Chicago made their business illegal, now Vugo is fighting back

Vugo is the type of technology startup political leaders often herald as the future of Chicago. But taxi protectionism has forced it to leave town.

Chicago Mayor Rahm Emanuel brands his city as “the digital mecca of the Midwest.” But what happens when politicians tilt the playing field toward entrenched interests?

Enter Vugo, a promising Midwest tech startup now suing the city for banning its business.

Starting up

James Bellefeuille used to moonlight for Uber, spending his nights and weekends ferrying Chicagoans around the city. His day job was in marketing. In 2014, he started thinking about how to combine the two.

Taxis had “Taxi TV,” a notoriously annoying screen that pestered passengers with ads. But what if he could create a better product for ridesharing vehicles like his? His clients could reach a whole new audience, and rideshare drivers could earn some extra cash.

He pitched the idea to his longtime friend Rob Flessner, and soon after, Vugo was born. The two got to work developing the product at Chicago tech incubator 1871.

Vugo is now a promising startup seeing success in Los Angeles, San Francisco and Minneapolis. More than 8,000 drivers use its ad platform to earn extra money. Drivers simply download the Vugo software onto a tablet and strap it to a headrest.

But none of Vugo’s drivers are in Chicago. And neither is the Vugo headquarters. Not anymore.

Moving out

In 2014, the city of Chicago passed an ordinance to regulate ridesharing vehicles. One of those regulations banned commercial advertising in the interior and on the exterior of ridesharing vehicles.

But the city allows advertising in the interior and on the exterior of taxicabs. And it allows commercial ads on personal vehicles as well.

When Bellefeuille and Flessner learned the city had made their business illegal, they left Chicago, and currently operate out of Minneapolis and Los Angeles.

“Chicago is an amazing city, we just can’t operate here,” Flessner said. “We just want a level playing field. Favoritism to the incumbents isn’t the right way to grow the economy.”

In attempt to level the playing field for businesses like Vugo, the Liberty Justice Center, or LJC, filed a lawsuit against the city Feb. 2. The suit argues that the ban violates the right to free speech and equal protection under the U.S. and Illinois constitutions by discriminating against ridesharing vehicles in favor of taxicabs.

“The city will vigorously defend its regulations, just as it has successfully done in previous cases,” Chicago Law Department spokesman Bill McCaffrey said in an email to the Chicago Tribune.

Fighting back

One of Vugo’s largest competitors is Uber itself. The rideshare giant is in the process of rolling out a product called Trip Experiences, which delivers branded content to riders. But drivers don’t see any of that ad money – all of it goes straight to Uber.

In contrast, Vugo shares 60 percent of its ad revenue with drivers, and that money adds up fast. Flessner says drivers can earn an additional $300 a month through their software.

“A lot of the drivers are making barely minimum wage,” Flessner said. “Anything extra on a trip goes a long way. A lot of drivers are immigrants trying to make ends meet, trying to put food on the table like everyone else.

“I think it would be hard to say that [Vugo’s] not a good thing for Chicago.”

Vugo and companies like it face an uphill battle with Windy City government, which has proven unfriendly to tech companies in recent years.

Take the new 9 percent streaming tax on residents who use services such as Netflix or Spotify. This stands as the highest tax of its kind in the U.S. LJC, which is the Illinois Policy Institute’s litigation partner, is suing the city to repeal the “Netflix tax.”

In addition to the Netflix tax, Chicago wants to levy a 9 percent tax on cloud computing services such as LexisNexis. Outcry from Chicago’s startup community pushed Emanuel to reduce the rate to 5.25 percent and exempt smaller, new businesses. It’s not clear whether a company like Vugo would be subject to the tax if it chooses to grow its business in Chicago.

In both cases, bureaucrats in Chicago’s Finance Department extended existing taxes to include digital services. There was no debate or vote in City Council.

The mayor and other political leaders might say Chicago is welcoming a new generation of tech entrepreneurs. But pushing policies designed to protect established industries betrays that message.

“There’s no startup industry. Every startup is in a different industry,” Flessner said. “That’s something the city needs to realize.”

With continued growth and a little luck, Vugo could become a major contender in the advertising space. But until Chicago embraces a fair playing field for businesses of all stripes, don’t expect it to return to its hometown any time soon.