When Hailo, a mobile application that hails taxi cabs, arrived in New York in early 2013 it was expected to take the country’s largest taxi market by storm, with the rest of the U.S. not far behind. On Tuesday, the startup company said that it plans to pull out of the North American market entirely, laying off 40 employees and citing the “astronomical marketing spend” required to pursue its mission.
The company had A-list investors and strong momentum. Where did the promising e-hail app go wrong?
Two years ago, Hailo’s U.S. launch was highly anticipated. The company had already gained impressive traction in the U.K., with 2.5 million passengers and the promise of a $100 million revenue run rate. An investment from New York’s most prominent venture firm certainly helped: Union Square Ventures led a $30 million investment in Hailo as it arrived in New York. (The round, which followed another for $17 million from Accel Partners, valued Hailo at $140 million before the investment.)
With fresh capital, Hailo opened an office in New York’s SoHo neighborhood and hired dozens of employees, including Tom Barr, the former head of the coffee business at Starbucks (SBUX). The timing seemed right. Union Square Ventures’ Hailo investment came right around the time that Uber, GetTaxi, and other similar car-hire mobile services entered a legal battle with New York’s entrenched livery car industry over whether e-hail apps would be legal in the city.
All eyes were on the field of competitors. Hailo and Uber were squaring off for an “epic NYC e-hail throwdown,” declared Liz Gannes of AllThingsD. Six months later—June 2013—e-hailing was legalized in New York. And so the throwdown began.
Hailo’s strategy was to let Uber take the high end of the market, serving customers with luxurious black cars for which Uber would need to recruit new drivers. Hailo would instead take the yellow cab market, infiltrating a network of existing drivers by having them download its app to connect with potential passengers.
It didn’t work. Former employees say Hailo failed to gain traction with New York cab drivers. In the two years it has been operating in New York, Hailo signed up a tiny fraction of the city’s 40,000 yellow taxi drivers. (The company has said it has 60,000 drivers worldwide.) To compare, Uber CEO Travis Kalanick recently said his service adds 50,000 drivers around the world per month. Anecdotally, I was only able to find a Hailo taxi in midtown Manhattan once in six times I opened the app this summer.
Hailo laid off a number of the engineers in its New York office in November 2013. (Jeremy Parker, a senior software engineer at the company, notes on his LinkedIn page that his position was terminated “when Hailo changed course and stopped building a developer team in NYC.”) Co-founder Jay Bregman told Fortune in an email exchange this summer that the company wanted wanted to refocus its engineering efforts in the U.K.
Then in February of this year, Hailo announced that Barr would be promoted to co-CEO alongside Bregman. The announcement was framed as a promotion for Barr, who now handles day-to-day operations. Bregman was said to be working on “skunkworks” projects aimed at redefining its product. In reality, Bregman was demoted. With today’s announcement, Hailo said Bregman would be leaving to start a new project related to robotics.
According to former Hailo employees, the company struggled because what worked in London didn’t translate to New York. London cab drivers are highly trained and equipped with smartphones. There, cabs are a luxury product. Meanwhile, New York’s grid system–far more regimented than London’s cowpaths—makes it easy for new drivers to learn the streets and take the job with very little training. It’s also not standard for yellow cab drivers to have smartphones as part of their job. Many New York drivers were suspicious of a service like Hailo, former employees say. Besides, it’s not difficult for New York drivers to find new fares, leaving Hailo’s value proposition thin.
Further, when e-hailing was approved by New York, the city’s pilot program was delayed because of an appeal from the black car lobby. Uber’s response to legal issues has been to continue operating, as it did when it met resistance in Germany.
Hailo also faced technical issues in New York. Because the city works with payment processors that use outdated technology, Hailo found it difficult to integrate its services with them, according to one former Hailo employee. At the time, Barr said Hailo planned to enter as many as 50 markets by the end of the year. It is currently operating in 20 markets. Meanwhile, Uber has expanded to almost 200 cities and is valued at $18 billion with a war chest of $1.5 billion in venture funding. Lyft is in 60 cities and is valued at $700 million with $332.5 million in investment.
Adoption is soft on the consumer side, too. The app has only cracked the top 1,000 app download rankings for the U.S. one time since it launched, according to App Annie. (By contrast, it has remained in the top 500 in Great Britain, though its standing has fallen slightly this year.) Uber has been in the top 100 in the U.S. for all of 2014. Lyft, which is smaller than Uber but growing quickly, has been in the top 200 for the last six months.
As if that’s not enough, Hailo’s value proposition was directly challenged by market leader Uber when it rolled out its cheaper UberX service, which sometimes undercuts conventional taxi cabs. Uber and Lyft remain engaged in a bitter price war as Hailo struggles.
Finally, Hailo’s one strength—London—weakened after it began charging a minimum fare of £10 during peak hours. (It later backtracked on that move.) The company raised capital on the premise that it could continue its strong early growth, but it has not. Hailo’s revenue in 2013 did not top $100 million.
None of this has stopped Hailo from attracting further investment. This year, the company raised an unannounced round of $50 million in venture funding from OCCAM and a group of Asian investors.
Last month, Hailo hired Gary Bramall, former marketer with Microsoft, Skype, Apple, and Orange, as its new chief marketing officer—based, tellingly, in London. In an interview with Fortune, he downplayed issues in New York, noting that it is his challenge to change Hailo’s image as an also-ran in the taxi wars. New York is a complex market, he conceded, where “even the best tech companies like Airbnb have struggled with legislation.”
Even as Hailo exits the U.S. and Canada—save for Toronto, where Hailo Canada president Justin Raymond seems to have taken a stand against today’s decision—the company still faces stiff competition from Uber, Lyft, and local competitors. Bramall said, elsewhere in the world, Hailo won’t be using the aggressive marketing tactics of Uber and Lyft. “We are aware that aggressive marketing, and bashing and trash talking, has a negative effect on customers,” he said. “We want to be positioned in a way that champions for the user.”
Correction, October 14, 2014: An earlier version of this story misstated that Fred Wilson led the Union Square Ventures investment in Hailo. The deal was led by Partner John Buttrick.