 (giving it a higher market share) or that the operating margins will bounce back to much healthier levels once they navigate their way through the growth phase.
If your view is that I have no business valuing Uber because I am not a tech person, that I am not an expert in the ride sharing business and/or that I have not made money as a VC, my responses are guilty as charged, you are right and without a doubt. I don’t have a tech background, don’t work on the right coast and know technology only as a user, but I don’t think any of those are prerequisites for investing in technology companies. I have tried to incorporate what I have learned from technology companies in the market into the valuation, in the form of easier scaling up, larger networking benefits and bigger market effects, but I might not have done it well enough. There are many who know a great deal more about ride sharing than I do, and while I have tried to learn about the inner workings of this business from Harry Campbell and about the Chinese growth potential from Drake Ballew, my ride sharing know-how is limited. Finally, if we did restrict writing about the valuation of young companies only to venture capitalists who have been consistently successful over long periods, the list of potential writers would be very short, and most of the people on the list would be too busy investing in these startups to write about them.
Whatever group you belong to, rather than complain about my mistakes (which are too many to count) or bemoan my limitations (which are legion), please take my Uber valuation and make it yours, putting your superior knowledge and experience into the numbers. In fact, let’s give this a crowd valuation twist and get a shared Google spreadsheet going, where you can post your results.
Notwithstanding the dressing down that I got from some in the technology/VC space for my first valuation of Uber, or perhaps because of it, there is no company that I have enjoyed valuing and talking about more during the last year, than Uber. Thecompany illustrates all the broad themes in valuation that I have returned in my blog posts and teaching: that uncertainty is part and parcel of valuation, that narratives drive numbers and that the pricing and valuation processes can yield different numbers. As a teacher, I am constantly on the look out for learning and teaching moments, and few companies have offered me more than Uber.
To show you how much Uber has found its way into my every day thinking, I will end with a personal story. Towards the end of last summer, my youngest son, who is fifteen had a friend over for the afternoon, and when it was time for the friend to leave, I looked out at the driveway, expecting the “Mom car", the typical mode of transportation for a 15-year old in the middle of suburbia (where I live). When I saw a strange sedan with a bearded man in the driver’s seat, I was taken aback, until I was told that it was an Uber car. Since this happened only two months after my valuation of Uber in June 2014, where I labeled it an urban car service company, my first reaction after I got over my surprise was that I needed to revalue Uber afresh. Of such small actions are obsessions born!
Well the VC's valuation of $51Bn is biased, especially if you've paid @ $17.
The more important thing to realise here is how any "amazing" business which has a +ive economic value add (ROIC > Cost of Capital), attracts new entrants and competition. Technology is both the advantage and disadvantage and it will drive all returns across this industry to the opportunity cost of capital.
Whether you look at Groupon or KING entertainment, Zynga. They all followed the same path.
Uber will inevitably follow the Amazon style of using every $ of cash for what management think of as growth. (Future) Shareholders value will never be seen in the traditional sense. Consumers may benefit if their business model enables cost savings, but personally, I don't see this. A traditional taxi - involves a car, a drive, and the fuel, marketing costs to get customers (?). Uber has the same operational costs. Ride sharing splits the cost per customer obviously, but we are yet to see if that takes off. If it does anyway, new entrants come in, and the cycle begins again!
Great writing. But, this valuation post is a perfect example of the effects of anchoring bias. It is precisely this bias, that VC's have been able to exploit to drive the valuations of these unprofitable companies to insane levels.
Which of my anchors is causing the bias? In fact, I am shifting all my anchors (total market, market share, profit margin).
I totaly agree with Yehuda. It`s a big part of the VC business to do priming. Especially, as long as Uber is a privat company and not publicly traded every statement coming from management, supervisory board, investors, consultants etc. needs to be regarded with super suspicion, because they have really strong incentives to inflate valuation. (Inflated valuations don't hurt investors as much as the original founders due to liquidation preferences) Furthermore, we all know or can imagine that Uber is a big marketing&pr juggernaut.. that means all the news about Uber has to be regarded with suspicion as well. So, even if Mr. Gurley has some good company insights, he is biased and is a successful investor maybe because he is a master of priming! Every successful VC needs to be that!
But, I also agree with Aswath.. it's the nature of startups (young innovative companies working in absolute uncertainty) that valuations are closely tied to the narratives and vary extremely. One of many reasons for that is that terminal value can't be calculated seriously and is highly imprecise, because nobody knows what will happen in the future.. concerning Uber that means we don't know if the service will be banned in other countries as well (I come from germany where it's is banned), how long it will take that regulators react. etc... there are just to many unknown variables and variables we actually don't know that they exist or have an impact etc.
So, in terms of Uber it's nothing more than a bet if Uber can make an impact in the industries it is aiming for. If so, than it has to be crystal clear to everybody that it won't survive if it doesn't aim for a big junk of these markets.. that means if you think Uber can make an impact than you must expect that it gets uber huge.
The VC's created the anchor by throwing some valuation number basically out of thin air. This anchor influences all future valuations, both consciously and unconsciously. It is almost impossible to ignore this anchor bias in future valuations, especially as many people attempt to "rationalize" the original valuation anchor.
For example, you say: "I was wrong about Uber’s value in June 2014, when my estimate of $6 billion was below the $17 billion assessment by venture capitalists then." Why were you wrong then? Simply because the VC's valued it at $17 billion? And then this valuation must influence your future valuation of the company.
The valuation methodologies used by VC's in many of these private start-ups now is very suspect. It's really just a ponzi scheme of sorts, ala Minsky. Virtually nobody analyzing these companies has audited financials. It's more of a trust me situation, with big numbers thrown out to support some fairy tale narrative.
Personally, I use Uber all the time, and it's great, but without access to any audited financials, I don't think it's possible to value this, and my gut, considering the many flaws in the business model, just tells me that the current valuation is simply absurd, especially when compared to other stable companies that are valued at $20 billion+.
I now get your point but that is not why I said I was wrong. It is because my valuation of the company has changed. That may reflect the pricing by VCs, but if you look at my history in valuing young companies, I have tried (though not always succeeded) in not letting the price feedback into my value. Thus, I valued Twitter around $20 when it went public and stuck with that value as the stock premiered and went even higher. With Apple, my valuation stayed around $600, as the stock gyrated higher or lower. Thus, if I revalue Uber next year, and the cost structure remains untenable, I would hope that I will have the courage to lower my value, even if VCs are pushing the price up. That is less an issue of anchoring and more one of faith in value.
One risk I think missing from this analysis is the sustainability of revenue (this is the same as its cost base, but from the other side of the ledger). Uber is obviously growing fast, provides a fantastically valued service, etc. But part of why it is 1) growing so fast and 2) perceived as so great is that its fares are so low. What happens if Uber has to raise fares by 50% or 100% in order to cover its costs, regardless of whether or not those costs are imposed upon it by regulators? I know that if my regular $10 rides were $15 I wouldn't ride nearly as often. It's not entirely for nothing that taxi fares are set at the levels they are.
The problem with all of these DCFs and arguments about valuations is that they are irrelevant (at least for the VC/Growth investors). All of these investments are some form of convertible preferred equity. Preferred Equity have several unique covenants that are unfamiliar to common stock investors: most importantly, Liquidiation Preferences and PIK