Bits Blog: Ride-Sharing App Gets $10 Million - and a Cease and Desist Order

How does an ambitious entrepreneur in the middle of raising money for his budding start-up inform potential investors that his company, which connects drivers with passengers looking for a ride, has been hit with a cease-and-desist order?

With a straight face and the utmost confidence. Unfortunately, that’s not always enough.

“There were definitely investors that said, ‘No we don’t want to deal with that risk,’ ” said Sunil Patel, the chief executive of Sidecar, a ride-sharing service.

Luckily Mr. Patel was still able to raise his funding. On Wednesday, the company is announcing that it has raised $10 million in a Series A round of venture capital from Lightspeed Venture Partners and Google Ventures.

Despite the new money, which will help the company expand beyond its home base in the Bay Area and double its staff from 20 to 40, the company still has to contend with state regulators in California who are trying to shut it down.

Mr. Patel said that the California Public Utilities Commission, which handles public transportation issues, was mischaracterizing the way the company operates. The commission maintainedin its order in August that Sidecar did not have the proper permits and authority to operate a car service. Mr. Patel says that because the company merely provides the communication tools to connect drivers and riders, it is legal. In addition, he said, payment is optional and donation-based.

“We’re simply letting the community organize its own transportation,” Mr. Patel said.

In a blog post, Sidecar said it was talking to the commission and would continue to operate as it did so.

Sidecar isn’t the only start-up wrestling with regulators over the legality of its services. Other ride-sharing companies, including Lyft and Tickengo, recently received cease-and-desist orders from the state of California. In addition, Uber, a start-up that lets people summon a car service or taxi through a mobile application, has been grappling with taxi lobbyists and officials pushing back against the company and its expansion across the country.

Mr. Patel says that his company, which got off the ground last June in San Francisco and has generated more than 50,000 rides since then, will prevail despite the murkiness around its legality. He said that the tension stemmed from the current taxi infrastructure, which is resisting being undermined by entrepreneurs who are working to bring new means of transportation in major cities. He said his company put measures in place to ensure that passengers would be safe when using its service, like performing background checks on drivers and tracking cars to make sure they delivered riders safely. The complaints, he maintains, are short-sighted and choking the development of innovation around public transportation.

He cited the battles between phone companies and Internet telephony, saying that Sidecar was “on the right side of history” and added: “This is something that we’re doing with public interest in mind.”