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Why Uber may not be guaranteed IPO success: Lessons for upscaling SMEs

16 min read

29 April 2019

Features Editor, Real Business

Uber's IPO valuation has dropped from it's initial $100bn goal due to the poor market performance of a competitor brand and the legacy of poor company practices. Can SMEs learn anything from the Uber case? Let's start with the importance of retaining a strong core company culture and business model. You'll need both if you want to gain investment.

They, (those faceless people that come up with popular sayings), say, among a host of other things, that ‘timing is everything’. But when it comes to cab hailing behemoth, Uber, the above saying carries even more weight ahead of its initial public offering, (IPO), next month.

Uber is going public: But do we really want their shares?

So, Uber is going ‘public’, where the likes of you and I can finally have a ‘stock’ in the company. But the question is, do we want it?

Once, the idea of Uber, a truly innovative digital brand, going public, would have once prompted visions of Amazon-level greatness among stakeholders. After all, pretty much every single city dweller that owns a smartphone also has an Uber app, either for food deliveries or car rides, – or both.

The Uber machine was also initially confident about their value to the public market, seeking an IPO valuation of $100bn, however, they have reduced this value recently, which is making us all think, – is Uber that much of a great bet anymore?

Uber’s valuation oscillation: The numbers

  • Uber could be valued as high as $120bn
  • Uber’s market cap would be $73.7bn at the lower end of its range
  • Uber’s last private valuation was around $76bn
  • IPO to be priced in a range of $44 to $50 per share
  • Reported a loss from operations in 2018 of $3bn
  • Uber’s first-quarter 2019 financials reports $3bn revenue
  • They also reported a net loss of around $1bn

Considering the murky state of Uber’s value, why is the company so confident that they can go public right now?

Well, for starters they’ve raised big funds before. In only ten years of existence, the young company has managed to bag over $20bn in funds from investors, (which is no easy feat for a digital startup).

So now that they’re bigger and better known than ever before, who’s to say they can’t manage a market floating valuation, even if the numbers are a big fudged?

The major obstacle Uber faces in taking the company to profitable flotation is whilst they’re hailed as a massive startup success, according to their financial statistics recently, they’re losing money. Furthermore, its current CEO, Dara Khosrowshahi, openly admits in the IPO filing that their business model continues to be a ‘work-in-progress’.

Does Uber have a bad business model?

Uber may be an innovative business concept, but is it a solid business? Let’s examine Khosrowshahi’s comment about their ‘under construction’ style business model in further detail.

It seems that Uber is a great business for consumers, where we can access rock-bottom taxi transportation fares, but does it make for a profitable company for investors at the top of the pyramid?

“After nine years, Uber isn’t within hailing distance of making money and continues to bleed more red ink than any start-up in history. By contrast, Facebook and Amazon were solidly cash-flow positive by their fifth year. – Yves Smith, The Intelligencer , December, 2018

Couple this with underpaid drivers, and their costly overheads for running their vehicles, as well as their contractual disagreements with the company at large, it doesn’t really paint a picture of Uber as a solid business for big-time investors, does it?

Digital taxi apps are new to the trading floor

Another issue is that the ride-hailing companies are completely new to the public trading market. This makes the likes of Lyft and Uber market forerunners, but it also means they run the risk of failing in this sphere as they knock down the door for other competitors to follow and possibly learn from their initial mistakes.

The future of mobility may be shared, but it hasn’t happened yet…

Part of Uber’s justification for going public includes its aim to get into the shared-mobility space in a big way. So, by sinking big money into Uber as it goes public, investors are also banking on the fact that mobility culture will shift to the use of shared car ownership overnight.

Whilst this is a topic that’s discussed widely due to issues surrounding urban communities and the environment, there’s a risk that the market flotation of companies like Uber comes a little too early before this cultural change truly takes hold.

Is Uber in shape for Wall Street?

Is Uber prepared for the ecosystem they’re about to enter?

Wall Street, after all, is an unforgiving landscape which is defined by a risk-averse and financial performance driven mentality. In short, is Uber robust enough and ready for the ride? Considering the multitude of lawsuits and brand-damaging events it has experienced over the past two years, maybe it isn’t such a safe bet for investors, but more on that later.

The IPO in a nutshell: What Uber needs to do this week to go public with a bang

This coming week, Uber executives are set to put boots to the ground in global markets such as New York and London to attract potential public investors to the company.

D-Day for Uber will be May 10, where they will ring the bell on the New York Stock Exchange floor and start trading.

This week, Uber representatives will seek to raise around $9 billion in cash and tender 180 million shares in order to reach their IPO goal. They have also stated that it expects its IPO to be priced in a range of $44 to $50 per share.

Will Uber suffer from a ‘failure to launch’?

We can’t talk about the upcoming Uber IPO without mentioning the digital cab firm’s main competitor, Lyft.

Uber will launch its IPO just over a month after Lyft’s, where the competitor’s shares dropped significantly in the weeks since its March IPO launch, stock is down by 20% from its initial pricing and by 35% since its opening trade,(it now has a current market cap of around $16bn).

– Some speculate that its disappointing performance on the stock market has made Uber more cautious of its initial lofty predictions, and the company’s recent actions show this to be true, (Uber has officially updated its S-1 filing with the Securities and Exchange Commission, and now seeks a valuation of up to $90 billion which is significantly lower than the $100bn initially sought).

What can SMEs learn from Uber’s IPO launch?

At this point, you might be asking yourselves, ‘what impact will Uber’s IPO launch, or failure to launch, have on my UK based SME?’ Well, as you grow your SME, (preferably to great new heights), you’ll have to keep in mind how you would prepare your company for going public if such a change came.

This starts with ensuring that your house is in order culturally as well as financially before you take the plunge. Thus, the Uber case offers some key lessons where this is concerned, the major one being how dodgy company culture and a poor reputational record can impact the chances of a successful public flotation…

Uber’s initial valuation is a cash-cow prize for its major investors

There’s no doubt that Uber’s major investors are hoping for that $100bn dollar valuation so they can cash in.

Travis Kalanick, one of Uber’s co-founders and ex-chief executive, is expected to bank a reported $8bn should the magic $100bn valuation be reached. But the effects of his poor leadership have not done much to stir market confidence in Uber as a potential public company. So is the trumped-up valuation simply to satisfy investor greed?

As any of us who have read a newspaper over the past few years know, Uber has not been immune to scandal, or should we say – scandals? So is this grand IPO vision mere wishful thinking on behalf of Kalanick’s and his fellow high-level investors to cash in?

You only have to look at the language in Uber’s recent IPO filing to see the admission, right from the heart of the Uber machine, that the company carries certain reputational issues from the recent past.

What does the IPO filing say about market confidence in Uber?

Uber’s current CEO, Dara Khosrowshahi, (who replaced Kalanick when he was ousted from the company in 2017), openly acknowledges the “mis-steps”  made “along the way”, in the Uber journey. In the filing, he stipulates that Uber is now taking  a “new path forward” and has “changed.”

But why would a company hoping to secure a multi-billion dollar IPO status openly admit to reputational shortfallings? Because, they are too well-publicised to hide, and they coincided with Kalanick’s period of tenure.

Khosrowshahi lists these factors in the filing, including workplace culture problems such as sexual assault, and a lack of legal compliance to make clear that Uber will be pursuing a new direction post IPO.

2017: The “annus horribilis” for Uber, lessons in brand damage

You remember that time in 1992 when, faced with a son and heir getting a widely publicised divorce, and having her much-loved Windsor Castle burn down, Queen Elizabeth II announced that the year would be forever known to her as “annus horribilis”.

Well, the same can be said for Uber in 2017, when the company faced a series of reputation-damaging events that threatened to overturn the entire company.

Dictatorial relationships with consumers, workplace harassment and evading the law, Uber admits all in their IPO filing…

Anyone who takes an Uber knows that the company often takes advantage of travel based issues such as urban rush hours, adverse weather conditions, or even political events to scale up their travel prices for consumers.

Uber employed this tactic in a major way during a tense political period in the United States in 2017…

“If events similar to those that occurred in 2017 occur in the future, our brand and reputation would further be damaged and our business may suffer.” – Dara Khosrowshahi, CEO, Uber 

Following a protest at New York’s JFK airport against US President Donald Trump’s Muslim travel ban in 2017, New York cabdrivers refused to run services to or from the airport. However, Uber broke the strike and continued to serve the area, much to the dismay of its customers. This led to a #DeleteUber campaign springing up, where hundreds of thousands of users deleted the app within a matter of days.

In airing the skeletons in Uber’s closet, it’s clear that Khosrowshahi thinks that ‘honesty is the best policy’ for securing market confidence in the brand under its new leadership and ahead of its flotation on the stock market.

Among other brand damaging admissions made in the filing was a reference to Uber’s “toxic” work-culture, which follows publicised testimonies from employees about sexual harassment and racial discrimination. 

In the filing, Uber also references the time it came under fire for using Greyball, a piece of software which helped drivers avoid being ticketed across their European, American and Asian markets.

Uber, a company flotation that may not be another ‘Amazon’ success story

Whether you’re looking to take a company public, or simply grow it some more, the Uber example shows that you can’t necessarily rely on hype or being known as an industry innovator to get the growth, valuation or public respect and admiration you desire.

The Uber case shows how quickly market conditions can change, and the importance of being a nimble business.

It also shows that if you build a business off a concept, (no matter how innovative), that only serves the interests of customers over stakeholders, you’re never going to get the funding you desire. It’s a balancing act between the two, and you can’t have a successful business without catering to the needs of both parties.

At the most basic, yet important level, the Uber case shows that business super-stars can fall short of the promising expectations they were destined. But for you SME owners, at least your businesses are small enough so that you can get your houses in order before that can happen.