Uber has broken a lot of rules in its 10-year history. So why should its debut on Wall Street on Friday, in the biggest US tech flotation since Facebook, be any different?
Even by the standards of ambitious, lossmaking technology start-ups, burning through US$2 billion ($3b) in cash a year this late in its existence seems wildly extravagant.
But in their meetings with investors in recent days, the company's bosses gave no indication when they expect to make a profit.
Instead, they sought to sell the ride-hailing company as a once-in-a-generation opportunity: a chance to back a business with the potential to fundamentally change transport and transform markets that Uber — with typical immodesty — values at about US$12 trillion.
Each era of tech can lay claim to its defining initial public offering. The arrival of Google, Facebook and Alibaba were all landmark stock market events over the past 15 years, signalling in turn the rebound of the consumer internet after the dotcom crash, the rise of social media and the arrival of China's internet powerhouses on the world stage.
There is a good chance that Uber's stock market debut will define the era of the "unicorns" — the large number of tech start-ups valued at US$1b or more that have been pumped up by money flooding into the private financing markets. If so, it could mark a more problematic moment in financial history.
Uber's first minutes as a public company were not auspicious. Its shares opened US$3 below its IPO price on Friday, a rare flop for such a hotly anticipated share sale. Yet the scale of its ambition seems almost unbounded.
The automobile industry, restaurants, haulage companies: all of them, according to the San Francisco-based company, are about to have their worlds disrupted by an app that lets users summon a ride, order food or arrange road freight.
Dara Khosrowshahi, the smooth-talking salesman brought in to clean up the mess left when co-founder Travis Kalanick was shown the door two years ago, is not shy about his ambitions.
He wants Uber to be seen as an Amazon for transport — a company that may have started out in ride-hailing but which is bent on changing the sector as a whole, just as Amazon extended its reach throughout ecommerce and logistics.
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There is a purpose to the self-serving comparison. Two decades ago, Wall Street was sharply divided over whether Amazon would go bust before it even managed to make a go of its original online bookstore. Last year, its stock market value touched US$1t.
But Khosrowshahi's efforts could backfire.
Roger McNamee, a veteran tech investor, calls it "a ludicrous comparison" that, if anything, only serves to highlight Uber's weaknesses. "There are no barriers to entry here at all — they don't have equipment and they don't have employees," he says. "Amazon built distribution and changed the perception of online commerce."
He might have added that Amazon only burnt through about US$1.1b before turning free cash flow positive for good in 2002 — less than a tenth of what Uber has spent, with no end in sight.
Also, its founder, Jeff Bezos, did not boast about the new markets he planned to conquer before even proving his original business idea could work.
In Uber, by contrast, Wall Street has just welcomed an US$70.4b giant with a voracious appetite for cash to match its spending addiction.
From the start, Uber followed a simple plan to dominate the ride-hailing market. It bet that the company with the most drivers on the road would be able to promise the shortest waiting times, attracting more passengers and drivers.
With fewer gaps between rides, drivers would be prepared to accept lower fares, since their overall earnings would be higher. And lower fares would bring more riders, feeding a cycle that eventually forced rivals out of the market.
The catch: it would take subsidies to both drivers and riders to get this flywheel turning. And the payments might need to be maintained for a long period. In Uber's case, that has meant raising an astonishing US$25b in equity and debt over the past decade, including the US$8.1b in new capital from Friday's IPO.
Khosrowshahi has tempered Uber's confrontational, winner-take-all style. It is no longer intent on destroying competitors or fighting with regulators. But his strategy still depends on "winner takes most", a belief that the ride-hailing company with the largest market share will walk off with a disproportionate chunk of the industry's profits.
So far, things have not worked out that way. Far from the competition being sidelined by a war of attrition, local rival Lyft has just pulled off an IPO of its own, and despite its shares losing value now has US$4b on hand to keep up the fight. Didi Chuxing, which dominates the ride-hailing market in China, has taken on Uber in Latin America.
Europe, where Uber has enjoyed an easier ride, is likely to be next, says Dan Chung, chief executive and chief investment officer of Alger, a New York investment group. There is no reason why Uber's rivals will not target its most profitable markets, he adds.
Yet, investors seem happy to keep feeding cash into both ride hailing and food delivery networks — the second market on Uber's list, with Uber Eats.
"We are concerned with the large funding that Postmates, DoorDash and Didi are using to compete aggressively in Uber's most attractive markets," says Walter Price, a tech investment manager at Allianz.
It does not help that, just as it was lining up its long-awaited IPO, Uber's business hit a wall. Quarter-to-quarter growth rates that had been running at nearly 20 per cent two years ago fell to 6-7 per cent last year before plunging to 1-3 per cent in the past two quarters.
Critics argue that the slowdown has revealed fundamental weaknesses in Uber's business. Michael Cusumano, a professor of management at the Massachusetts Institute of Technology, says the mistake has been to regard the company as a "platform" business — a reference to the dominant internet companies that succeed by attracting large amounts of activity to their websites and mobile apps. "I think it's a bad example of a platform — it's a mystery to me why it's had such hype," he says.
Platforms exist to solve imbalances in particular markets, he says: users are prepared to pay for the benefit of reaching others who can provide them with what they need. Uber, by contrast, has to subsidise both riders and drivers to keep them coming back.
"The bigger they get," says Cusumano, "the more countries they go into, the more money they burn."
Uber's performance in the months before the IPO lent weight to the doubters. It has had to ramp up the incentives it pays to drivers to attract them to its network.
As a result, the share of fares it keeps for itself — its "take rate" — has steadily fallen and its growth has threatened to flatline. This year, it has been paying around US$100 million a month in inducements to drivers over and above the fares they collect.
Its supporters claim this is a temporary phenomenon, the result of a buoyant US economy that has brought better employment opportunities elsewhere.
Santosh Rao, an analyst at Manhattan Venture Partners, says the large amount of data the company collects on the 91m users of its service each month should allow it to generate more loyal — and profitable — customers. But he concedes that, after a decade, investors will wonder why Uber has not been working on solving this problem before.
Another warning sign for investors is that the "network effects" that were supposed to underpin its business — making the service more valuable the more people use it — have not turned out to be as strong as the company had hoped. Drivers and riders can use multiple apps at the same time, making it difficult for any one network to get an edge.
And even if Uber ends up with a large part of the ride-hailing market, it will still face plenty of competition that will limit its ability to raise fares. "In most cities, public transport is an option. Walking is an option. There are bike sharing services. Taxi services are [developing] apps," says Chung.
None of this means Uber cannot carve out a profitable business or go on to have a profound impact on transport. But it does leave a big question over what a stable, profitable model would eventually look like.
Based on a range of outcomes, the median valuation for Uber would be four to five times next year's revenues, says George Ortega, lead analyst on Uber at Alger. With annual growth now slipping below 20 per cent, that implies a valuation of about US$60b.
Others suggest it might be a lot less. To turn a profit consistently, it would probably have to set higher prices, says McNamee: "That's almost certain to shrink the market."
Uber's boosters claim that ultimately autonomous cars will change its business for the better. A belief that the driverless future "comes relatively soon and reduces costs significantly" underpins the optimism of many Wall Street analysts, says Price at Allianz.
Even if the technology is adopted on the most optimistic timetable, though, it may not do enough to bail out Uber's business model. Building its own fleet of cars would be "a huge capital cost" that outweighs the savings from not paying driver incentives, says Cusumano.
A new wave of competition could also erode any benefits. With big tech and auto companies hoping to launch robotaxi fleets of their own — including Tesla, the Alphabet subsidiary Waymo and General Motors — prices are likely to fall quickly, says Price.
These doubts have not been enough to seriously dent Uber's stock market debut. At US$70.4b, it is a testament to what McNamee calls a "momentum-driven stock market", where professional investors are jumping on a bandwagon to avoid missing out.
But beneath the razzmatazz at the New York Stock Exchange on Friday, this has been a sobering moment. Uber's IPO valued it at around a third less than the most optimistic predictions in recent months. Investors who paid US$45 a share this week were getting them for nearly US$3 less than Uber sold them for in a private funding round three years ago — a lifetime for a tech start-up.
This suggests that, though stock market investors have just refilled Uber's war chest, wariness about the company has risen and money will be harder to come by. The day when Uber has to face up to the reality of building a sustainable business is finally drawing near.
Written by: Richard Waters and Shannon Bond
© Financial Times