Pando

Tell me again why Uber is worth $69 billion?

By Sarah Lacy , written on January 23, 2018

From The Travis Shrugged Desk

Uber’s early employees, investors, and founders were racing to cash out their shares for a steep 30% hair cut to the company’s vaunted $69 billion valuation it had before its disastrous 2017.

Uber apologists insist there’s nothing to make of that. Investors and early employees profit take all the time! It’s just because companies are taking longer and longer to go public!

A lot of people cite the 2009 deal, when a lot of Facebook’s early employees and investors took advantage of DST’s offer to buy their shares. Sure, a lot of early employees and early investors sold some shares. But Mark Zuckerberg certainly did not seek to offload 50% of his shares, as Travis Kalanick did. Co-founder Dustin Moskovitz didn’t either. Even after the IPO, Moskovitz only sold a small fraction of his $2.9 billion worth of Facebook even though he’d since moved on to co-found Asana. When the lock up expired, Zuckerberg sold enough to cover his tax bill.

If you want to look  at historical comps, I’d argue 50% of your stake in a down round after a disastrous year is not exactly a founder showing confidence in the company’s future...The two scenarios simply aren’t the same. You can’t ignore that Facebook was a growing company where the founder CEO had the confidence of nearly everyone, and Uber is anything but that.

But let’s pretend for a moment that the apologists are right and that’s not a horrible sign.

What of Softbank’s purchase of $1 billion in primary shares at last year’s $69 billion price? What is the rationale for that?

Obviously, Uber needed to save face on its valuation, and Softbank was getting the bulk of its shares a huge discount, and it required pretty large governance changes for the deal to be done. Still. At some point-- 2019 we’re all now saying-- Uber will need to go public. Does it think it’ll be worth $70 billion by then?

In the past Uber’s ever escalating valuations were based on:

  • Extreme growth
  • Dominance in its core market
  • Rhetoric that it would win in self-driving cars and that would eventually help its profitability
  • World domination
  • Business extensions like UberEats

How’s all that looking in 2018?

  • New CEO Dara Khosrowshahi has said that Uber is no longer growing at all costs and will be cutting its burn rate.
  • Uber’s market share in the US has fallen so much that analysts worry it won’t have the cushion to control prices and maximize for profits. (Not that it did that back when it owned the market…)
  • Uber is still embroiled in a multi-billion lawsuit alleging trade secret theft in its self-driving car division. Khosrowshahi also said that fully autonomy is at least a decade away. So much for margins improving anytime soon. Meanwhile, Waymo is expanding the cities its mapping out.
  • Uber’s new board member from Softbank told the Financial Times that Uber needs to focus on it’s “core markets” only. Is “world domination” even a pretense anymore?
  • UberEats was a neglected step-child of the company in the best of times. The idea that the company will put real muscle behind this is far-fetched. It’s also a more competitive market.

And this is before you get to challenges like a “Frankenboard” and an exodus of “human capital” in the last year.

But I’ve been arguing most of these points for months. I’ve argued even longer that ridesharing is a commodity business and without expensive incentives it can’t dominate market share.

If you don’t want to listen to me, perhaps you’ll listen to a new report by Valley venture fund NFX. Backed by several well-respected serial entrepreneurs turned investors, NFX is almost obnoxiously focused on network effect businesses. Unlike most people in the Valley, they don’t throw the term around. [Disclosure: Two of NFX's founders are also Pando investors.]

Network effect businesses aren’t merely a marketplace where you have suppliers and consumers and you need both for it to thrive. They are businesses where each of the user’s experience is made significantly better by more people being in that network.

Despite what so many VCs and analysts want to claim: Ridesharing has never been a strong network effects business.

A few points from the report:

Uber is vulnerable because its core network effect, a two-sided marketplace between drivers and riders, is asymptotic. It’s relatively weak. This is because there’s not much added value to a rider getting picked up in 3 minutes versus 4 minutes. So, beyond that point, adding to the supply of drivers has diminishing returns. Other companies can enter a city’s ride sharing market if they can reach a sufficient threshold to provide comparable pickup times.

The threshold to enter a market isn’t very high because both sides of the marketplace will “multi-tenant,” meaning they will use multiple services. The drivers will drive for Uber, Lyft and maybe more. The riders will add another app to their phones and flip between the apps to get the best price/service.

In the face of a weak core network effect, Uber has done a good job of adding other defensibilities like scale and brand. Brand in particular. They have stayed in the press for a whole variety of reasons for 7 years now. With scale, they have raised so much money, they can continue to build and scale regardless of profits, which theoretically drives their utilization up and cost per ride down. (This may or may not be true past a certain threshold.)

To the last point, Khosrowshahi has said he’s going to be cutting money to scale “at all costs.” And certainly Uber’s brand is tarnished after 2017. And should Uber make it to a time when self-driving cars are the norm, it’s then competing with Tesla and Google: Two companies with far more scale and far better brands.

If that’s how they are going to hold onto their marketshare, that valuation is going to fall at some point...