum along at up to 15 miles an hour and drop them wherever they want for the next rider—until the battery runs out.

People have flocked to them in a handful of densely populated, warm-weather cities including San Francisco and San Diego. But it isn’t clear whether they will work in colder, wetter climates and in more sprawling locales with fewer bike lanes. Heavy rain makes for hazardous riding, as do steep downhills.

Meanwhile, numerous city governments have begun to limit the number of shared scooters to prevent well-funded scooter companies from flooding sidewalks like bike-share companies have done in China.

Even if those restrictions were lifted, it isn’t clear how all of these companies will distinguish their scooters in a crowded market.

Despite the hurdles, the rush of scooter cash reflects the tremendous deluge of investor money that has pushed up Silicon Valley valuations lately.

Venture capitalists are driven by two main factors: strong demand and promising economics.

Even with little marketing, companies say thousands of people now regularly commute on the scooters. Trips average a bit more than a mile.

“Consumers are saying this is what they want,” said Mark Suster, a partner at Upfront Ventures who was an early investor in Venice, Calif.-based Bird. “I have never seen revenue grow faster in a consumer-product-oriented company.”

Investors are banking on scooters becoming as popular in the U.S. as dockless share bikes are in China. But price wars there have caused heavy losses and oversupply of bikes. Bike-share giant Mobike was valued at $2.7 billion in April despite reports of tens of millions of rides a day, while Bird’s scooter count is in the thousands.

Euwyn Poon, co-founder of San Francisco-based Spin, said his company was originally focused on shared bikes, which brought in 50 cents to $1 of revenue per bike per day in Seattle. Scooters, he said, generate about $20 of revenue a day, averaging more than five trips.

Many scooters would generate more money if their batteries didn’t run out by midday, he said. Spin has said it had a few hundred scooters in San Francisco before the city started implementing a permit program.

The companies tell investors they recoup the cost of the scooters, generally about $350 to $450, after about two months, or faster. The biggest daily costs are maintenance and charging—about $10 to $15 a day per scooter, according to investors who have seen the numbers. The companies pay a force of local residents to charge the scooters in their homes, and some company trucks pick up remaining scooters at night.

The craze kicked off in September when Bird—then valued at $18 million, per PitchBook—scattered scooters around the streets of Santa Monica, announcing its presence to the city in a LinkedIn message to the mayor.

They became an instant hit, while also drawing the ire of residents and city officials upset with the clutter of scooters lying around, or riders on sidewalks.

But it wasn’t until March, when thousands of scooters from Bird, Lime and Spin began appearing in the streets of San Francisco that venture capitalists began to swoon.

Backing Bird—incorporated in April 2017—is Sequoia Capital, which led a $150 million investment at a more than $1 billion valuation, up from $300 million in March. Meanwhile Alphabet Inc., through its GV venture-capital arm, is leading a $250 million investment into Lime, which started in January 2017, valuing it at about $1.1 billion, a person familiar with the matter said. Uber Technologies, by contrast, took four years to cross the $1 billion threshold, according to PitchBook.

Lime and Bird have told investors they aim to operate millions of scooters, hoping to replace many short trips by car and foot in cities around the world. Bird and Lime have followed Uber’s playbook, stirring demand from consumers before regulators have a chance to draw up rules.

They also are planning rapid expansion internationally, where local rules thus far are more permissive, said Caen Contee, a vice president at Lime.

But U.S. cities are feeling emboldened to pre-empt the scooter craze after getting caught flat-footed like they did with ride and home sharing.

Cities including Nashville and Denver have started impounding scooters by the dozens. And officials in San Francisco, Los Angeles, Charlotte, N.C., and Washington, D.C., aim to limit the number of scooters and dockless bicycles, divvying up permits between multiple operators.

While transportation officials widely say they like scooters as a means to cut congestion, they want to maintain some control.

“If nothing else, we’ve learned from ride-sharing and home-sharing coming to Nashville, it’s better to be strict on the front end,” said Jeremy Elrod, a member of Nashville’s Metro Council who is pushing for a pilot program that initially limits the number of scooters to 250 for each company. “It’s hard to claw them back,” he said.

Another complication is that regulations like those in San Francisco put companies with vastly different sizes on the same footing, proposing to limit five companies to up to 250 scooters each. Bird said it had more than 1,000 scooters in San Francisco last month.

“Cities are taking a completely different approach with this than they did with cars,” said Roger Lee, a partner at venture-capital firm Battery Ventures who has looked at scooter companies but hasn’t invested. “The city is determining the winners—and it won’t be driven by traditional market forces,” he said. “It potentially nullifies the benefits of raising billions and billions of dollars.”

Write to Eliot Brown at