Mind the Gap
by

Uber waited too long to IPO and now it faces a difficult sell

The taxi hailing systems company may have missed its best opportunity for a public listing. Convincing investors now will be tough given its bad publicity and legal problems

PUBLISHED : Sunday, 26 November, 2017, 6:59pm
UPDATED : Sunday, 26 November, 2017, 9:39pm

Uber Technologies’ saga of tribulations and violations continues to sprawl despite the former CEO, Travis Kalanick stepping back. The new CEO Dara Khosrowshahi is fighting a rearguard action while new problems surface. It is a sign of deeper problems with the structure of over valued, private tech companies that should have been pushed into a public listing earlier.

Unethical management behaviour ranging from sexual harassment to ignoring service failures have caused them to be banned from London. A major lawsuit with Alphabet’s Waymo over intellectual property violations hangs overhead. A large 2016 data breach secret involving 57 million users hidden from regulators was exacerbated when the company paid a ransom to the hackers.

Climbing private valuations have helped create in its wake management and governance problems that would have been fatal for most organisations.

Contrast Uber’s US$68 billion valuation as a private company to Facebook’s IPO in 2012 with a peak market cap of US$104 billion, or Facebook’s US$19 billion acquisition for WhatsApp a 55 employee, 450 million user, ad free messaging service. Google’s 2004 IPO valuing it at more than US$23 billion. Netscape’s IPO in 1995 valued the 16 month old company at nearly US$3 billion. Internet valuations continue to soar without much thought about how governance is affected.

A lawsuit between the former chief executive and founder Travis Kalanick with venture capital investor Benchmark, who tried to remove him from the board, was only recently stopped. Yet, Kalanick managed to install two directors to the board given his 10 per cent shareholding.

Uber is a volatile mess operating in a tech industry that requires cohesion and focus on product and service - where tough competitors and shifting technology threaten to erode its lead.

In the past, investors and venture capitalists told the founders that they will make money, but not possess power in governing the company and the exit. At lower valuations Kalanick’s 10 per cent stake of Uber’s shares may not have resulted in much power. But at today’s US$68 billion valuation he has the means to wage costly and insouciant lawsuits with his investors.

Going public earlier may not have solved Uber’s problems. But, at least higher regulatory obligations would have been imposed to protect retail investors. It’s too late now. An Uber IPO at this time is a difficult sell given its bad publicity and legal problems. Buy side liquidity is a problem when you have so many private equity, venture capital, sovereign funds and mutual fund managers already invested. Convincing IPO investors that Kalanick- a major shareholder and founder of two board seats has no influence on the company’s operations will be almost impossible.

Uber is becoming a lesson for chasing “unicorns”- billion dollar tech companies that resist IPOs. Successful tech companies tend to rise quickly in value, outstripping traditional governance standards. Rowdy, fraternity house behaviour lingers. The general lack of ethics at Uber is something you might see at smaller companies.

Uber’s current success lies in its ability to fund losses for as long as it takes to build market share and establish a monopoly in major urban areas. The sustainable opportunity is to extract monopoly rents by displacing complacent, protected rivals like taxi companies.

Uber needs to decide if it is a tech company or just a badly managed, but cutting edge technology taxi hailing system. Competing taxi hailing systems now coexist around the world in China, Malaysia, Singapore. When the technology becomes more commoditised and common place, every taxi company can compete directly with Uber.

Uber needs to refocus and leverage their current high valuation to shift to another related business or market where they can regain technological leadership. Perhaps they should see themselves as a data harvesting company rather than a hailing company. Today, its user base and intellectual property are becoming fragile and can be competed away.

Uber’s spiralling value may have sown the seeds of its own demise.

Peter Guy is a financial writer and former international banker

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