The funding positions the company at the front of a pack of Internet startups, at a valuation of about $17 billion, up from $3.5 billion in a financing last year.
Back in 1999, I started The Internet Bubble Monitor, a blog about that bubble. I tracked the absurd valuations of firms that had already gone public. This time around, it looks like the VCs want to front-run the public and bid firms up to absurd levels before anyone else can.
I would be curious to know what the investors think that the margins will be in the business in five years. Will Uber be able to collect $5 a ride? Fifty cents a ride? Maybe Facebook or Twitter will offer ride connections for free and hope to make a go of it on advertising revenue.
But, hey, I’m just an old man who doesn’t understand technology.
I would also argue that both Uber and Lyft forgot one of business’ many lessons, one taught very well in the movie _Tucker: The Man and His Dreams_, and that is, don’t mess with politically connected industries. The attacks are already happening, and unless Uber and Lyft are better connected politically — and they may well be, but I doubt it – theirs is a losing proposition.
When I noticed this going on, at first I thought this was a case of “Average Is Over”: Investors are flooded with cash, but the number of quality bets to make are limited. I heard something more interesting that changed my mind. First, giving a firm like Facebook ridiculous amounts of money is a way to leverage the companies knowledge capital into various emerging and risky technologies. Having the best engineers in the business work on optimizing facebook’s advertising or server code is inefficient. Secondly, firms like Uber and Facebook act as a means for investors to give the illusion of mitigating risk when investor’s are really gambling on newer tech plays. For example, Facebook went on to purchase Oculus, which my best estimate is that it’s a coinflip to be the most important entertainment technology of the next decade. When the Oculus fails, you can always claim you were investing in Facebook proper.
So the real question is, “Which company is Uber going to buy?”
I bet Uber uses the cash to purchase delivery or personal shopping services, or will somehow get into the electronic chauffeur industry. I could see them getting into bike rentals, a zip car variant, or even those cars that stack up. Perhaps more exotic services like transporting your vehicle for you, like working with manufactures to deliver you your Tesla after you order it online. I think you’re right that, long term, there isn’t enough profit in Gray-Market human transport to justify Uber at that evaluation. If you broaden the market to “any future technology involving vehicle transportation that realistically could emerge in the next 10 years”, 18 billion seems reasonable.
I don’t think that makes it better, really. I read what you’re saying as “investors overopay for equity in Facebook, and this allows Facebook to overpay for equity in still more speculative, risky ventures, and many investors don’t seem to realize this.”
NYC taxi medallions sell for $1 million each, and there are 13,000 of them. You can look at this either way — is Uber really worth more than the entire NYC taxi business? On the other hand, that is a lot of rent over and above the costs of providing the service that Uber might capture.
The economics of NYC are here – http://blogs.reuters.com/felix-salmon/2011/10/21/why-taxi-medallions-cost-1-million/ It would be interesting to see analysis of other cities, especially those that are not so restrictive.
Of course, as is so often the case when regulation is imposed, NYC has adopted a jerry-built structure of additional car services to compensate for the no-growth-for-30-years medallion policy. For example, 6000 street hail licenses for areas where the Yellow Cabs do not like to go.
Dispatch for self-driving vehicles owned by individuals and by Uber?
If there are no cab drivers, is there a cab driver lobby?
Forget about NYC. Innovation occurs everywhere else first.
The point is, Uber (and other “sharing” enterprises) provide services in competition with normal capitalistic firms WITHOUT CAPITAL COSTS. Which is what makes investment in them so profitable.
Example: I want to start a cab company in LA. I need permission from the city, I’m limited to a specified geographical area (the San Fernando Valley, say), and I have to meet some city or state quality requirements on air emissions, safety, response time, etc. Costs costs costs. Also I need to buy say 100 taxi cabs, or minivans I get converted to cabs, at say 40,000 per cab — that’s 4 million dollars of capital, right in front. Then there are maintenance and other operational costs, which I assume will be met by daily income.
If I set up something like Uber, I have virtually no capital costs. I ask would be drivers to send me photos of their cars, and pick the 100 or so best looking ones. If I want to double the size of my “fleet” I just ask people to send me more photos. My operational costs are limited, since I expect my drivers (“associates”) to pay for their own maintenance and repairs. My training and licensing costs for drivers boils down to asking if they know how to use Google Maps on their cell phones.
And so on. Get the idea? As long as things go well — no passengers assaulting drivers, no drivers assaulting passengers, no nasty news stories or Internet rumors — I can take 20% or so off the top of the fares paid, and my only real competition comes from Lyft and other virtual cab companies; Valley Yellow Cab can’t possibly match my “efficiencies,” and will soon find itself serving only old fogies who still use telephones to call for cabs and haven’t learned how to send text messages and transfer funds via cell phones.
Same thing for AirBnb. All the profits of owning a hotel chain, and none of the costs, none of the capital. In the modern world, we don’t have to come up with wads of cash up front to be capitalists; we just need a good concept, and a way to tap a portion of the income stream. Building stuff is for losers.
You ain’t seen nothin’ yet. Wait till we finally get flying cars!
the profits and lack of capital should attract competitors, no?
Well, I mentioned Lyft as a competitor. There’s a third outfit in the car sharing business, whose name escapes me, and no doubt with time others will emerge.
This isn’t altogether a bad thing. There are many many places where it’s essentially impossible to find a cab today, because so few people use cabs in those locations that cabbies just don’t “hang out” there — suburbs, for instance, or small towns. Also, to be honest, there are areas cabbies stay away from because they’re perceived as being dangerous — i.e., black. And some regions just aren’t profitable — “I hung out in North 5 for 3 hours yesterday, and I got one ride, for two bucks and fifty cents, and did the fare even give me a tip? You’ve worked that area, you know he didn’t!” So, if some semi-retired or semi-disabled person picks up 20 or 30 bucks now and then to supplement their income by playing cabby when he or she feels fit enough, I’d not break into tears.
Let’s be honest, and admit people working on the margins like this are not what Lyft and Uber are about, Judging from the internet coverage I’ve seen, the “ride sharing” firms aim at affluent computer-savvy types who don’t mind paying a premium for travel in a vehicle that’s more chic than the average cab, They won’t actually kill off traditional cab firms if they’re successful at this; but they’ll be eliminating the fares cabbies hope to get one or twice a week, which is going to make cab driving a less rewarding profession, and so on.
Other hand, on the bottom end of scale, this is going to make “gypsy cab” enterprises more common — the sort of thing where someone paints PHIL’S TAXI on his car doors and dickers with his patrons over the fare and doesn’t bother to get special insurance or worry about maintenance of his vehicle, because hey tomorrow’s just another day, y’lknow? Capital costs are pretty damned low in this kind of business also.
And on the gripping hand … at the real high end, I suspect we’ll soon see Google-brained Maseratis and Ferraris running about 24/7, with built in bars and maybe bimbos, providing very posh travel experiences indeed for the ultra affluent. There’s no real limit on the heights, after all. But the irony is, this WOULD be capital intensive. It might look like just a step up from Uber to the passengers in such a vehicle, but the financial structure of the car-owning firm would be quite different.
Yadda yadda yadda. I used to drive a cab in LA. It was not the best six months of my life. I met decent people, I met deadbeats, I met derelicts, I met drug addicts. It was not the best way to make a living then, and I doubt it’s improved in the last twenty years.
Just to add to the fun, the question arises of whether we should expect allow or even expect people receiving government assistance to participate in the sharing economy.
Suppose we’ve got a guy out of work long term. Maybe now we pay him 1000 bucks a month in extended unemployment. But he’s got a car and a cell phone. Do we (or the State Employment Service) tell him, “Go to work with Uber while you’re waiting. We assume you can clear $75 per day in income, and thus don’t unemployment after all. Good day!” Do we tell a single mother receiving child support, “You’ve obviously got a spare bedroom, since you report your boyfriend has moved out. Granted, you aren’t in the nicest part of town, but there are transients who aren’t choosy about accommodations. We expect you to earn on average 25 dollars a day once you’re registered with AirBnb, and we’re adjusting your welfare payment by that much effective immediately.”
Is this the pathway to “reform” we want to take?
One important difference between these deals and public companies is that investors get a different class of stock. These classes of stock can include a lot of different clauses. If you just superficially pay attention to “valuation” you are missing a lot of it. For example if this stock has a 3x liquidation preference, then even if Uber goes public for less than 17 billion, the stock could still be hugely profitable for the investor – that means essentially this class of investor gets to 3x their money before anyone else sees any money. So, you really can’t evaluate a deal with just the “valuation” number.
Here’s a much more detailed valuation exercise that reaches similar conclusions:
http://aswathdamodaran.blogspot.com/2014/06/a-disruptive-cab-ride-to-riches-uber.html