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When Montreal entrepreneur Alexandre Taillefer launched Téo Taxi in late 2015, bragging his app-based startup would drive Uber out of town within five years, a host of Quebec Inc. players jumped enthusiastically on board for the ride.

After all, Mr. Taillefer had starred in the French-language version of Dragon’s Den, and his plan for an all-electric taxi fleet with salaried full-time drivers was too seductive to resist. It promised a locally owned alternative to the Uber-led gig economy and jibed with Quebec’s environmental ambitions.

That fantasy ended on Tuesday as Téo Taxi ceased operations, leaving Mr. Taillefer, the Quebec government, Caisse de dépôt et placement du Québec and the province’s two labour-sponsored venture-capital funds with some explaining to do. Dozens of Téo drivers arrived for their Tuesday morning shift only to discover they were out of a job and Téo’s signature green-and-white cabs were pulled off Montréal’s snow-covered streets.

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The abrupt manner in which Téo axed its more than 400 employees was at odds with its branding as a more community-rooted and socially responsible rival to Uber, the Silicon Valley-based behemoth that has disrupted the global taxi industry with a riding-hailing service that relies on freelance drivers and a dynamic pricing model that undercuts traditional taxi fares. But Téo’s failure provides a sobering reality check.

“Our business model is not viable under current conditions,” Téo Taxi chief executive officer Dominic Bécotte said at a news conference. “The error would have been not to try.”

That may be true for Mr. Taillefer, who took a risk and lost. But Téo’s demise raises questions about why the Quebec government, the Caisse, the Quebec Labour Federation’s Fonds de solidarité and the Confédération des syndicats nationaux backed his long-shot plan in the first place. Did they let Téo’s progressive optics cloud their vision?

The provincial government and its direct affiliate, Investissement Québec, pumped more than $30-million into Téo Taxi, parent Taxelco and XPND Croissance, a venture-capital fund set up by Mr. Taillefer that, until recently, was Taxelco’s majority shareholder.

The Caisse, the Fonds de solidarité and Fondaction participated in rounds of financing that saw them invest more than $40-million into Téo and its affiliates, including a $7.5-million capital injection in October that saw Mr. Taillefer’s stake in Taxelco diluted to minority status and led to his departure from the company’s board of directors.

By then, it had become clear that Téo was buckling under its cost structure. Its electric fleet – mostly consisting of Kia Souls and Nissan Leafs, but which included several Teslas – was too expensive to run. And its labour costs – it paid its unionized drivers $15 an hour, plus benefits – left it with overhead that far exceeded that of traditional taxis and Uber alike.

While Mr. Bécotte blamed Téo’s difficulties on provincial and municipal regulations that prevented Téo from competing with Uber’s fares, Téo could not have cut its prices without suffering even deeper losses. Had the company been able to rely on Silicon Valley venture capitalists willing to bide their time, that might have worked. But Téo’s outside investors concluded that it was never going to beat Uber.

“The government, the Ministry of Transportation, the Ministry of the Economy and other partners participated in the creation of Téo Taxi,” Quebec Transportation Minister François Bonnardel said last week after La Presse reported on Téo’s difficulties. “Now, from what I understand, their model doesn’t work.”

Téo received public funding under the former Liberal government, which was defeated in this past October’s provincial election by the Coalition Avenir Québec. Mr. Taillefer served as the 2018 Liberal campaign chair and even suggested he might run for the party’s leadership as it prepares to seek a replacement for former premier Philippe Couillard. But his star has seriously dimmed with Téo’s demise.

CAQ Treasury Board president Christian Dubé, meanwhile, was a Caisse senior vice-president last February when the provincial pension fund manager, along with the two labour-sponsored funds, injected $17-million in XPND Croissance to enable Téo to expand its fleet of electric vehicles.

Mr. Dubé was quoted in a news release at the time touting the investment. However, when it was later revealed that Mr. Dubé was Mr. Bécotte’s father-in-law, the Caisse insisted Mr. Dubé had not been directly involved in the decision to invest in XPND.

At the time, Mr. Bécotte was a senior executive at XPND. He took on the top job at Téo two weeks ago, becoming the company’s fifth CEO in less than four years.

The Montreal Economic Institute, which preaches free-market principles, seized on Téo’s example to issue a warning about using public money to choose winners. “The government should not play the role of investor or banker for a very simple reason: It happens regularly that private investors make mistakes and fail, but when they do so, it’s with their own money or with money entrusted to them voluntarily,” MEI president Michel Kelly-Gagnon said. “In contrast, when the government ‘places a bet’ with taxpayer funds, it is generally without their consent.”

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After all, it’s always easier to gamble with somebody else’s money.

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