A Blog by Jonathan Low


Dec 6, 2014

The Promise - and Problems - of Uber's $40 Billion Valuation

The greater the valuation, the greater the justification that founders and early stage investors feel about the way they have managed a young enterprise's growth.

Given that Uber's leadership has never lacked for, ahem, self-confidence, the $41 billion valuation the company was accorded this week could be seen as a validation of its methods and attitude.

It could also be the end of the beginning.

Whether one admires or despises Uber's truculent approach to everything and everyone, it has arrived at this stage of its growth with a lot of believers. But we have been here before, especially with leaders who have a surfeit of self-respect, the game changes the longer you play.

The promise is that the company will seize the opportunity it has created to re-make car service for hire around the globe. And that this is just a starting point, with delivery for Amazon, Google and others as a potential new market.

The challenge is that even with experienced, sure-footed management, the challenges will also grow in line with the opportunity. Among them: municipalities and regulatory authorities can change the rules so that cab companies get advantages, increasing competition; that drivers demand a better deal, raising costs; that they valuation is like the best price you were ever quoted for a prized toy or house - it will never get higher and everything subsequent will seem like a disappointment. And, for Uber as for so many others, that more sophisticated and well-heeled investors will demand more experienced and diplomatic senior leadership.

The could be a jumping off point for Uber. The only question is whether the jump will be up or down. JL

Cadie Thompson reports in CNBC:

It definitely raises the risk. You see what happened with Facebook, being valued at such a large valuation definitely ups the risk of an unsuccessful IPO. Investors are looking at financial more than anything. They may bring some pressure on the company.
It would appear nothing can slow Uber down. Despite recent controversy in the press, investors seem confident in the company.
After raising money this summer at an $18 billion valuation, the company recently raised an additional $1.2 billion at a whopping valuation of $40 billion for its latest funding round. So in just six months its valuation more than doubled. That's pretty rare, industry experts say.

But with the huge valuation comes a few potential problems, say analysts, including setting up perhaps-too-lofty expectations for the company's inevitable IPO.

Too big too fast?

"This is a massive step up in valuation in just six months. Folks obviously feel like it's a big market opportunity and feel good Uber will capitalize on it," said Anand Sanwal, founder and CEO of CB Insights, a firm that tracks venture capital investments.
"There haven't been a lot of companies raising billion plus rounds and their pace is pretty remarkable. The sentiment is definitely positive from at least an investors perspective. It will be interesting to see if Uber can grow into this valuation."
For now, Uber is the most valuable start-up among all venture backed private companies, and stacks up pretty impressively against public companies.
Read More Uber: HK our fastest growing market outside US
There are only 15 U.S. tech companies that trade above a $40 billion market cap, according to FactSet, and their numbers include giants like Apple, Google, Facebook, Oracle and Microsoft.
"This is very rare. From your VC, tech standpoint, only Facebook has gotten this high of valuation before going public," said Adley Bowden, senior director of analysis for the venture research firm PitchBook.
But as Uber's value keeps rising, so will the pressure from investors, industry pros said.

Mounting pressure

<p>$40 billion Uber = 4 GoPro&#039;s</p> <p>CNBC&#039;s Dominic Chu compares companies to Uber&#039;s new $40 billion valuation. </p>
"Expectations are always raised as you raise more money, bring more investors in and increase the valuation like that," Bowden said. "So the margin for error definitely gets smaller. The spotlight is definitely on them. Any misstep at all, any decrease in rate of growth or anything like that they are going to be heavily scrutinized. So it absolutely does raise their entire profile."
Such a large valuation also has the potential to hurt the company when it goes public.
Read MoreGoldman offers clients Uber service
Because Uber is following in Facebook's footsteps of raising large later-stage rounds instead of going public, when the company finally does go to market its valuation could take a hit.
"It definitely raises the risk. You see what happened with Facebook and others, being valued at such a large valuation definitely ups the risk of an unsuccessful IPO or one that initially comes out lower than the valuation in the private markets," Bowden said.
Another growing point of pressure that comes with more investors and more money is a push to change the company culture, experts said. Scandals involving privacy issues and shady business practices have plagued the company recently, so there may be mounting pressure to shake up management and adjust the corporate climate.
Read More Uber saw a small dip in growth during its bad press week
"These investors at the end of the day are looking at financial more than anything else. And you know the cultural and political risk is factored in. But depending on the size and type of investor, they may bring some pressure on the company," Bowden said.


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