Money, money, money is the theme of this week’s round up – and none of it (so far) looks like it’s coming to drivers. So what’s going on? Today, senior RSG contributor John Ince highlights investments in both Uber and Lyft, critique of these investments (at least for Lyft), and how Uber’s new CEO is going to make more than you – a lot more.
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SoftBank, Dragoneer, Didi close to finalizing investment in Uber [TechCrunch]
Sum and Substance: Japan’s SoftBank Group, U.S. investment group Dragoneer and Chinese rideshare giant Didi Chuxing are close to finalizing their investment in Uber via a joint venture, sources tell TechCrunch. The tender offer is on track to launch by the end of the month and includes a direct investment in the company, as well as the purchase of shares from employees and early investors. The potential investors were first reported by The New York Times about a month ago. We’re hearing that the conversations are not only still happening, but that the deal is likely to include the largest secondary transaction in history, with thousands of Uber employees eligible to sell shares.
Bloomberg earlier reported that Uber could be lining up between $2 billion and $10 billion from these new investors. We’re hearing that the latest conversations involve numbers toward the top of that range, around $8 billion to $10 billion. The investment is being led by Dragoneer, Didi and SoftBank — which now has about $100 billion to deploy from its Vision Fund — but General Atlantic is also expected to participate. A special-purpose vehicle is being formed to make the investment.
The round is significant, not only because of the deal size, but because the shares will likely be purchased at Uber’s last private valuation of nearly $70 billion. After months of public scrutiny and a formal investigation into the company’s culture, which led to many executive departures, including CEO Travis Kalanick, there has been widespread speculation that Uber’s valuation would be cut. Instead, this move doubles down on its existing value. It also gives employees and early investors another opportunity to cash out. For years, Uber restricted the sale of equity stakes, making it difficult for these individuals to turn this compensation into cash.
After its policy came under fire, the company began conducting buybacks earlier this year. We’re told that Uber just finished a second buyback last week that was made available to hundreds of employees who were eligible to sell up to 20 percent of their stake in the company. Such moves also reduce some of the pressure for Uber to orchestrate a liquidity event. New CEO Dara Khosrowshahi recently told Uber employees than an IPO is still 18 to 36 months out. Equity investors who have invested about $9 billion in the company since 2010 are likely also highly supportive of a funding deal that allows them to turn some of their paper gains into riches.
My Take: If this comes to pass it will be huge – potentially a turning point for Uber. It would essentially wipe out the effects of almost a year of horrendous news surrounding the company. It would give both investors and employees an early exit – enabling them to cash out of their investments.
It makes you wonder what exactly these new potential investors are thinking. Are they not aware of all the problems facing the company – with hundreds of lawsuits pending, no clear path to profitability, deep divisions within the company, staff morale deteriorating, and a driver corps that has no particular loyalty? But then again, maybe they know something we don’t know.
Maybe they are basing their investment of the assumption that Uber will achieve monopolistic power and be able to jack up rates and move onto the fast track to profitability. Who knows what they know? All I know is that this game is getting more fascinating all the time.
Alphabet Considers Lyft Investment of About $1 Billion [Bloomberg]
Sum and Substance: Alphabet Inc. has held conversations with Lyft Inc. about a potential investment in recent weeks, signalling strong support for Uber Technologies Inc.’s main U.S. competitor, according to people familiar with the matter. An investment of about $1 billion in Lyft may come from Google or CapitalG, Alphabet’s private-equity arm, said some of the people, who asked not to be identified because the discussions are private. A deal may not come together. Alphabet and Lyft declined to comment. Alphabet is also an Uber shareholder through its GV venture capital arm, but Waymo, a unit of Alphabet, is currently suing Uber over self-driving car technology. As the relationship has deteriorated, Waymo signed a partnership with Lyft to work together on testing autonomous vehicles.
While Lyft has recently focused on controlling spending, the cash would allow the San Francisco-based startup to pursue more aggressive growth with subsidies for drivers, discounts for riders and marketing. Lyft kicked off a major television campaign this month that stars Jeff Bridges. With an extra $1 billion, Lyft would be able to ensure its independence for the near future, something co-founder John Zimmer has said is a priority. But some investors have suggested Alphabet would be a natural home for the ride-hailing startup. Lyft held informal talks with Alphabet and other potential acquirers last year but didn’t pursue a sale.
Lyft has gained market share this year as Uber has bent under a series of self-inflicted scandals. Uber faces at least three U.S. probes and several high-profile lawsuits. Dara Khosrowshahi, the former Expedia Inc. chief executive officer, took over as Uber’s new chief last week. He’s looking to complete a fundraising deal of his own: Uber is advancing on an investment from SoftBank Group Corp. and others of as much as $12 billion, most of which would allow existing shareholders to cash out.
My Take: Relative to its size, a $1 billion investment for Lyft would be just about as significant as the rumored $10 billion investment in Uber by Softbank and others. So the key players would be staying fairly even in the key competitive factor – cash in the bank. In the final analysis, having enough cash to keep your business going is what will determine who wins this game. So right now it looks like the rideshare business will be around for at least a few more years – despite what Steven Hill says in his New York Times piece below.
What Dara Khosrowshahi Must Do to Save Uber [New York Times]
Sum and Substance: Uber’s board has picked Dara Khosrowshahi, leader of the online travel company Expedia, to replace the embattled chief executive, Travis Kalanick. But the company’s troubles run deeper than Mr. Kalanick’s flubs and scandals, and new leadership alone won’t be able to right this distressed ship. If Mr. Khosrowshahi is to succeed, he’ll have to do what his predecessor refused to do: confront the reality that Uber’s business model simply doesn’t work. While Uber has become popular as a taxi company for the digital age, and has been valued at nearly $70 billion — more than Ford, G.M. or Tesla — the company has been losing money faster than any technology company ever. It lost nearly $3 billion in 2016 (plus another billion or two in China), and it has already lost over $1.3 billion in the first half of 2017.
The dirty little secret of Silicon Valley is that seven out of 10 venture-backed start-ups fail because they never become profitable. The company Mr. Khosrowshahi will take over is on track to becoming one of those failures. That’s in part because Uber has never figured out how to offer taxi service at a lower price and still earn a profit. Consequently, it has become stuck in a trap, using its venture capital funding to subsidize at least 50 percent of every ride to cut fares and try to gain a monopoly position that can drive the competition out of business. As a result, the more customers use Uber, the greater into debt it goes. Uber can subsidize rides for only so long. At some point, investors want a return on their money. They want to get to the stage where they can profit from the company’s I.P.O., or they turn off the spigot. Uber is standing at that precipice. More than anything, that’s what the recent revolt by Uber board members has been about. Uber’s initial investors and board members were willing to look the other way as scandal after scandal erupted because the business model seemed to be on track.
But now some investors are publicly saying Uber is worth far less than $70 billion, and the Uber board is offering shares to new investors at a discount…. Confronted with this reality, a desperate Mr. Kalanick set his sights on deleting drivers and their wages from the expense sheet through the development of autonomous vehicles. But it is increasingly clear that this is another huge gamble that Uber cannot win, at least not in time to save itself. Most experts (including those previously bullish on self-driving technology, such as the editors of The Economist magazine) have recognized that autonomous vehicles are at least 20 years from fruition. We will continue to see various experiments, and autonomous service vehicles used in very limited settings, but Mr. Kalanick’s promise of a self-driving transportation grid dominated by Uber is pure science fiction.
Uber’s only chance to survive at this point is to actually make its taxi business work. If he’s to have any chance of doing that, Mr. Khosrowshahi will need to make major changes. First, he should parlay Uber’s popularity among its users into a significant increase in fares. Second, he should follow the recommendations of Eric H. Holder Jr., the former attorney general, to root out the company’s destructive “bro culture.” Third, he should find a way to repair Uber’s poor relationship with its drivers, since the company will need them for a good while longer.
One study found that only 4 percent of people who sign up to drive for Uber are still driving a year later. Uber burns through drivers as fast as it burns through its investors’ cash. Fourth, Mr. Khosrowshahi should drop foolhardy futurist ideas like self-driving or self-flying vehicles (the latter was Mr. Kalanick’s latest brain storm) that have no chance of success in the near future and are a waste of resources and attention span. Fifth, he should shut down Uber’s foreign operations everywhere except London, where it has had a degree of success. Finally, he should head off the coming backlash over urban congestion by cooperating more with local officials to use the company’s tracking technology to reduce the horrible traffic (much of it caused by Uber and its competitor Lyft) that is plaguing cities. That would mean sharing driver data so cities can track traffic flows and create congestion zones like the ones in London and Stockholm.
If Mr. Khosrowshahi follows this blueprint, the company has a chance of surviving. If not, Uber will burn through its remaining estimated $6.6 billion in cash and go out of business in three to five years, and he’ll be its final chief executive.
My Take: Steven Hill has been one of Uber’s most vocal and perceptive critics. In this timely piece, he reiterates many of his key points – Uber has yet to demonstrate a viable business model – self driving cars are a fantasy for the near future – and Uber congestion is one of the fallouts of ridesharing. I can’t help but wonder if those companies above that are considering investments in Uber and Lyft have given due consideration to the points Hill and others have made.
New Uber CEO may get $200 million [TechCrunch]
Sum and Substance: The Uber board offered Expedia CEO Dara Khosrowshahi the new role on Sunday. And according to Bloomberg data, they would have had to pay him a lot of money to woo him. Khosrowshahi, who has been at the helm of Expedia since 2005, had almost $185 million in unvested stock options when the offer was made Sunday. He probably wouldn’t forgo that kind of money unless Uber could offer him more. With a $68 billion valuation, Uber can afford a significant compensation package. When Uber bought Otto, it was enough to net founder Anthony Levandowski $250 million. Because Uber is a private company, it won’t need to disclose Khosrowshahi’s salary and equity stake.
Khosrowshahi received nearly $95 million in pay in 2015, making him one of the most highly paid leaders in corporate America. The vast majority of that sum came from a package of stock options that the online travel company gave him in March of 2015 and that was expected to vest over several years. His pay wasn’t always so rich, however. In 2014, Khosrowshahi’s compensation at Expedia totaled $9.6 million. Last year, he took home $2.4 million in salary and bonus compensation.
My Take: If this is true, then Uber board has really rolled the dice with this move to hire DK. How can they ask a new CEO to get serious about cutting costs while paying him $200 million? His compensation package is blowing a hole in their commitment to put Uber on a path to sustainable profitability.
At Expedia, DK was one of the highest paid CEOs in the world last year… and Uber will be paying him more. How much more? Let this sink in – Uber will be paying DK 100 times more every month than the average driver will make in a lifetime. Drivers should not be happy about that – unless DK finds a way to pay drivers more for their work than they’re getting now. Fare increase anyone?
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