Pando

Uber’s new three-front war: With the Valley, Wall Street and itself?

By Sarah Lacy , written on November 9, 2016

From The Travis Shrugged Desk

Last night we saw that bad behavior, sexism, and an “us v. them” mentality doesn’t disqualify you from the White House.

But what about from being the next super unicorn?

Here in the Valley, Uber -- whose lies and defiance of decency, rules and conventions previously prompted us to describe it as the Donald Trump of SIlicon Valley --- may be facing the beginnings of a potential three front war. One against much of the tech world, against parts of Wall Street, and surprisingly against itself.

All of this despite the vast potential spoils should Uber go public at anywhere close to its current valuation.

Let’s look at each of those.

Last week, we wrote about the view of Uber from the rest of the tech world, and it wasn’t pretty. The highlights: 73% of techies perceive Uber’s culture as “bad” or “very bad”; 73% believe it is overvalued, and only 19% are interested in working there.

And that was hardly the first hint that the tech world is less-than-enamoured with the highest valued private company in Valley history. Another poll-- in the form of a bracket-- showed that Uber CEO Travis Kalanick isn’t close to the most admired founder in tech. And a survey by the Atlantic similarly found techies declining to list Uber as the “most exciting startup”, as a company with a reputation as being a good place to work, or as a prestigious place to work, despite overwhelmingly listing ridesharing as the most life-changing innovation in recent years.  

But Uber is fine with anyone outside its walls hating on it. Indeed, talk to anyone close to or inside the company, and they will tell you that is Uber’s value add: It’s consuming “us-against-them” culture that so galvanizes its staff that even when Uber threatens journalists the a manager posts a Tweet of the office dancing to “Shake It Off.”

That “us-against-them” culture, of course, has been paired with Uber’s greatest weapon: Cash raised on demand-- almost as easy as “just pushing a button!”  at nearly any price, rarely with any board participation, and frequently with no transparency into how the company is actually doing.

As many have detailed, that cash has been used as a weapon to buy market share, buy Uber’s way into markets, and bleed Lyft out of the comparatively paltry billions it has raised.

Outsiders? They’ve taken shots at Uber for a while. Whether it’s the press, competitors, legislators, drivers, riders… there is barely a constituency that hasn’t taken issue with Uber at some point. This is a company facing more than 70 lawsuits, some of which threaten the foundations of its business model.

But Uber has had itself, and they had cash.

Not so fast…

Two stories came out this week amid the noise of the election that point to weaknesses -- possibly for the first time-- in each of those categories.

First Bloomberg reported that two major banks passed on offering Uber shares to high net worth clients despite the potential for vast banking fees in a future Uber IPO. The reason? Uber’s typical arrogance, take-it-or-leave-it attitude that so far, hasn’t turned off many investors.

From the piece:

The potential fees and reputation boost that could come from working on Uber Technologies Inc.’s initial public offering are the stuff of bankers’ dreams.

Yet at least two investment banks passed on selling shares of Uber to their high-net worth clients -- shares eventually sold by other banks in January -- because the ride-share company wasn’t willing to provide financial details about its business, people with knowledge of the matter said.

JPMorgan Chase & Co. and Deutsche Bank AG both turned down the opportunity to offer their wealthiest clients the option to invest in Uber, said the people, who asked not to be identified because the information is private.

Bank of America Corp. and Morgan Stanley ended up selling the shares earlier this year through those firms’ private wealth divisions.

JPMorgan and Deutsche Bank were concerned they wouldn’t be able to fill demand for the offering given the lack of specifics, the people said. Deutsche Bank also took into consideration that share sales through banks’ private-wealth divisions are unusual, and it hadn’t done one before, one person said.

The last such offering of a big technology company was more than four years ago. In that case, Goldman Sachs Group Inc. sold private shares of Facebook Inc. to international clients before the company went public in 2012.

Just as I am hard pressed to remember a time when the Valley rank and file didn’t dream of working at the highest profile startup of the era, I am hard pressed to think of a time when a Wall Street bank wouldn’t do anything in its power to get the underwriting fees and glory of taking that company public.

In some ways, it’s the startup version of winning a commanding Electoral College count while losing the popular vote. Is it a mandate after all?

But we knew that concerns were setting in about Uber’s business model. More shocking was this piece from The Information:

Now that Uber has largely conquered the ride-sharing market in the U.S., CEO Travis Kalanick is accelerating his long-term plan to challenge Amazon.com in delivering goods to people’s homes. But he has to overcome a key problem: how to expand in delivery of food and other goods without undermining Uber’s core business.

Those secondary businesses, two-year-old UberEats (hot food delivery) and one-year-old UberRush (delivery of groceries, flowers and hot food too), largely rely on the same network of drivers that the company uses for its ride-sharing operation. And already some Uber city managers have resisted diverting drivers to the new initiatives, especially during peak ride-sharing times at night, said people familiar with the internal dynamics. Adding to the complication is infighting between the UberRush and the UberEats teams, these people said. 

This strategy working is key to Uber proving it is worth its $70 billion valuation -- and has room to grow it-- for a few reasons. For one, its core driver-reliant business is not profitable, and self driving cars are likely at least five years away. For another, the promise of that valuation was international domination, which Uber has not only failed at, it’s admitted defeat in earlier this year when it ceded China to Didi in exchange for a juicy stake in that company.

Uber desperately needs a path to better margins and a path to dramatic growth. Given its domination of US ridesharing as is and the arguable limits of ridesharing’s growth in non-urban markets where car ownership is high, that is not easy. The history books are filled with Silicon Valley companies that dominated one market or one product or one revenue stream, but could never won a second one. This is what makes companies like Facebook and Amazon so singular and so remarkable.

The promise of UberRush and UberEats is it could in theory do both: Allow drivers to deliver goods and food at the same time they deliver people, thus solving the business model issues. And have a tangible growth story.

And this category is one that other stand-alone logistics startups have struggled with. We’ve documented at length the problems with the dinner and on demand space. Postmates may be the strongest, and Postmates struggled to close its recent round, relying heavily on inside investors.

But none of that is certain. UberEats is doing a fraction of Postmates’ revenue, according to The Information, and as of now it is another money losing business. If it approaches competition and growth the way Uber has with ridesharing, expect more money burned in subsidies trying to gain top market position. That is the only way Uber knows how to compete. So far it is a mixed track record: It worked in the US; it failed in China.

Additionally, some like Ben Thompson have given Uber higher odds in the self-driving car war, because of Uber’s laser focus on that market as opposed to potential foes like Google. If Uber takes on the more difficult on demand goods and food market, it gives up that advantage. Uber also adds Amazon to its list of formidable future competitors.

But those risks we knew. The Information story highlights one we didn’t know, which may be even harder to overcome: What happens when Uber executives turn that win-at-all-costs pugnacious attitude against one another?

Taken with the Bloomberg story, it’s a particularly potent question. We have seen an Uber that takes on the government, a world of competitors, the media, and the truth. We have not seen an Uber divided unto itself, and an Uber unable to raise money at any price, at any time.

Uber has thus far been able to wage a battle against the press, the law, drivers, and riders by offering a convenient and cheap service… thanks mostly to an unprecedented $8.7 billion in private capital. Consider past pugnacious CEOs like Steve Jobs: At least Apple users adored him. Kalanick has taken everyone on.

But can the company survive-- and by “survive” I mean become a thriving publicly traded company at this valuation beyond a well-choreographed IPO-- if it’s divided and infighting? And can it still have an IPO on its own terms if cash gets harder to come by in the meantime? And in a Valley that doesn’t admire Uber, doesn’t aspire to work for Uber, doesn’t seem to be in chorus in rooting for Uber, what happens when there’s a meaningful stumble?

All but a handful of tech companies fall prey to a life cycle that typically waxes and wanes within ten years. Of the last wave, LinkedIn hit it, Twitter hit it, and they were the second and third most successful social networks out of thousands of entrants. Only Facebook has proved immune. And Google before it, and Amazon before it. Think of how many phenomenally transformative companies have fallen prey to this cycle: Yahoo, Netscape, eBay. The list goes on and on.

By raising money at such unprecedented valuations, Uber has only one shot if it’s going to be a “success”: It can only be a Google or Facebook. It cannot be a Dropbox or a Pinterest or one of these decacorns that has arguably waited a smidge too late to go public. It can’t even be a Snapchat, a company that shows promise and will likely sport a high valuation, but one that doesn’t assume it becomes a $100 billion company. Uber cannot be a LinkedIn or a Twitter and succeed. And again, these are already the 1% success stories in startupdom.

Given the failure at international. Given banks aren’t doing anything to get the underwriting. Given 73% of techies believe the company has a “bad” or “very bad” culture and working there is not considered as prestigious as working at Apple, Google, Facebook, or even SpaceX. Given The Information hints at not only infighting within the company but potentially between founders…. Remember, co-founder Ryan Graves’ latest demotion was to running these non-ridesharing businesses.

...I’m not sure I’d bet $70 billion on those odds.

Like our new President Elect Trump, Uber has made promises that will be almost impossible to keep. And the time to deliver cannot be put off much more than six months or, at most, a year.

We are in our own version of unchartered territory here.