The ride-sharing app company Uber last week raised $1.2 billion in venture capital on terms that valued the company at $17 billion. As Will Oremus at Slate.com observed, that's almost as much as Hertz and Avis combined.
It's more plausible to see Uber's valuation not as an artifact of its genuine potential, but of growing inflation within the high-tech bubble.
Consider this: the number placed Uber in a rarefied club that previously included Groupon (worth $16.6 billion on its first day of public trading in 2011) and WhatsApp (worth $19 billion, based on the price paid for it by Facebook).
Of course, Groupon today is worth about $4.2 billion in market capitalization, a sizable plunge from that first day. And WhatsApp was paid largely in Facebook stock, which in time may or may not prove to be as valuable as quatloos.
Rational analysts have been pointing out the flaws, or at least the pitfalls, in treating Uber's $17-billion valuation as a number that reflects actual conditions in Silicon Valley, the business category, as opposed to "Silicon Valley" (the HBO satire).
One is tempted to think of the latter when hearing Uber insiders say things like: "Uber is building a digital mesh -- a grid that goes over the cities. Once you have that grid running, in everyone's pockets, there is a lot of potential for what you can build as a platform. Uber is in the empire-building phase." Watch the show, and tell me that couldn't come right out of the mouth of any of its leading characters, verbatim.
As is pointed out by Rags Srinivasan, a marketing expert who blogs at IterativePath, Uber is worth $17 billion today only if one makes very aggressive projections of the total market for taxi services and Uber's potential share of that market.
Among the assumptions is that the non-U.S. taxi market equals the U.S. market at $11 billion a year, that Uber's market share will be 50%, and it can raise its profit margin to 30% from 20%. Put all that together, he says, and you get to $17 billion -- almost.
On the other side of the coin are the head winds that Uber enthusiasts like to pretend don't exist. There's the legal pushback the firm is facing from municipalities and competitors, including taxi drivers. Maryland regulators, for instance, are proposing to designate Uber as a common carrier, which the company grouses would impose "antiquated regulations on our decidedly modern industry."
We're not a transportation company, Uber maintains, but "a technology company -- we do not own vehicles or manage/control drivers." Uber says the benefits it brings to "consumers, the market, and the economy are undisputed." Uber sounds more and more like BP and Exxon Mobil every day.
Another issue is that the barriers to entry for Uber competitors may not be very high. Nothing really keeps other entrepreneurs from distributing their own smartphone apps to summon drivers and undercutting Uber by offering passengers lower fares or drivers higher commissions.
One of the problems faced by companies with disruptive technologies is that they can get disrupted themselves -- think of the possible fate of Dropbox. The popular cloud-storage firm just saw its market potential undermined by none other than Apple, which will push its own cloud-storage functionalities in its OS X Yosemite and iOS 8 operating system upgrades this fall.
Uber claims to have an advantage because it was first into the ride-sharing biz. But while "first mover advantage" is a cherished mantra in Silicon Valley, it sometimes works and sometimes doesn't. It's certainly not a can't-miss formula for lasting success.
Ilan Mochari of Inc. Magazine probably has the savviest take on the Uber valuation: it's meaningless except possibly as a come-on to the next round of investors, who can use it to persuade themselves that they have a good chance of a profitable exit, if they're nimble enough. Others should keep in mind that almost every high-flying dot-com firm during the last bubble had a ludicrous valuation at one point or another, and only a bare minority of them are still around.
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