Since hitting what was then reported to be a $330mm valuation in 2011, just two years after launching, everything has seemed “up and to the right” for Uber. Its valuation rose to $3.5b by 2013 then $17b in 2014. In the last 7 months or so, the ascent has continued, reaching what is now believed to be around $50b. For perspective, that makes Uber — again, a company that launched in 2009 — larger than 80% of the S&P 500.
This valuation, it has been assumed, has been earned on the back of an extremely lucrative business model that will only get more lucrative as it matures in many of the markets it is operating in. A recent Bloomberg report, which revealed smaller revenue numbers and higher operating losses for the company than most in the market assumed, makes this outcome seem like less of a foregone conclusion than had been expected. The leaked numbers don’t paint a perfect picture of Uber’s financial and operating positions since we do not know exactly which period the numbers correspond to but are instructive in that they show how difficult it will be for Uber to justify the mega valuation it has reached.
As a business, it is highly doubtful that Uber will fail to be a going concern any time soon. The end game for recent investors, who dumped huge amounts of capital at an overheated valuation into the company, is less clear. Losses in venture backed companies are not abnormal and are generally endorsed by investors pushing the company to grow. However, when taken in context with other recent news surrounding the company, the competitive landscape, and the markets they operate in, the financial numbers begin to paint a less than ideal picture of a company that everyone — from top-tier VC firms to massive asset managers — has been falling all over themselves to invest in.
Over the last couple of weeks, top Uber executives in France were arrested and UberPop (Europe’s version of UberX) was shut down in the country, something that had long been expected in the face of violent protest from the taxi industry and complaints about unethical business and employment practices. This comes on the heels of a (non-binding) ruling by the California Labor Commission that said an Uber driver should be classified as a W-2 employee instead of as an independent contractor. If changes are eventually made to the way on-demand workers are classified, Uber (and its domestic rivals) face higher costs and increased labor-related scrutiny.
Perhaps most worrisome for some later Uber investors is the way that the competitive landscape has developed around Uber in recent periods. One often invoked statistic is that investors are valuing Uber as if it is bigger than the world’s entire taxi market. This criticism neglects to acknowledge the fact that Uber’s ambitions are much larger than being simply a massive taxi company. With their goals of replacing car-ownership and their efforts to develop mapping and self-driving technology and branch into on-demand delivery, this is obvious. What the valuation does seem to indicate is that investors believe the worldwide market for Uber’s services is a winner take all one, with the expectation obviously being that it will be Uber standing alone when the dust settles.
As Stretechery’s Ben Thompson wrote in late 2014, the markets that Uber is competing in are transactional in nature, meaning that lower prices will be the key to winning them. In this scenario, Uber enters a market and can bleed competitors dry through higher spending, which builds upon itself by improving marketplace liquidity and allowing them to offer lower pickup and delivery times.
While the on-demand market still possesses the above characteristics, it is looking more and more like individual, regional markets may be winner take all, but the global market may not be for a few important reasons.
Protectionist governments and consumers, or the benefit of building social capital
Katherine Teh-White of global consultancy, Futureye, has been quoted many times in Uber-related articles for her thoughts on the “social license” companies need to operate, especially in new markets.
New businesses actually have to establish a social license to operate. This is the agreement by society or a community that an organization’s practices and products are acceptable and aligned with society’s values. If society begins to feel that an industry or company’s actions are no longer acceptable, then it can withdraw its agreement, demand new and costly dimensions, or simply ‘cancel’ the licence. And that’s basically what you’re seeing in Europe and other parts of the world with Uber.
Uber’s battles across the globe are often painted as Silicon Valley tech company vs. old world, anti-innovation governments and while to a certain extent this may be the case, it certainly doesn’t tell the entire story. For example, Uber drivers have faced stiff fines in many European cities, something that Uber the company has repeatedly picked up the tab for. This contempt for local laws, as onerous as Uber may find them to be, raises concerns of citizens as well. If Uber fails to comply with these rules, as Bloomberg’s Leonid Bershidsky, where does it stop? What other laws and regulations, possibly around workers right, will Uber choose to ignore.
Well-funded niche (and not so niche) competitors
United States based consumers, especially ones near major markets, are familiar with Lyft, the benevolent underdog who operates in about 65 cities in the United States. Lyft is well funded to the tune of about $1b and has proven to be a viable, if not overly threatening, antagonist in the Uber story. As touched on above, however, Uber’s ambitions are larger than simply being a taxi company, which means they are competing with a host of other well funded (less well funded, of course, than Uber itself) companies aiming to stake claim to sizable chunks of the on-demand economy before Uber has time to get around to the space.
In the same way that Uber and Lyft have been fighting an intense turf war in the United States, Kuaidi and Didi were battling it out for supremacy in China. That is, until they merged earlier this year, creating a combined company that now owns almost the entirety of the Chinese market and will make it difficult for Uber to gain any significant foot hold.
Again, on a regional basis, the market for ridesharing and other on demand businesses that Uber would like to branch into seems to be winner take all in nature and if Uber can’t deliver the same level of liquidity as its competitors in these areas, it stands little chance.
Other competitors like Singapore’s GrabTaxi and Ola, which operates in India, pose the same threat in other Asian cities. According to CBInsights, these three SoftBank-backed companies (including Didi Kuadi) have now raised more capital in total than Uber.
While Uber may be pulling further and further ahead in the U.S., it will need to grow rapidly in major emerging markets in order to justify investor expectations, something that seems unlikely to happen in light of this increased competition and the company’s inability (or disinterest) in building the social capital required to operate effectively in these new locations.