When it was first founded in 2009, Uber was valued at $2.8bn. In December 2014, we documented how Uber's valuation rose to $41.2bn, placing it neck in neck with some of America's bellwether corporations. Many mused over the crowd sourced ride-sharing company's hockey stick valuation trajectory and questioned of there was more left on the table.
Then the world's most valuable tech startup, or startup of any kind for that matter, Uber's crown was promptly stolen by China's own version of Apple, Xiao Mi. Following the humble footsteps of Alibaba's founder Jack Ma, the little millet as it is known, quickly gain the attention of stardom. Sensationalism and bombast promptly ensued.
The world's fourth largest maker of mobile phones had rose to become the world's highest valued privately held company of its kind. With a $46bn price tag, observers ruminated if anything could surpass that in 2015.
It took just 3 weeks, 3 weeks after private investors announced their dictation of Uber's $41.2bn price tag, for that record to be smashed with a $4.6bn mallet. If you haven't already read our story on Xiao Mi's stellar ascent, we still feel that Xiao Mi holds more ground than Uber does; whatever that actually means.
But back to the question of how stratospheric the numerics can rise to, we suggest not holding your breaths. Even before the business community could say "Uber Bubblicious" without twisting their tongues, they got an answer.
50 billion dollars. That's how much Uber wants to be valued at, according to the most generous backers of a company they believe will revolutionize the world of private hired commuting. The $50bn private valuation will become a utopian mirage of sorts if Uber raises anywhere from $1.5bn to $2bn in additional funding.
The news was announced by the company earlier in May, and was greeted with polarized reactions which ranged from outright amazement to a ludicrous circle jerking joke of the decade. If indeed Uber secures that bout of additional funding, it will officially become the world most capitalized privately held business, on top of having the baddest eye-watering valuation out there.
We at Business Of Finance are natural skeptics of the accounting wizardry and phony math which, more often than not, obfuscates rather than clarifies the fair value of startups, and which billion-dollar tech startups are so fond of; especially those that thrive on a brazen cult of personalities. By eschewing reality from fiction, anyone can cook up numbers of fairies and unicorns on their inconspicuous books.
We are therefore left with little else to comment on but to note that the transition from private startup to public company is often not a smooth one. Elon Musk's Tesla saw its dotcom-esque rally after it went public, and not before. It looks as if companies like Uber breed and bud in mirror opposite of Musk's genius.
When the house of cards does collapse on the absence of anything concrete, we wish these startups the best mazing through utter pandemonium they have bestowed upon themselves.
We will leave readers with some anecdotes to ponder over while taking a dab at some plausible math that might explain how Uber can remotely be worth $50bn.
Of all the so-called Unicorns (companies with valuations of at least $1 billion), Uber stands out above the rest. It currently holds the distinction of being the world’s most highly capitalized startup and its growth appears to be accelerating at breakneck speed. Still, when I saw the news that Uber plans to raise another $1.5 to $2.0 billion at a staggering $50 billion valuation, I was shocked. I couldn’t help but wonder what that really meant for the company. In order to better understand what was going, my team and I dug into the numbers.
At BodeTree, our mission is to make understanding finance simple and easy for small business owners, but every so often we like to analyze much larger companies like Uber. We relied on what publicly available information we could find to develop a reasonable estimate of Uber’s revenue. The goal was to figure out what a $50 billion valuation meant for the company in terms of implied revenue growth and margins. Here’s what we found:
If you assume a normalized long-term free cash flow margin of about 35% (yes, this is quite high, but Uber’s business model is very efficient), Uber’s $50 billion valuation means that they will need to generate about $35.7 billion dollars of gross revenue and about $7.1 billion dollars of net revenue to justify the recent valuation. Perhaps more interestingly, the company will have to have an annual growth rate of about 286% each year over the next five years to hit these numbers. To put those numbers into perspective for a moment, it means that Uber is currently valued at 125x trailing annual net revenue.
Uber’s massive market value surpasses 80%+ of all S&P 500 companies, many of which have been around for 20, 30, 50 or more years (Uber was started in 2009). At first glance, the $50 billion valuation seems absurd. However, if the company manages to continue its current growth trajectory (seemingly doubling revenue every 12 months or less), it is not as crazy as one might presume. Still, this sky-high valuation isn’t without risk.
First and foremost, Uber’s only real exit strategy at this point is to go public. That won’t pose problems for them in the near-term, but it may cause problems in the future. After all, Wall Street is notoriously short on both patience and understanding. It’s likely that when Uber goes public, it will be at a valuation of $70 billion or more. At that point, unless their revenue has increased dramatically, they’re going to have to deliver on even more accelerated growth annually over the next five years. With increasing pressure from both the incumbent players and local governments, achieving this growth could be a tall order.
While very few companies will ever find themselves in Uber’s enviable position, each and every entrepreneur eventually has to grapple with establishing a value for their business. When that time comes, they have to decide whether to push forward with a high value and its implied growth, or take a more conservative route.
The market is strewn with the corpses of companies that have reached for high values and failed in execution. Consider the stories of Zynga, Webvan, or Groupon. All of these businesses saw incredible growth and high valuations, only to be brought down by the harsh realities of not meeting the public market’s expectations. That’s why my co-founder and I opted for a conservative valuation during our last fundraising round at BodeTree. It was a difficult decision, but ultimately we chose to settle on a value that captured the immense opportunity that was ahead of us, yet was still tempered by conservative assumptions. In the end, we settled for a value that we thought was more reasonable than what the market might have supported.
Our rationale was simple. If we had raised the round at the highest valuation possible like Uber, we would have committed ourselves to delivering even more growth in the near-term in order to justify the value. It’s likely that we would not have been able to remain focused on our long-term vision. We felt strongly that giving ourselves the room to do what was right for the company – and avoid the pressure to grow at all costs – was the best path. And today, we have no regrets.