The Billion-Dollar Email : Why I Passed on Uber’s Seed Round

Blue skies ahead for Uber’s new enterprise?

Did I pass on Uber’s seed round?

No. It’s worse than that.

I never even bothered to listen to Travis’ pitch, even though I was repeatedly offered the opportunity. I then passed on Uber’s A Round as well, which I thought was valued too high, in light of the company’s progress.

Too bad — as the initial funding round has increased over 4,000 times in value, making a $250,000 investment worth more than $1,100,000,000.

Nope, that’s not a typo.

Two hundred and fifty thousand would have netted my firm more than one billion dollars.

As discussed in Why I Passed On Twilio, VC’s love to talk about their successes, but seldom publicly acknowledge their mistakes. However, passing on a killer investment is not the worst error an investor can make. It is far more detrimental to one’s returns to make investments in companies which fail to return capital. A VC has done their job when their funds include enough great companies to generate an industry-leading outcome.

Thus, while it is painful for a great investment to pass you by, the pain is wistful, not acute.

The Billion Dollar Email

Although Uber never pitched Rincon Venture Partners, we share a very good mutual friend with Travis Kalanick, Uber’s Founder and CEO. Our mutual friend mentioned to me over breakfast during the late summer of 2010 that Uber was raising a seed funding round. At that moment, I could have been one of Travis’ first pitches, if I had been curious to learn more.

In between mouthfuls of home-fried potatoes, I recall telling my friend (paraphrasing from memory — his and mine), “It might work in San Francisco, Boulder and Austin, but I don’t see it expanding beyond a few small cities with strong tech communities. If they try to move into Philly, New York or Boston, they’re going to get their throats slashed.”

I am not disclosing my friend’s identity. He is now a Senior Executive at Uber, although back in 2010 he had no formal affiliation with the company.

A few months later, on December 30th, 2010, my friend appended the following text to a lengthy, non-Uber oriented email:

“not sure if you guys are aware of uber (ubercab.com). essentially they are a service that turns the downtime of town car/limo services into cab service. i thought it was a great idea given how crappy cabs are and it seems to be getting traction. one of my old *** <company name redacted> colleagues is the ceo. probably not up your alley, but thought i’d mention it.”

My email response was characteristically brilliant, stating:

<name redacted> — I think you have mentioned this one before, not sure. Sounds familiar.

Looks like they are ultimately providing the service (via independent drivers), correct? If so, not a great fit. If they are selling s/w that allows independent drivers to make more money, that is a bus model that fits within our overall investment thesis (i.e., s/w sales vs real-world fulfillment of a service).

Keep them coming, esp those for which you know the Founders / key players.

My Partner, Jim Andelman, responded a couple of days later with a much more cerebral and thoughtful email, stating:

Potential issues:

#1 they got a cease and desist order from SF for operating a taxi service w/o a license. Turned out to be great PR, got them lots of attention, and they’re likely able to change their TOS to get in compliance. But still a risk, and something that may need to be handled a little differently in every single jurisdiction.

#2 (bigger one IMO) is the limited number of metro areas that have the right supply and demand dynamics for this to work as a good service. I’m just not sure it’s gonna fly everywhere, and may end up nichey even where it does work well enough. Oppty is for them to expand beyond car rides, into other verticals (that are similarly inefficient and have a location component) once they are firmly seated on the handset. But each vertical requires a lot of focused attention, so could be like building a bunch of businesses at once, which is hard.

Over the next several years, my Partner and I were reminded of Uber’s success every time we connected with our mutual friend, long past when it became a slightly painful joke.

What I Missed About Uber

There were two areas in which I greatly underestimated Uber: (i) its ability to create a robust, two-sided market and, (ii) its wily use of consumers to muscle its way into hostile markets.

Two-sided Market

One reason I was not excited about Uber was because its success was predicated on creating a two-sided marketplace of drivers and riders. Not enough drivers and riders would have shunned the company. Likewise, a dearth of riders and drivers wouldn’t have been incentivized to sit idle, waiting for fares.

Although a number of extremely successful companies have pulled off two-sided markets (notably, Airbnb, eBay and Rincon portfolio company Tradesy), most startups lack the capital to achieve critical mass necessary. Uber’s development of its marketplace is a textbook example of how to do it right.

The company began operations in San Francisco, a tech savvy city with a concentrated downtown and notorious for its terrible taxi service. Additionally, Uber initially focused on replacing limo-style town cars and thus appealed to a relatively small number of upscale riders, inclined to have smartphones and be price insensitive.

Although it was a brilliant market entry strategy, it contributed to my misunderstanding of the opportunity. I viewed their value prop as a town car substitute, rather than appreciating the larger opportunity to eventually cannibalize the taxi market.

It’s possible I would more fully understood the company’s vision, had I spoke with Travis and not relied on my friend’s secondhand description of the opportunity.

Consumer Leverage

Uber marshaled the collective efforts of its users to overcome decades of entrenched political graft and corruption. They accomplished this in a number of ways, including offering free rides in markets politically closed to them. Uber gave dissatisfied taxi consumers a taste for their superior service and then made it easy for them to express their outrage via social media and email barrages directed at local political hacks. Eventually, even the most corrupt politicians acquiesced when faced with an angry electorate.

Listen To Trusted Sources And Take The Freakin’ Meeting

The ultimate lesson I learned from scoffing at Uber is that I should have honored my friend’s thoughtful (and repeated) suggestions and his nose for great businesses. A successful, serial entrepreneur in his own right, he mentioned Uber to me and my Partner several times when it was at a stage that fit within our investment focus. He was clearly excited about the opportunity and was trying to help his buddy Travis by pulling in what he considered to be helpful investors. Yet we never took the time to learn more about Ubercab.com. Dang it.

Note to my loving wife: The next time a friend knocks me over the head with a billion dollar opportunity, I’m going to listen. Promise.

John Greathouse is a partner at Rincon Venture Partners, a venture capital firm investing in early stage web-based businesses. John has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions, which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition. He is also a Co-Founder of RevUpNet, a performance-based online marketing agency. John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. Find John on Twitter: @johngreathouse.

A version of this article previously appeared on Entrepreneur.com.