Jerry Seinfeld asks in his latest Netflix special that if we get “on” trains but get “in” taxis, how do we enter Ubers? “You take Ubers, because there’s no money. They’re like free,” he reminds us, and we instantly recognize this strange truth.
While Uber rides obviously are not free, there is more to Seinfeld’s observation than the mere fact that an Uber ride is a cashless transaction. Remove all of the disruption mythology and cultural controversy around Uber, and the reality of Uber as a business becomes a much simpler tale: Uber is a global scheme that takes billions of dollars from ultra-wealthy investors, and redistributes that money to the masses; to drivers in the form of income and subsidies, and to the public in the form of under-priced rides. Travis Kalanick and his band of misbehaving managers may have been toxic sexist assholes who don’t belong anywhere near a position of authority, but one thing they were not doing was fleecing the common man for the benefit of the rich. If anything, they are accidental Robin Hoods of a scale the business world has never seen.
This goes against everything the mainstream media has been reporting about Uber, which paints the company as a financial behemoth run by remorseless marauders using their incomparable venture capital treasure chest as a battering ram against local governments and transportation providers, while screwing over its own drivers by taking bigger and bigger cuts of the profits. But Uber as corporate overlord completely misinterprets the more complex story of why Uber truly is a unicorn: it is a mega-funded company whose business model is to brazenly rob the rich only to hand it over to the masses.
As the reality of the situation becomes more and more undeniable, the financial press is cautiously starting to sound the alarms. Although Uber is a private company that does not publicly announce financial results, the media is nevertheless regularly reporting on the unprecedented losses at Uber, which amount to nearly $8 million per day. Bloomberg recently branded Uber a ‘socialist’ enterprise, the ultimate scarlet letter in the business press. And as Uber courts its next wealthy target, Japan’s Softbank, its earliest investor sued Kalanick for fraud, as the swindle becomes ever more clear.
To understand how this situation came to be, it’s worth reviewing some fundamental facts about Uber.
First, Uber is still a private company, meaning that its investors cannot yet monetize their investments to the general public by selling their stakes in an IPO and public stock exchange transactions. It’s widely understood that an Uber IPO at a price well above its privately-implied value (more about that below) would be the defining benchmark for a “successful” investment. Furthermore, it means that Uber does not have to publicly announce results, and is much more able to hide the financial truth than a public company.
Second, from what we do know about its financial results, Uber has never made a profit, not even close. In 2016, it lost $2.8 billion, and that does not account for the $1 billion loss from its exit from the Chinese market. That means Uber is losing nearly $8 million per day. This isn’t because Uber is taking ride profits and plowing it back into the company as re-investment (such as Amazon). It’s because Uber rides themselves are enormously underpriced, and passengers pay only 40% of what the ride actually costs, leaving Uber to eat the other 60% (although a link to Vice, this isn’t mere stoned millennial speculation; it’s backed up by legitimate financial scrutiny).
The final key piece to understand is that Uber makes up for its enormous cash losses by repeatedly raising new rounds of cash investments from new, even richer investors. Every time this happens, it dilutes out earlier investors in that their ownership stake shrinks to make room for the new investor, but it can be made up for if the new investor pays a high enough price to make up for the dilution. For example, last summer Saudi Arabia’s sovereign wealth fund wrote Uber a $3.5 billion check in exchange for roughly a 5% stake in the company. While that 5% stake makes all the earlier investors own a smaller portion of the company, the investment implied a $70 billion total valuation for Uber, which made the book value of their investments higher than before the investment.
By the numbers, Uber has taken about $12 billion in total from investors. $9 billion of that is in the form equity stakes, mostly from venture capital firms but also Saudi Arabia’s sovereign wealth fund. The remaining $3 billion is in the form of loans from Morgan Stanley and Goldman Sachs. Now again short on cash, Uber is about to close another round of financing with two major institutional investors, Softbank and Dragoneer. How could professional institutional investors fall for this? As with all swindles, it begins with selling a fantasy.
The fantasy that Kalanick painted for investors was to occur in roughly three stages. Uber is in the midst of realizing the first stage, which is waging a costly battle to take over city ride market share all around the globe. Second, using its market share power, it would raise prices to achieve massive profits. And finally, it would plow those profits into its nascent autonomous vehicle research and development arm, which would realize the post-Marxian capitalist dream of value without labor. The investors would be in charge of the planet’s first autonomous robot workforce. The payoff was not mere profits, it was ushering in a new era of civilization.
As Uber used its investors’ money to bribe drivers into buying cars and providing rides, the first stage vision began to actually materialize. Despite controversies over Kalanick’s management style and personal failings, the press and investors largely excused it as the price for finding an entrepreneur brazen enough to pull off this global ambition.
The success of the first stage made the reality of stages two and three more credible. But as the financial situation — i.e. profit/loss margin per ride — failed to improve with market share throughout 2016, serious questions about Uber’s viability were raised, not least by aviation industry veteran Hubert Horan who put the entire vision into question:
There is no evidence that Uber’s rapid growth is driving the rapid margin improvements achieved by other prominent tech startups as they “grew into profitability.”
Investors, employees and other insiders began to leak concerns about Uber’s vision. Kara Swisher described Uber as one of the leakiest Silicon Valley companies she has covered throughout her long career. By March, Vanity Fair reported that high level employees were abandoning Uber, a potential signal of serious business trouble. When Uber’s vice president of autonomous vehicle research resigned in April of this year, the third and final phase also began to look more like a mirage, forcing investors to ask themselves if their ultra-ambitions were merely masking growing desperation.
It is at this point that the media’s treatment of Uber begins to change, but instead of questioning the business model itself, it focused on an investor-led effort to oust Kalanick himself. Uber investors, increasingly aware of their predicament as victims of a swindle rather than the owners of the real Tyrell Corp., began a media campaign to suggest that Uber’s problems lay in Kalanick’s mismanagement of corporate culture. This was a temporarily effective deflection strategy, as it both explains the exodus of employees as being caused by culture and not business reality, and keeps alive the original vision of global robot domination.
Kalanick is now gone but not forgotten, and he continues to battle for controlof the company he founded. His successor, Dara Khosrowshahi, is a turnaround expert brought in to fix an unfixable situation, but as there seems to be no path to an IPO, and as early investors with the most to gain start to revolt, perhaps the most that can be done by Uber’s management is to keep the charade up for as long as possible, find even richer investors to overpay for the company, and allow its earliest and most cantankerous investors to slowly exit their investment with as big a profit as possible before the whole things collapses.
In the meantime, the $12 billion or so that Uber has burned through has largely been going to paying off drivers and giving customers cheap rides. We have venture capitalists and Saudi princes to thank for the largesse, and Kalanick to thank for pulling it all off. Yes, Uber is going to be a clusterfuck, but this time it’s likely the super-rich who will get screwed.
Meanwhile, we can all still feel fine about “taking” an Uber without fear of paying into a hostile corporate android takeover of the planet.