Uber is expected to go public tomorrow and all signs are the IPO will be big. But a brief read of the ride-hailing app’s prospectus reveals all manner of risks for potential investors.
In Silicon Valley parlance, Uber is a unicorn. These legendary beasts are privately owned startups that are valued at more than $1bn. And as the name suggests, they’re a statistical rarity -- although less so than in the past.
When the VC Aileen Lee coined the term ‘Unicorn’ in a 2013 blog post, she tallied thirty-nine of these businesses. As trigger-happy VCs have showered cash far-and-wide searching for the next Amazon, this figure has swelled to 346, according to CB Insights.
But even as the field has become more crowded, Uber has retained a unique power. The San Francisco-based app titan will market its shares at “a price range of about $44 to $50 each”, a source told Bloomberg. This’ll give Uber a valuation of about $80bn to $90bn, dwarfing other unicorn IPOs.
A successful business, then! The numbers, after all, don’t lie. But the figures belie Uber’s true dysfunction. Office scandal, labour strife, legal challenges and an unclear pathway to profitability have dogged the company for years.
Uber’s S1 filing -- a document US businesses are required to file before IPO, detailing its financials and risks -- makes for a wince-inducing read. Here are a few highlights:
The company is bleeding cash: Uber lost $3bn in 2018 on $11.2bn in revenue from its basic operations.
Buyers can expect 'substantial and immediate dilution': “The assumed initial public offering price of $_ per share is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.”
The company's own assessment of its tangible book value: “Our historical net tangible book value as of December 31, 2018 was $(7,620) million or $(0.02) per share.”
Its self-driving car ploy has hit a snag: "Autonomous vehicle technologies involve significant risks and liabilities. We have conducted real-world testing of our autonomous vehicles, involving a trained driver in the driver’s seat monitoring operations while the vehicle is in autonomous mode. In March 2018, one of these test vehicles struck and killed a pedestrian in Tempe, Arizona. Following that incident, we voluntarily suspended real-world testing of our autonomous vehicles for several months in all markets where we were conducting real-world testing, which was a setback for our autonomous vehicle technology efforts."
Besides these financial worries, there’s Uber’s shoddy reputation after years of scandal. Travis Kalanick, Uber’s famously abrasive founder who stands to make billions from the IPO, was forced out after numerous complaints about his behaviour.
The wider organisation has had its troubles, too. In 2017, Susan Fowler, an ex-employee, detailed a culture of fear, backstabbing and harassment at Uber HQ. In 2014, an erstwhile Uber exec told a journalist of a plan to publicly smear Uber’s critics.
Years of scandal has tarnished Uber's reputation in Silicon Valley's startup ecosystem, too. Speaking to AccountingWEB, David Heinemeier-Hansson, co-founder of Basecamp and Silicon Valley critic, labelled the company "a disgrace". “They’ve basically proven that there are no consequences for even the most despicable corporate behaviour.
“All that happened was that Travis lost his CEO seat and now has to cry himself to sleep as a 10-billionaire. It’s a dark stain on the startup ecosystem, much as Facebook has become. We were promised a fresh outlook, new ideas, saving the world. Instead, we got the same greedy shitheads.”
Uber’s Achilles heel, though, might prove to be its drivers. While the company plans to automate them in the long term, Uber drivers have waged a pitched battle against their classification as self-employed individuals with no entitlement to the minimum wage or holiday pay.
In the UK, Uber is fighting a case over whether drivers should be classed as workers or self-employed. A landmark 2016 tribunal case ruled that two drivers were Uber staff and entitled to holiday pay, paid rest breaks and the minimum wage and the ruling was upheld by the Court of Appeal. The company said it will go all the way to the Supreme Court.
Potential VAT liability
There’s also the nagging case of Uber’s potential VAT liability in the UK. Jolyon Maugham, a tax barrister and founder of the Good Law project, has crowdfunded a case against Uber’s London business because he claims the app undercharges VAT.
Uber claims it is not liable for VAT because it is only a platform, and does not provide a transport service. Speaking to AccountingWEB, Maugham explained the case is proceeding on two fronts: “We’re about to start a judicial review of HMRC’s failure to launch a protective assessment on Uber’s VAT liability and we’re still pursuing Uber for a VAT invoice.”
Maugham said he wants a protective costs order in place before proceeding since Uber’s legal costs will likely be in the millions. “It’s very easy, if you’re Uber, to shut off access to justice,” Maugham said.
If Maugham’s VAT case has merit, it fundamentally alters Uber’s economics in one of its largest markets. An extra 20% will have to be factored in somewhere, either from Uber’s commission, higher fares, driver’s income or a combination of all three.
The employment and tax cases exemplify the volatility of Uber’s business model.
Indeed, AccountingWEB members are unconvinced by Uber’s long term potential, too. “I always feel that newer business entities these days are just not built for the long haul,” wrote DJKL on an Any Answers forum thread. “They seem to survive longer if lots of assets are needing to be built up/deployed but if not they are often here today gone tomorrow.”
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.