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

The SaaS consolidation trend

Consolidation. It’s the name of the game in the world of software. And as software manifests itself as a service (SaaS), the service companies are following the same path of consolidation.

If previous trends are any indication, we can expect the following:

Rapid innovation, which causes disruption.

Innovators battle it out with competition.

Some survive, some don’t and either get acquired or die.

History as an example

Let’s look at one example, the enterprise infrastructure software world. In 2000, there were a dozen or so companies — some startups and the big iron players such as IBM and Sun — trying to own the market. One company, BEA, starting making headway.

They acquired a smaller competitor, WebLogic, and this became the cornerstone of their revenue. They expanded and grew to be the big fish in the pond of enterprise infrastructure software with $1.5 b in revenue. (At the time, I believe they set the record for a software company reaching the $1 billion mark.) Then a bigger fish — Oracle — swallowed BEA. The enterprise infrastructure software (installed type) is now completely consolidated within the larger giants such as Oracle and Microsoft.

Or, let’s step back in further. Back to the future of the 1980s. Word processing was the killer app for PCs. Wordperfect quickly beat out competitors such as Wordstar and Multimate to be the king of the hill. Wordperfect’s stickiness was in its macros, keyboard shortcuts that, once you had learned them, you were reticent to try any other word processing app. Then along came Microsoft Word. With the inside track on DOS and then Windows APIs, Microsoft was able to displace Wordperfect as the predominant word processing app.

There were still holdouts: the legal profession in particular was dragged kicking and screaming into the new world. The killer death blow came when Microsoft cannibalized their own app and subjugated it to be part of its Office suite. And with that and a little magic known as OLE (object, linking and embedding), Microsoft could make drag and dropping from Excel, Powerpoint and Word seamless to the user.

The rest, as they say, is history. In the 2000s, search went through the same competitiveness, until Google, through a better search algorithm and little bit of luck as it stumbled upon the concept of Adwords and Adsense, beat out the competition.

Business Intelligence went through its innovation phase in the 2000s as well, and by the end of the decade, the major players were swallowed up.

What’s next?

So what can we expect to see in the world of SaaS (Software as a Service)? Mulesoft was recently acquired by Salesforce for a whopping $5.6 billion.

The interesting sidebar on this acquisition is that it came one year after Mulesoft went public. What motivated Salesforce to wait a year? Why didn’t they swoop in prior to IPO to offer a premium that would have saved them a few dollars.

Could be a few explanations. Perhaps the team at Mulesoft was more eager in testing the waters of the public offering. It could also be that Salesforce was — at least allegedly — a target of a takeover itself at the time Mulesoft went public. Perhaps Salesforce had its hands full.

Other significant acquisitions include Appdynamics scooped up by Cisco, just prior to Appdynamics IPO (the usual timing for these mergers). A study by a San Francisco firm tracked 95 software companies from 2005 onward. Seventy-eight percent — over three-fourths — of those companies have been acquired in the time period.

SaaS, I believe, is heading the same direction.