As reported by Xconomy: When Rujul Zaparde started running his company’s new peer-to-peer car rental service at San Francisco International Airport last year, it came with a heavy dose of entrepreneurial hustle. Glitz and glamour, not so much.
“It was me, greeting you at the car in a terrible-looking green vest,” he says with a laugh. “It was pretty bad.”
Ten days later, the company got a cease-and-desist order from the airport, which was not pleased that FlightCar was operating without permission in one of its parking lots.
FlightCar fled, but didn't go away permanently. After relocating to a facility in nearby Millbrae, CA, the Y Combinator-backed startup continued doing business—FlightCar lets everyday customers park their wheels for free, and offers the chance to earn some money if another person rents the car while they’re away.
The change of scenery didn't satisfy airport officials. Since it was serving SFO travelers, the argument went, FlightCar had an obligation to operate under the airport’s strict rental car regime, which includes a 10 percent tax on revenues and a $20 fee for each rental.
In the 2012 fiscal year, SFO raked in more than $90 million from those charges,according to the lawsuit that SFO filed, accusing FlightCar of unfair business practices. The startup is fighting the case.
In November—about six months after the lawsuit against FlightCar and just in time for the start of holiday travel—another peer-to-peer car rental service came to San Francisco’s airport. This time, the reception was different: a glowing press release from SFO announcing the agreement it had reached with an innovative new company, RelayRides.
The deal allowed RelayRides to offer its customers free parking and a little payback if cars were rented out, similar to FlightCar’s offering. Instead of ferrying customers from the lot to the airport in local town car services, as FlightCar does, RelayRides would be using a local hotel’s shuttle bus. And it would be shelling out 10 percent of its sales and the $20 per-rental fee, just like the big rental companies.
“RelayRides, which offers a forward-looking new concept, has clearly taken the leadership position as the first such company to establish an authorized service with SFO. We applaud their proactive approach, and for providing an example for others to follow,” airport director John L. Martin said.
Similar battles are becoming almost routine as startups born of the digital economy confront the real world’s established power systems, particularly in the emerging “sharing economy,” where online tools help networks of consumers rent things to each other. And as these young companies try to manage rapid growth and fend off threats to their survival, the decision about whether to fight regulators or accommodate them can become another way to gain a competitive edge.
RelayRides is a perfect example of the boom in sharing economy startups. The company was founded in 2009 in Boston before raising venture capital investment from August Capital and Google Ventures, and moving the company headquarters to San Francisco.
The original idea was to operate as an hourly car-rental service akin to Zipcar, but with a significant twist: instead of owning an inventory of cars, the company would let users rent their unused car hours to other people around town.
RelayRides’ strategy has shifted since then. The company ditched hourly rentals last fall, focusing instead on more lucrative long-term contracts, particularly for people away from home. “Our business is focused, right now, primarily on travelers,” community director Steven Webb says.
RelayRides has expanded rapidly in the past two years, fueled by $18 million in venture investment. In the spring of 2012, RelayRides was still available in just two markets. Today, the system lists cars for rent in 1,900 cities and 287 airports across the country, Webb says.
Those airports are especially critical if RelayRides is going to continue growing. The company just started offering airport-specific rentals last summer, and “we expect it to be around half of our business within a year,” Webb says.
That tracks with the broader rental car market: airports provide about half of the revenue for the U.S. industry, which generated an estimated $24 billion in 2012.
“The average rental through an airport is a lot higher than the average rental to someone in your neighborhood,” Webb says. “Airports represent a lucrative opportunity for us, and they represent a lucrative opportunity for our members who are renting out their vehicles.”
But, since they’re typically built by public entities, many airports are also heavily regulated. If you want to build a business that taps into the lucrative stream of airport travelers, that often means getting permission from the airport’s bosses and paying significant fees and taxes for the privilege.
Getting more aggressive in the airport market meant another significant change in tactics for RelayRides. In almost all of its locations, including all the other airports it serves, the company works as a relatively passive online network connecting car owners and renters—it puts the two parties together, processes the transactions, provides some insurance, and takes its cut of the bill.
In striking its deal with SFO regulators, RelayRides put employees on the ground for the first time, Webb says. Now, instead of just listing where cars were located and letting the renter and owner meet up, RelayRides keeps the fleet in a central parking lot (provided by another business) and uses an airport shuttle bus, which is operated by a local hotel. To entice more owners to rent their cars, RelayRides also offers free parking at the airport lot, in addition to earning 10 cents a mile from any rentals.
Essentially, it’s the same model used by FlightCar. And RelayRides plans to expand its footprint at other airports by following the same pattern, which includes playing nice with regulators.
Webb says RelayRides decided to go the regulated route at SFO because it would be easier and more sustainable. The company can still compete with traditional rental car behemoths after paying the fees, he notes, because it has lower costs from not owning and maintaining a large fleet of cars.
“We found when we were discussing with the authorities at SFO, we were able to create a very long-term, mutually beneficial agreement that, for us, represents a really solid way to grow the business elsewhere,” he says.
FlightCar’s approach to local regulations couldn’t be more different. Since getting booted out of the SFO parking lots in February 2013, the company has fought airport officials’ insistence that it is operating illegally.
In fact, co-founder and CEO Rujul Zaparde says, the public dustups with SFO has been good for business. “During that week, when the SFO litigation had come up, we actually had our best numbers up to that point,” he says.
The company’s decision to dig in for a legal battle is remarkable in the face of a growing competition with RelayRides, whose investment haul is about triple the size of FlightCar’s $6 million total venture capital backing.
FlightCar’s fundamental argument is that the old-fashioned regulations put in place for rental-car companies just shouldn't apply to its business. “We’re not a car rental company. We’re a peer-to-peer car sharing company,” Zaparde says.
It’s also aided by some quirks in the local geography—San Francisco County owns the airport itself, but the land is surrounded by neighboring San Mateo County. That means FlightCar’s Millbrae parking operation isn’t on any property regulated by San Francisco’s government.
And since the startup pays local car services to ferry customers to and from the airport, rather than running them to the designated rental car center on a shuttle bus, FlightCar is leaving airport officials no real way to track who is coming from or going to the startup’s location.
“If we were, say, an investment bank, and we regularly sent town cars to the airport to pick up our clients, would we have to run a branded shuttle and give you 10 percent of our revenue? That wouldn’t make any sense,” Zaparde says. “So, where does the airport’s jurisdiction really end?”
Zaparde points out that FlightCar isn't getting off without shelling out any fees to the airport. Since SFO charges for-hire cars a $3.75 toll for using the property to collect customers, the startup often winds up paying $15 in fees—two for the renter’s rides to and from the airport, and two more for the car owner. On a “ballpark figure” average of $100 per rental, the company is already paying 15 percent of its take in fees, Zaparde argues.
Of course, as revenue goes up with more expensive and profitable rentals, that toll cost stays the same. But Zaparde says FlightCar is getting less for its lower fees, too—it can’t advertise in the airport since it’s not an officially blessed vendor, or run branded shuttles without paying for use of the rental car center, he says.
San Francisco airport officials don’t buy those arguments, of course.
In its lawsuit accusing FlightCar of unfair business practices, the airport said FlightCar’s move to an off-airport location didn't matter, because “as an off-airport rental car company that catered primarily to individuals traveling to and from SFO, FlightCar was still subject to its regulations.” Other rental car companies operating outside the airport property had also paid the required fees, officials noted.
Airport officials also say FlightCar’s town car service defeats the point of its $430 million AirTrain system, which is intended to cut down on traffic congestion and pollution by funneling rental car customers to and from the airport on automated people movers. There’s plenty at stake for SFO in this fight, even if FlightCar is a small company at the moment. As noted in its lawsuit, the airport collected about $94 million in fees from rental car companies in the facility’s 2012 fiscal year, which represents more than 10 percent of the airport’s operating budget.
If a scrappy upstart can find a way to dodge those fees, the bigger companies might seek to follow suit, unless SFO enforces the regulations they’d all agreed to. The airport is asking a local judge to shut down FlightCar’s operations, and fine it for the business it has already conducted.
Officials at Boston’s Logan airport, meanwhile, appear to be taking a wait-and-see attitude. The airport notes that FlightCar does not have a contract in place to operate at Logan or pay its share of rental car taxes, but it hasn't moved as aggressively as San Francisco officials.
“They’re just waiting, I think, to see how the SFO lawsuit plays out,” Zaparde says. In the meantime, Logan officials quietly amended their regulations last fall to make clear that they consider “car sharing” or “peer-to-peer car service” companies the same thing as traditional rental car companies.
Zaparde acknowledges that, like RelayRides, FlightCar could still compete with bigger companies even if it paid the fees that regulators want and followed all the rules. For him, the SFO battle is worth fighting because it could win car-sharing companies, with all their ostensible economic and environmental benefits, the right to be treated differently from the established industry.
“This sets the precedent of what happens at all the other airports,” he says. “We really do not believe that we should be treated just like a car rental company … that’s why we’re willing to go all out here to see what happens.”
Rental car challengers aren't the only sharing-economy startups getting sucked into these kinds of fights. Since their networks have the potential to grow at the exponential speeds previously seen only online, they can surprise regulators and established competitors by emerging at a substantial scale without getting their permits in order.
Startups like Uber, Lyft, and Sidecar, which let people use their cars as unofficial taxi cabs, are some of the most prominent examples. Uber, which has raised more than $300 million in investment capital from big-name Silicon Valley backers, has caused a ruckus in many cities by taking on traditional taxi and town-car services. That’s brought battles with regulators and lawsuits from taxi companies around the country, upset that the startup doesn't follow the rules in a heavily regulated industry.
Airbnb, a startup that has raised more than $325 million for its online platform that lets anybody rent out a room or their whole house to other consumers, has run into trouble with government officials who say the company is essentially operating an illegal hotel chain. New York’s state attorney general got serious about Airbnb’s operations, issuing a subpoena for the startup’s data last fall.
The entrepreneurs behind these growing companies, inflamed by Silicon Valley’s libertarian-infused competitive attitude, have regularly rebelled against the regulators and competitors who want to rope them into the existing rules. But decisions like the one at RelayRides may also be signaling a new attitude of conciliation.
Just last week, Airbnb announced programs in New York and Portland, OR, in which the company would begin collecting lodging taxes from its hosts and sending the money on to state officials.
“This is new for us,” wrote Airbnb founder Brian Chesky, one of this generation’s iconic tech entrepreneurs. “And if it works well for our community and cities, we may replicate this project in other U.S. cities.”