VentureBeat – How the ride-hailing industry is fueling a new breed of startup

By: Paul Sawers, November 8, 2019 – Original Article

Amid concerns about low wages in the ride-hailing industry, a number of venture capital (VC)-backed startups have emerged to help drivers boost their earnings by selling goods, displaying advertising, and even crunching big data to optimize their routes.

But while dissatisfaction in the ride-hailing industry may have played a part in spawning a new category of company designed to help drivers earn more money, that’s only part of the story.

Growth industry

Uber, Lyft, and the countless other ride-hailing companies contributed to a reported $34 billion market in 2018, a figure that could rise to well over $120 billion within five years. The driving force behind this surge are the millions of individuals who have signed up to drive for these big players. Uber alone claims some 900,000 drivers in the U.S., and 3 million globally.

But the ride-hailing industry is facing a serious problem — most drivers don’t earn much once commission, expenses, and taxes are taken into account. A report from the JPMorgan Chase Institute last year indicated that Uber and Lyft drivers earn 53% less than they did four years ago. As the poster child of the industry, Uber in particular has faced fierce criticism for the pay its drivers take home, and countless reports suggest ride-hailing companies don’t pass on the extra fees they charge for surge pricing.

Just this week, news emerged that a group of drivers in New York City were planning to sue Uber for failing to repay taxes they believe they are due. And drivers across the U.S. have gone on strike this year over their dwindling take-home pay. Things could get worse, too.

Uber is struggling to reduce costs and hit profitability (something that could be a long way off), and has previously hinted that it may have to eat further into driver earnings to do so. But in its pre-IPO filing with the U.S. Securities and Exchange Commission earlier this year, the company acknowledged growing driver dissatisfaction. “While we aim to provide an earnings opportunity comparable to that available in retail, wholesale, or restaurant services or other similar work, we continue to experience dissatisfaction with our platform from a significant number of drivers,” the company said. “As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase.”

This situation has created fertile ground for third parties that promise to boost driver profits. One of those is Octopus Interactive, a Bethesda, Maryland-based startup that helps ride-hailing drivers make extra dough by installing interactive, location-based advertising technology on the passenger side of their vehicles.

Whether they work for Uber, Lyft, Via, or Gett, any driver can apply to Octopus for a free tablet, mount, and LTE data. The tablet has a rear-facing screen, where riders can play games and even win cash prizes — interspersed with short ads that allow drivers to earn up to $100 per month.

All the quizzes and games are designed and built in-house, and for the advertisements Octopus works with a number of high-profile clients, including Disney, Red Bull, Sprint, National Geographic, and Bloomberg.

“Drivers have seen a nearly 50% drop in pay over the last few years as Uber / Lyft rates and incentives have fallen, and driver competition has risen,” Octopus cofounder and CEO Cherian Thomas told VentureBeat. “They are essentially running a small business in their vehicle and are smartly taking advantage of complementary monetization channels.”

This week, Octopus announced that it has closed a fresh $10.3 million round of funding, although the news originally leaked via an SEC filing back in September. The financing round was led by Sinclair Digital Group, an affiliate of Sinclair — one of the largest operators of TV stations in the U.S. Marketing- and media-focused VC firm MathCapital also participated in the round.

Second screen

Octopus was founded in 2018 by Thomas and COO Bradford Sayler, formerly of VC-backed Spotluck, which used gamification to help people find local diners to eat at. While at Spotluck, they created an early version of Octopus, which they used as an additional marketing channel to acquire app downloads. After Octopus took off, they decided to shutter Spotluck and refocus their efforts.

“Once Octopus caught on within the driver and advertiser community, we decided to dedicate all of our team’s time to it,” Thomas said. “Although Spotluck was a fun app for consumers and restaurants, Octopus had a superior business model and unit-level economics. As a team, we realized it’s best to pivot and do one thing [really well], and fortunately our board agreed to the shift in business.”

From a driver’s perspective, the promise of earning an extra $100 per month is alluring, but how likely are they to earn that much? According to Thomas, many of its “high-volume” drivers do hit the $100 mark, but those who work a full-time week of roughly 40 hours can expect an average of $75 — though the exact figure will depend on the number of rides given and engagement from riders. However, drivers can earn additional income, including $25 referral fees for each fellow driver they recommend to Octopus, and the company said the positive experience generally leads to more tips.

“The largest payout comes in the form of greater tips,” Thomas said. “The average increase in tips is 30% as reported by our drivers, and this can go well above $100 per month. To date, we’ve paid out over $2 million in direct deposits to our drivers and estimate Octopus tablets have contributed over $7 million in tips.”

On the surface, the system also seems ripe for abuse — how does it know there is a rider in the back seat, for example? And is there anything stopping the driver or their friends from sitting in the back playing the games? Turns out there are mechanisms in place to prevent this, with each device emitting 75 data points every two minutes, including GPS location, vehicle speed, accelerometer, and engagement level. And Octopus periodically reconciles its data with the drivers’ rider logs.

To appease advertisers, Octopus can also confirm there is a person in the back seat by using the Google Tensorflow machine learning platform to deliver verified impressions via passenger detection. This ensures advertisers only pay for riders who actually sit in front of the screen while their ad is playing.

In an age when consumers are typically glued to their smartphones, Octopus promises a more engaging journey, which may be particularly appealing when multiple riders are traveling together. But Octopus says the experience may even transport individual passengers out of their smartphone-browsing routine and into a different world.

“Our tablets receive nearly a million touches on certain days,” Thomas said. “We provide a lean-in game experience that riders typically pay to access in other public settings (arcades, bars, etc.), and they are thrilled to be getting it for free. Also, we offer instant and daily prizes — we’ve paid out over $50,000 to date — to entice riders. We estimate that nearly half of riders touch the tablet during their ride, especially ones that are riding in groups.”

Octopus is far from the first company to adopt an advertising-based approach to helping drivers earn more money. Minnesota-based Vugo offers something similar, and Alphabet’s VC arm GV recently led a $30 million investment in San Francisco- and New York-based Firefly, which promises to help drivers make up to $300 extra each month by mounting electronic, geotargeted ads on their car roof.

New York-based Halo offers something similar to Firefly, while Wrapify allows any driver — even those doing the school run — to monetize their trip by placing advertisements on their vehicle.

Chicago-based Ivee adopts a slightly different approach, partnering with brands to deliver “experiential marketing,” which may include changing the car’s decor or ambiance or even setting up a karaoke experience for passengers. According to Ivee, drivers who use the Ivee kit see twice as many tipping passengers, with an average tip volume increase of 15%.

Driving profits

A number of other companies have taken different approaches to boosting drivers’ take-home pay.

Pittsburgh-based Techstars alum Gridwise claims it can help drivers earn as much as 39% more per hour by harnessing vast swathes of data to tell them where they should be and when. The company offers a mobile app that aggregates data from numerous third-party sources, including traffic services, social media, weather, concerts, and local news, as well as crowdsourced data from its own network of drivers.

Gridwise can also issue predictive alerts so drivers know the best times and days to be on the road. This feature relies on information such as airport congestion, weather forecasts, and other factors likely to increase rider demand.

This is similar to a startup called PredictHQ, which works directly with ride-hailing companies (such as Uber) so they can more accurately forecast surges in demand. But Gridwise puts the power of big data in the hands of drivers themselves.

And then there is New York-based Cargo, which offers an in-car commerce service to help drivers earn extra cash by selling stuff — from earphones to chocolate — in partnership with the brands behind the products. Cargo has raised nearly $30 million in funding since its inception, including a $22.5 million series A round last year that was led by Peter Thiel’s Founders Fund, with participation from notable names such as Zynga founder Mark Pincus.

Drivers display the items in a little transparent case up front, and riders can visit the Cargo Store mobile app to pay for goods, with the driver taking a cut of each sale. Cargo previously told VentureBeat that drivers can earn up to $500 extra per month through commissions, referrals, and bonuses, though in reality the average driver earns closer to $130.

Cargo initially operated as an unofficial provider for ride-hailing drivers, but last year Uber jumped on board as an official partner, leading to the launch of Uber Greenlight Hubs, dedicated pickup points where drivers can collect boxes.

Founder and CEO Jeff Cripe thinks that wherever transformational businesses crop up, “valuable economies of goods and services” tend to orbit around them. Other examples include the launch of the iPhone and Apple’s App Store for developers, and the myriad services that have sprung up around Airbnb’s home-rental marketplace.

“Uber is another globally transformational company,” Cripe told VentureBeat. “In 2016 we founded Cargo as the first company to build on top of the rapidly growing ride-share platform in order to more effectively monetize every trip, and a really valuable emerging commodity: passenger minutes. Like airlines did with food and beverage, entertainment, and Wi-Fi, we believed ride-share would and should lean into value-add services that drive better economics and a better rider experience.”

While it would be easy to point to low wages as the main driver behind all these new services, that’s probably not entirely accurate. The fact of the matter is these services require little buy-in from drivers and involve little risk. In other words, even if ride-hailing drivers did earn more upfront, it’s likely many of them would still want to boost their take-home pay by partnering with companies such as Octopus and Cargo. This is something Cripe firmly belives. “There is little correlation between these two things [low pay and drivers using Cargo],” he said. “We are low-effort supplemental income. If someone told me all I had to do was bring donuts in to work every day to get a 10% raise, I would opt in regardless of how much money I make.”

Additionally, as is evidenced by the increase in tips reported by companies such as Octopus and Ivee, it seems value-add services make good businesses sense from a customer satisfaction standpoint. This can also translate to better ratings.

“We actually hear cross-geography feedback from drivers that one of the main interests in Cargo is providing the best ride experience to their passengers, and the better ratings they get because of it, in addition to the obvious financial benefit,” Cripe said.

Captive audience

So while these various startups do highlight the problem of low pay in the gig economy, that’s really just one of the factors leading drivers to transform their vehicles into ad-infused commerce hubs. A key takeaway here is that cars represent a major opportunity for companies and advertisers eager to target a captive audience while they’re confined to a closed space for up to 30 minutes or longer.

“We knew it would be an ideal captive setting to acquire the … millennial hard-to-reach consumer, but we had no idea that drivers and riders would love our simple product so much,” Thomas continued. “We tracked the ride-share space very closely and noticed that while ride-share usage continued to skyrocket, driver earnings had dropped over 50% over the past five years. We knew that if we could create a product that riders and drivers loved, then we could connect the brands and monetize.”

Sinclair’s investment is also very much a strategic move, as it will enable Octopus to access more relevant local media content, based on where the rider is traveling.

“What we see here is an untapped medium with a truly captive audience that is buckled in and looking to engage,” Sinclair executive chair David Smith added. “We invested in Octopus because the team has successfully created an innovative and differentiated branding opportunity that we can help scale further.”