Will Uber Ever IPO and Allow Early Investors Out Research Paper

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Introduction

One global company that has taken off like a rocket in recent years is Uber—the ride-sharing corporation whose business is based entirely on an app and the concept that people are willing to pick up other people in their own cars for a small fee, with transactions conducted entirely through the app. Uber became immensely popular following its inception in 2009 and has expanded across the world in short order, launching into various other forays and offshoots from the ride share concept: now there is Uber Eats, a food delivery service, and Uber’s investment in autonomous cars that drive themselves (the supposed future of driving). Questions remain, however, about Uber’s financials, particularly in the wake of its mounting cash burn problems, its dwindling valuation, and its exodus of financial officers and executives (). This paper will discuss Uber’s credibility and the financial issues it faces and how the company can turn its problems around.

Background

Uber is a private company that is currently facing a host of government probes and public criticisms regarding its use of consumer data, its business model, its finances, and its ethics (Newcomer, 2016; Romm & Bhuiyan, 2017). As a private company and investment unicorn for venture capitalists, Uber shot straight up in terms of valuation, with a promise of growing into profitability through monopolistic enterprise (Kaminska, 2016). However, as the public has gotten more and more interested in Uber and the talk of an IPO has escalated, the company has been obliged to share more of its finances and EBITDA in order to satisfy curious investors outside Silicon Valley. The result has been bewildering. As Huston (2017) notes, “if Uber Technologies Inc. had been a public company in 2016, it would have been among the top 10 biggest money losers.” Net losses of $2.8 billion on net revenue of $6.5 billion in the West with another $1 billion net loss in China for total net loss in 2016 fast approaching $4 billion. This comes on top of a valuation of $68 billion from a round of funding in mid-2016, though its nearest competitor, Lyft, is valued only at 7.5 billion USD. Uber’s EBIDTA—earnings before interest, tax, depreciation and amortization-basis—indicates, at least from what the private company has been willing to reveal so far—that its $68 billion valuation is extremely high considering its mounting losses.

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Nonetheless, as McKenna, Owens and Huston (2017) report, “Uber Technologies Inc. says the Securities and Exchange Commission has signed off on its preferred description of its business model, giving investors the first inkling of how regulators might treat the company if and when it files for an Initial public offering.” In other words, the firm says the SEC has given it the green light to allow initial investors to dump their shares in the retail market with an IPO based on a deplorable EBITDA.

What to Do

While Uber is currently facing at least five separate Justice Department criminal investigations, the company is still planning a 2019 IPO (Blumberg, 2018). The sense is that early investors want to exit their positions before the company’s valuation dips any further (it has descended about 33% from its 2016 valuation already). Currently Uber’s debt as equity approach has allowed it to expand but “the core problems with the current business model of subsidizing drivers and riders will catch up with them,” according to Hawkins (2017). In order to get itself into better legal and ethical standing from a financial point of view, Uber has a few options and it has already begun to engage in them.

First, it has to divest of unprofitable subsidiaries. It has done this in China already by dumping its China ride share program, which was weighing on the company’s books. But this is just the beginning. Uber has an investor problem and its need to cover its tracks in terms of debt as equity to help get itself to IPO is causing waves among its biggest investors today. As Smith (2017) notes, Benchmark has a substantial stake in Uber that is worth billions and sits on the Board—but ex-CEO Kalanick wanted Benchmark off the Board: “That’s impossible unless they get Benchmark to give up, as in sell, its stake. And despite this group making an offer to buy Benchmark out, no one with an operating brain cell thinks they can round up the money.” This is important considering Uber’s exaggerated EBITDA promises. Smith (2017) reveals why: “Benchmark contributed only 0.2% of Uber’s capital ($27M/$13B) but has….....

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