Earlier this week, word broke about Uber's new valuation. $41.2 billion to be precise. That's right, close to double what Twitter is currently worth, and on par with some of America's big names including the likes of Delta Airlines, Time Warner Cable, and just $10bn shy of General Motors. Truly staggering.
Of course, because Uber is still privately held, valuations are always going to be a fishy affair. This news comes on the back of a company announcement that it had raised an additional $1.2bn from private investors. Uber was valued at $18.2bn by private equity analysts only in June this year, a 1370% total growth from the $2.8bn price tag when it was founded in 2009.
Its latest valuation places it head and shoulders above any other startup, a sign that a lot of money is banking on the company's exponential growth its CEO, Travis Kalanick, is promising. The company has already undergone 6 rounds of funding form private investors.
Most commoners would know Uber by its mobile application, would already have been on their smartphones partly due to the company's aggressive marketing and promotional campaigns in the 250 cities it operates in. Its closest competitor in the otherwise arid field is also an American based crowd sourcing technology startup called Lyft and it is roughly valued by private equity investors at one-eighth that of Uber. The company was founded on the idea of ride sharing through real time peer-to-peer communications under a network of private users. Crowdsourcing isn't a novelty by itself, but it does seem that humans have only just begun to scratch the surface of the infinite possibilities it offers. With the advent of instantaneous communications through systems which are forever online, gathering contributions from individuals, even if on a micro scale, can be achieved with little latency and lag. And this trend is etched firmly in place by the constant advancement of technology.
Uber has not only managed to crowd source thousands of private drivers, professional and non-professionals alike, to create comprehensive yet dynamic fleet of personal drivers for its users, it has also managed to rather safely integrated multiple online payment and geographical tracking systems that require no additional installations on the end of both drivers and users. All that while ensuring a relatively seamless process of flagging a ride, commuting in that flagged ride, and making payment at destination.
Be it the improvements in cellular GPS systems in terms of their robustness and accuracy, or the speed of online electronic payment netting systems, Uber has managed to capitalize on these developments for its own good. There is a certain deft in its management, I must say.
Uber has gracefully demonstrated what can be done when we ride on the back of a technology wave, and it shows little sign of stopping despite the heaps of hurdles that stand tall ahead. But investors certainly believe Uber's current achievements to be but an infinitesimal drop in the bucket to have valued a startup with little more than a five-year presence at over $40bn; in their eyes, there is still a long way to go.
David vs. Goliath
It does seem very apt does it? Not until quite recently, Uber has been undercover beneath global headlines because it was just minding its own business. Then came a shocking story that was disgusting in substance, in which a female user was raped when she used the company's services in India. Uber has since been banned from operating in the second most populous nation in the world. The world is quite aware that the issue of rape has long been prevalent in India, but such unraveling has opened inquires on the potential risks of hiring the company's services; as we should be reminded that there are two faces to a coin.
Hundreds of thousands of taxi drivers across the globe are affected by the introduction of Uber's disruptive service. They have two choices: either work with Uber, or work against Uber. The minority that choose the former are given the opportunity to operate under the Uber network as an "Uber Taxi" while retaining their identity as professional taxi drivers who can operate independently as a licensed driver. This is not a problem for Uber.
However, it is the majority of taxi drivers across the more than 200 cities the company has a foothold on that is giving and will continue to give Uber slightly more than a problem. The company is in fierce wars with trade and labor unions that represent these taxi drivers; a particular occurrence in the European Union where the presence of these bodies is the strongest in the world. Taxi divers themselves have also held protests and strikes in many cities worldwide. The essence of such upheaval remains the fact that Uber operates without any form of government regulation while taxi divers operate in their respective regulated environments; from another angle, one requires a proper license to operate a taxi which costs time and money to acquire, and Uber allows anyone with a driving license to circumvent that sunk cost. It is only natural that taxi drivers feel resentful. Uber is going to have to solve this conundrum before things get ugly; and part of the $1.2bn raised in this latest bout of financing will be channeled towards resolving some of the business' underlying issues.
I feel that unless the company manages to reach an agreement with regulatory bodies around the world to draft legislation that will eventually act to supervise and manage the conduct of Uber drivers, and how the company conducts its business as a whole, it would have a harder time maintaining the same level of growth as it has been enjoying for the last few years. Because the innovation as grown so rapidly, this will be a rare instance where by a company might actually choose to voluntarily initiate such deliberations to expedite a holistic resolution, which would in turn be beneficial to the company in the longer run. It remains to be seen if Uber will undertake this less traveled path; while there are skeptics owing to the aggressive nature of its management, the possibility remains.
Besides facing regulatory hurdles, there are inherent risks of using a crowd sourced ride-sharing service. As exemplified by the rape cases reported in India and Chicago, the safety of its users can easily be compromised by an act of lust, or a misdemeanor. There are also cases that go unreported; the possibilities of robbery and kidnap come to mind. Personal information might also be intentionally or unintentionally stored and analyzed against the will of users and will have therefore breached personal privacy laws. Again, these risks are heightened because of the unregulated and unlicensed nature of Uber's business.
But is it worth $40bn?
From the onset, I mentioned that valuations are always a tricky and somewhat shady affair when a company is still private. There definitely exists a motivation to affix a high valuation to a startup which has already gained a cult following; an exorbitant price tag also helps ice the cake further to attract yet more private capital. Whether or not Uber is worth $40bn is an open question, but it would be useful to take current market conditions into account.
Just 3 to 4 odd years back, when IPO and M&A activity in corporate America was still at more moderate levels, the markets were more interested in finding value that was already inherent in businesses. The pace of the market's rally was about the same as recently but the environment in which capital was administered was a polar opposite to how it is today. There was definitely more discretion in capital expenditures 3 years ago. Investors wanted to see value in their investments, and companies were reinvesting their earnings into productivity.
Fast forward 3 years and capital seems to be more like loose change than actual capital. Having only recently seen record level of corporate share buybacks and dividend payouts by companies, and a record level of M&A activity, there is just no dearth of capital in today's markets. Without going into the specific causes of this munificence, we can safely thank our various central banks for the historic episode of record low interest rates on money. The hand of these central banks has cheapened the cost of borrowing money to the extent that it has become a no brainier not to use this opportunity to earn a carry, or in Uber's case a windfall.
Today's story is all about growth, not value. A $40bn current valuation prices in quite a lot of potential, meaning if Uber fails to deliver on those expectations, the inevitable will happen. One doesn't have to look too far away at the darlings of the recent past (see Twitter, and Groupon) to see how a company gets punished for under performing expectations. And as the WSJ reports, Uber's strategy for growth going forward would be to go even more global. While its growth strategy does seem modest, its forward guidance on its financials certainly don't.
Like any sensible person without insider knowledge of Uber's affairs and dealings, I have my skeptical hat on. It is hard to be objective when dealing with numbers as high as $40bn without greater resolution. But for most of us, it doesn't matter until the company chooses to issue a prospectus. Until then, we wish Uber the best of luck in 2015 while waiting for the $100bn valuation milestone.