November 28, 2017

Breakingviews: Uber Backers Face Head on Collision With Greed

by Breakingviews

Uber’s early backers are on a collision course with their own greed. Japan’s SoftBank and allied investors want to buy roughly one-sixth of the bumptious ride-hailing firm. Existing owners can sell at a $48 billion valuation, or about 30 percent below the last one. Even with a markdown, they could make many times their money. The promise of more, however risky, will cloud the thinking.

Consider just one of the many rounds of funds raised under now-deposed co-founder Travis Kalanick. A so-called Series B investment in 2011 judged Uber to be worth $300 million before an injection of $37 million of new cash, according to Crunchbase. A hypothetical seller would be exiting today at about 142 times the implied “post-money” valuation. Spread over about six years, that implies an incredible internal rate of return – a common measure of profitability – of about 130 percent.

That means a range of investors across Silicon Valley, Wall Street and beyond are in position to crystallise a career-defining return. They can take money off the table and stop worrying about Uber’s seemingly inexhaustible capacity for scandal.

On the other hand, Uber could be turning a corner. It recently hired a promising new boss in former Expedia chief Dara Khosrowshahi. Sloppy governance is being cleaned up, even more so if the new offer secures enough sellers. And having SoftBank’s Masayoshi Son on side would be valuable, with his deep pockets and ride-hailing holdings across the globe.

These are heady times for tech, however. There is a risk that Uber becomes a globally significant, and yet not very lucrative, service like Snap or Twitter, both of which have market valuations of about $16 billion. There is also the tantalizing possibility the ride-hailing app turns into a self-driving, logistics colossus that could rival the likes of Facebook or Tencent in terms of value.

If there was, say, a binary option of Uber having a one-in-four shot at becoming a $500 billion company or instead a $15 billion also-ran, it would imply a blended valuation of $136 billion. That could mean plenty of investors will be ready to buckle up for the ride.

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