Uber has suffered its greatest ever setback -- and startups should take note

Uber is throwing in the towel in China.

After a gruelling ground war, the Californian ride-hailing company is officially selling its Chinese unit to its rival in the country, Didi Chuxing.

Uber has suffered through extreme regulatory scrutiny, driver assaults, controversy over background checks, digging up dirt on critics, and more. But this is something else. China is the world’s most populous country, and a market consistently touted by China as a land of opportunity.

Uber’s withdrawal is the greatest setback in its seven-year history — and a rude awakening for many in the venture-capital-funded startup ecosystem.

First, the facts:

The details of the Didi Chuxing deal, which was first reported by Bloomberg, are as follows:

  • Uber is selling its Uber China unit to Didi Chuxing.
  • Uber’s app will continue to exist in China (for now), while the two teams are folded together.
  • The combined company will be worth $35 billion.
  • Per a press release, “Uber will receive 5.89% of the combined company with preferred equity interest which is equal to a 17.7% economic interest in Didi Chuxing.”
  • Didi Chuxing will also invest $1 billion in Uber, at a $68 billion valuation.

Venture capital isn’t everything.

As Uber battled its Chinese homegrown rival, it faced a litany of problems — from crackdowns by the Chinese authorities to censorship in WeChat and allegations of driver fraud.

China was a puzzle that Uber just couldn’t crack, no matter how much cash it threw at it. The Californian company — worth $68 billion, the most valuable pre-IPO tech startup in the world today — was burning a whopping $1 billion in China a year as it fought Didi. While it is apparently profitable in some developed markets, it is deep in the red in China.

This failure comes despite Uber’s previous touting of China as a land of milk and honey. “To put it frankly,” CEO Travis Kalanick wrote in a leaked letter to investors in 2015, “China represents one of the largest untapped opportunities for Uber, potentially larger than the US.”

The company boasted of meteoric growth in the country: Nine months after launch, Uber enjoyed 479 times more trips in Chengdu than it saw in New York after the same length of time, it said.

Uber graph china annotatedUberA graph from Uber showing its rapid rate of growth in China compared to elsewhere in the world.

But metrics aren’t everything. The most most explosive growth in the world won’t do a company any good if it can’t turn a profit and build a viable business around its core product.

Uber’s failure in China is a lesson that much of Silicon Valley and the tech industry would do well to heed. Many in the venture capital business are happy to pump tens of millions into wildly unprofitable businesses off the back of hockey-stick growth graphs and vague promises of future returns.

It’s a strategy that can work. Just look at Facebook! But it’s no guaranteed recipe for success, no matter how many billions you throw at it — as Uber is discovering to its cost.

Counter-intuitively, the Didi Chuxing deal may actually help Uber in the long-term. By offloading its unprofitable Chinese segment, it should make it easier for the Californian startup to finally go public.

Ultimately, the deal is a repudiation of the notion that with enough venture capital behind you, you can do anything.

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