Uber’s über IPO fiasco

This will be one for the business textbooks for years go come. Unfortunately for Uber, it’s initial public offering (IPO) is the perfect case study for all the wrong reasons:

  • The company waited nine years before its IPO. If it had delayed in order to achieve some level of a true business model, that might have been one thing. But in this case, all signs of that being achievable are vague at best.
  • In fact, the company showed no signs of a roadmap to profitability, now burning $1.8 billion a year and a staggering $10.7 billion in losses over the lifespan of the company.
  • CEO Dean Khosrowshahi was handed a compensation package tied to an inflated valuation for the company at the time of IPO. If the company reached a $120 billion in market value at IPO and remained there for 90 days, he was to be awarded $100 million. 
  • Much of the stock was in private hands already, through a network of investors, many of whom included those who were expected to buy again at the market price when the company went public. They weren’t thrilled about it, to say the least, which is why the IPO price dropped from $45 to $42 at the last minute.
  • Even the underwriters were wary of the price and were shorting employing “naked shorts,” a highly questionable tactic, which in most cases is illegal and in this case was detrimental to the overall IPO.
  • The market is souring on the Unicorns, companies with $1 billion+ valuations that emphasize gaining market share over profitability.
  • Lyft, which itself had just gone public and is Uber’s main competitor, had only days before Uber’s IPO posted less than favorable “earnings” (i.e. losses) statements.
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Can Uber survive this?  Buried deep in its S-1 prospectus, the company makes this rather pointed statement:

“Our business would be adversely affected if Drivers were classified as employees instead of independent contractors.” 

Uber S1 filing with the SEC

What this means is that Uber, which is paying a median rate of $8.55 per hour to U.S. drivers, with female drivers making on average of $1.24 an hour less than their male counterparts, is essentially admitting it cannot stay in business if it must act like a regular, grown-up company.

Days before the Uber IPO, Lyft and Uber drivers went “on strike” by turning off their apps, to protest their low wages. Driver turnover will be a main concern. If Uber is not able to address this, it could ultimately affect user experience. 

And now that the company is public, the pressure will be on. Under the glaring spotlight of earnings reports, Uber must continually convince shareholders, analysts and pundits that it is on the path to a sustainable business.

And while it is doing this, it has to bet big (via R&D investments) on autonomous driving, in the hopes it can do an end-run around (no pun intended) its driver problem. But it is highly unlikely that this is going to come soon enough. There are myriad regulatory hurdles, not to mention technological and social acceptance issues.The company claims it is modeling its business on Amazon, which focused on gaining market share and ran at a loss for 14 years before turning a profit. But Amazon started very, very modestly compared to Uber. (Amzon’s S-1, by comparison, had the goal of being “the bookseller to the world.”)

Also in Uber’s S-1 filing, the company states:

“We do the right thing, period.”

I guess we’ll see what that means in the coming months.

Sources:

[https://www.washingtonpost.com/b…

[Uber’s growth slowed dramatically in 2018

Uber’s I.P.O. Flop May Be Wall Street’s Worst Ever

Dara Khosrowshahi hasn’t yet earned his $100 million-plus stock bonus for when Uber hits a $120 billion valuation — but there’s still time for him to do it

Uber’s Top Investors 

Lyft’s First Results After I.P.O. Show $1.14 Billion Quarterly Loss

https://www.npr.org/2019/05/08/721333408/uber-and-lyft-drivers-are-striking-and-call-on-passengers-to-boycott