Uber Now Worth $40 Billion

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.

 Even at its second latest valuation, Uber was worth more than any of its peers including the fast growing Chinese mobile phone maker Xiaomi which surpassed Lenovo and LG to become the 3rd largest smartphone maker globally

Even at its second latest valuation, Uber was worth more than any of its peers including the fast growing Chinese mobile phone maker Xiaomi which surpassed Lenovo and LG to become the 3rd largest smartphone maker globally

The funding is a vote of confidence in Travis Kalanick, Uber’s co-founder and chief executive whose brash personality has courted controversy. A recent privacy scandal stirred by one of Mr. Kalanick’s deputies appeared not to faze investors focused on Uber’s business prospects.
— The Wall Street Journal

Infinite possibilities

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.

 An increasing number of countries are starting to tighten their grip on disruptive services such as Uber. India was the latest nation to impose a full ban on Uber services, but there are potentially more troubles ahead especially in areas where trade and labor unions have a stronger say in shaping legislation; Europe is a particular concern

An increasing number of countries are starting to tighten their grip on disruptive services such as Uber. India was the latest nation to impose a full ban on Uber services, but there are potentially more troubles ahead especially in areas where trade and labor unions have a stronger say in shaping legislation; Europe is a particular concern

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.

That plan doesn’t always work. Uber last week suspended operations in Nevada after a judge issued an injunction against the startup amid accusations that it competes unfairly with taxis because it doesn’t follow the same rules regarding drivers, insurance and more. Elsewhere, regulators in Brussels are readying new laws that would allow Uber and taxis to coexist, while a decision from a French court over the possible banning of Uber is due Dec. 12.

In Europe, Uber has been the focus of violent protests by taxi drivers and regulatory bans on a carpooling service it calls UberPop that was unveiled this year. UberPop, which uses drivers without professional taxi or chauffeur licenses, is banned in Brussels and facing court challenges in Berlin. In France, the national consumer-protection agency and the Paris prosecutor say the new service is illegal and are backing a suit against Uber in commercial court.

Uber’s response last month was to hold a news conference at its Paris office to declare that the firm would expand UberPop in Paris. In a presentation before giving televised interviews, executives said their goal is to have 70,000 drivers without professional licenses picking up fares across Paris in two years.

Uber executives say they are operating under outdated laws that they fully expect to change once lawmakers see the service’s popularity with constituents.
— The Wall Street Journal

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?

 Global startups valued over $1bn are listed here, and Uber practically consumes them all at 400% of the next highest in place (Snapchat, Dropbox, Xiaomi, and Airbnb)

Global startups valued over $1bn are listed here, and Uber practically consumes them all at 400% of the next highest in place (Snapchat, Dropbox, Xiaomi, and Airbnb)

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.


Uber also is exploring using its fleet of drivers to transport goods and services in addition to people. The company has tested deliveries of items including ice cream, flu shots and fresh meals and recently poached the head of Google ’s same-day delivery business.

The latest financing assumes that Uber’s rapid expansion overseas will overcome these hurdles and continue apace, said Bill Gurley, a partner at Uber venture investor Benchmark and a member of the board at the ride-sharing company.

“International expansion probably is the key theme of the fundraising,” said Mr. Gurley. “We feel remarkably good about where we stand in the domestic market and our real growth initiatives are focused internationally.”

The funding round includes several new investors, including Middle East sovereign wealth fund Qatar Investment Authority and at least two hedge funds, Valiant Capital Partners and Lone Pine Capital, said a person who was briefed on the matter. One of the world’s largest venture capital firms, New Enterprise Associates, also made its first investment in Uber, said another person familiar with the matter.

Uber profits by keeping 20% of the fare paid on most rides on its service and gives the rest to its drivers, who work as independent contractors.

It made hundreds of millions of dollars in revenue last year and is growing sales at a clip of more than 40% a quarter, said a person familiar with the company’s operations. That is an increase from earlier this year, when Mr. Kalanick said revenue was doubling every six months.

By the end of next year, Uber expects to be operating at an about $2 billion net annual revenue rate, which excludes driver pay, according to the person familiar with the company’s financials. Such growth is coming from a cookie-cutter global expansion, where the company moves quickly to open up shop, splashes out incentives to sign up drivers and then hires lobbyists and lawyers to gird for legal challenges from taxi companies and regulators.
— The Wall Street Journal
 Rumors are circulating that if Uber does list, its IPO capitalization could be in the range of $100bn, that would put it above Facebook's IPO valuation, 4 times that of Google's, and a staggering 140x that of eBay. It might well go down the history books as as the second largest IPO after Alibaba's

Rumors are circulating that if Uber does list, its IPO capitalization could be in the range of $100bn, that would put it above Facebook's IPO valuation, 4 times that of Google's, and a staggering 140x that of eBay. It might well go down the history books as as the second largest IPO after Alibaba's

 Private equity has been flowing with reckless abandon into startups with no track record of a positive bottom line, and many of them are valued above listed companies that have real business operations are already protibale

Private equity has been flowing with reckless abandon into startups with no track record of a positive bottom line, and many of them are valued above listed companies that have real business operations are already protibale

 Case in point when companies over promise and under deliver. Groupon has never seen the highs of its IPO while Twitter has been a little luckier but still far from its post IPO exuberant highs; both of these companies have yet to turn a profit

Case in point when companies over promise and under deliver. Groupon has never seen the highs of its IPO while Twitter has been a little luckier but still far from its post IPO exuberant highs; both of these companies have yet to turn a profit

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.