When it comes to Uber--and the valuations of late-stage companies in general--the press always seems to miss the mark.
By now you've likely heard about Uber's massive $1.2 billion funding round. The round, led by Fidelity and Wellington, values the company at $18.2 billion post-money ($17 billion pre-money).
It's a big number. Massive, in fact, so I'm not surprised that my friends in the press are having trouble understanding how investors could justify investing any amount of money at such a high valuation. The Wall Street Journal called Uber's valuation a "head scratcher." FiveThirtyEight doesn't believe the numbers add up. And The Guardian's James Ball called out Uber and AirBnb as companies having "borderline sociopathic business models."
Somehow we've come to a point where people believe Uber's valuation is not only evidence of a dangerous bubble, but of a serious personality disorder and disease that apparently all of Silicon Valley shares. But when you really dig into both the numbers and how late-stage investments like this one are structured, the valuation is both reasonable and not a sign that Silicon Valley has entered an unescapable bubble.
FiveThirtyEight has the most logical, data-oriented analysis of Uber. In the piece, author Aswath Damodaran estimates Uber is making $1.5 billion in gross receipts and $300 million in revenue. He also estimates the total size of the taxi and limo market at $100 billion--adding that the market will grow by six percent each year. He further estimates a 20 times multiple on current revenues. With those factors, the author pegs Uber's valuation at $5.9 billion.
While FiveThirtyEight's analysis is rooted in data, it's flawed, for a large number of reasons. I'm going to discuss a two key ones here.
First, I believe the press is significantly underestimating both the size of the taxi and private car market and vastly under-appreciating Uber's potential for expansion in not just the private car space, but delivery, logistics and many other potential markets. FiveThirtyEight cites that yearly revenue for taxis in Tokyo reaches somewhere between $20 billion and $25 billion. For a single city in a single country. Then, without blinking, it cites another research report that claims revenue for taxis in every U.S. city reaches just $11 billion total. This analysis of market size doesn't even pass my smell test. Estimating market size is a very difficult art, but I would bet any amount of money that the total market size for transportation is well over $100 billion. I know Uber and its investors have data that shows the market is much larger than $100 billion.
The key here, though, is that Uber's market isn't just limos and taxis--it's all of transportation. This includes delivery, which by one estimates is a $208 billion market. Uber is already experimenting with delivery through UberRUSH. Its technology is well-suited to managing the logistics of deliveries, and it could easily expand into another multi-billion dollar market by building its own system or acquiring another delivery logistics company and applying its technology. Uber's potential to expand its market size is far greater than six percent per year, and this is what investors are betting on.
Second, and more importantly, private market valuations are not the same as public market valuations. When you buy shares in a public company, it's almost always common stock. But when you invest in a startup--whether it's during a Series A or a $1.2 billion late-stage round--you receive preferred stock. With preferred stock, investors limit their downside by being the first group to be paid out when there is an exit event--an IPO, acquisition, etc. So if Uber were to suddenly collapse and sell to another company for $5 billion, the investors in its most recent round would still get their money back, because their preferred stock puts them first in line.
With such low risk (Uber isn't collapsing to $5 billion anytime soon), a higher valuation makes sense for both Uber and its late-stage investors. You can't simply take the valuation metrics that public market investors use and apply them to venture-backed companies.
Overall, Uber is a company with incredible fundamentals (revenues are doubling every six months) and it still has plenty of markets it has yet to conquer or even enter. And it has expansion opportunities that most Fortune 500s could only dream of. So the next time you hear the press complain about the high valuation of the next multi-billion dollar startup, remind them how late-stage investments actually work and why betting on companies growing as quickly as Uber are usually deliver a great return.