Does Uber Have an IPO Problem?

Since 2009, Uber has leveraged a superior analytics platform to drive a transportation revolution. With established segments such as UberX, UberBlack, UberSUV, etc and new players such as UberEATS and UberRUSH, Uber has only accelerated its pursuit of innovation and disruption over time. Given this context, this paper is going to explore the main potential consequences of an Uber IPO to demonstrate that Uber should remain private for the foreseeable future. While conceding that an IPO can provide ample funds for continued expansion, the main focus will be on how market scrutiny would negatively affect short-term business objectives and how disclosure requirements would cripple Uber’s competitive advantage. Looking beyond the prospect of an IPO, there are viable alternatives in the secondary markets that can ensure continued investor engagement in private fundraising. With these considerations in mind, Uber leadership will be able to better position itself both privately and under the public eye in the months and years ahead.

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Jack Ma, the prolific CEO of Alibaba, recently declared to an audience in New York City, “If I had another life, I’d keep my company private.” Despite launching the largest IPO in history this past June and raising nearly 25 billion dollars, Ma highlights a feeling of frustration with the aftermath and change in business operations associated with going public. Private companies at large share this sentiment – in 2014 the median technology company was 11 years old at the date of its IPO, nearly double the average of 6 years in 2000.[i] This is indicative of a wider debate taking place in boardrooms across the country as to whether or not going public is in the best interests of companies. No company has captured more business headlines or fueled more speculation of a public market entrance than Uber. With its valuation in the private market soaring from $3B in 2012 to nearly $51B today,[ii] many market pundits have questioned why Uber has not yet filed an IPO. Although an IPO has the potential to provide Uber funding for expansion, it should postpone such an action because public market scrutiny would force a change in Uber’s long-term mindset, increased disclosure requirements would harm Uber’s competitive advantage, and public funding would be more expensive than private alternatives.

If Uber were to enter the public markets as a recognizable, high growth company, it would indeed have the potential to raise a significant amount of capital that could be used to fuel its continued expansion. In a strictly economic sense, a firm will consider an IPO as a source of funding when it minimizes the firm’s cost of capital and in turn maximizes its valuation.[iii] Two years after its first institutional round of funding, Amazon launched its IPO in 1997 at a market capitalization of $440 million.[iv] Despite losing millions of dollars and failing to turn profitable until 2001, public shareholders provided the continuous funding necessary for Amazon’s expansion. Jeff Bezos, Amazon’s CEO, was able to convince investors of Amazon’s high short-term capital costs were essential to long-term profitability. Today, Amazon has reached a valuation of more than $315B at an annualized growth rate of more than 41%.[v] Uber has a similar business model that requires large short-term investments to reach scale and profitability. Combine this with a high degree of public interest and interaction with Uber’s platform, public investors have developed a significant demand for ownership in Uber.[vi] Moreover, in comparison to the costs associated with private funding – namely conceding large portions of ownership – the costs of ownership associated with the public markets tend to be cheaper over time.[vii] While Amazon’s success in the public markets does not ensure Uber will face an identical fate, it serves as a supportive case of Uber’s IPO potential. Its business model of rapid expansion implies that it will continue to need more fundraising for the foreseeable future. The public markets have the capacity and demand to meet such a challenge.

Despite the ample funding capacity of the public markets, executing an IPO forces a potentially harmful prioritization of short-term profits over long-term growth strategies. Every company must strike a balance between its short and long-term objectives. It is this decision making that allows companies to sacrifice profits in the near term to realize greater gains in the future. However, a degree of decision making is forfeited when a company enters the public domain. An analysis of 400 companies who either considered or completed an IPO found that the number one reason for remaining private was to preserve decision-making control and ownership.[viii] Following the completion of an IPO, CEOs are beholden to their fiduciary obligation to maximize shareholder value. Market scrutiny and vocal shareholder demands for positive returns shape day to day business operations and force greater weight to be put on short-term profit maximizing objectives.[ix] The result is that sometimes decisions made to boost a company’s stock price in the short-term can run counter to long-term objectives. Investments with long-term returns such as R&D spending may be reallocated towards driving sales in an attempt to boost short-term profits. This shift would be disastrous for Uber. With competitors emerging in domestic and international markets, Uber’s future potential is determined by its current customer acquisition and growth. Simply put, Uber’s ability to make critical business decisions regardless of their short-term profitability is essential for long-term success. In addition to this adverse effect on corporate strategy, Uber’s growth would also be negatively impacted by the regulatory burden imposed by an IPO.

The disclosure requirements associated with filing for an IPO would expose Uber’s proprietary technologies to competitors worldwide and decrease its competitive advantage in the “on-demand” economy. Since Uber demonstrated a market interest in “on-demand” services beginning in 2009, many firms have followed its framework in different horizontals. Companies such as DoorDash, Postmates, Lyft, BuddyTruck etc. have all capitalized on the massive market opportunities in the “on-demand” space. All of these companies are direct competitors to Uber in that they are horizontal adaptations of Uber’s core analytics platform. While Uber is currently focusing on using its platform for direct consumer transportation, it has begun to roll out horizontal services such as UberRUSH and UberEATS that compete with many of the aforementioned companies. Thus, Uber’s competitive advantage is not simply in its ability to provide transportation, but rather in how it can leverage a superior analytics platform to provide unparalleled services across multiple sectors. Through the disclosure requirements and investor relations mandated in the public markets, Uber would stand to expose both the current operations and future plans of this analytics platform. In such a hyper competitive market with intense consumer and investor focus, ceding even the slightest advantage to Uber’s competitors could mean the difference between the success or failure of a new product.[x] Uber can avoid this disclosure issue as well as changes to its corporate strategy by continuing to focus on funding in the private markets.

Private venture capital markets have demonstrated an insatiable appetite for the funding of Uber’s operations, removing the pressure for a near-term IPO. The US is on track to set a record amount of venture capital spending of more than $70B in 2015, compared to $56B in 2014.[xi] Factors such as the low interest rate environment, increasing participation by corporate investors, and new capital sources such as hedge and mutual funds are driving this growth trend. Taken together, these factors have a created an environment where the private cost of capital is lower than public alternatives.[xii] So long as this dynamic remains true, Uber will be able to exercise greater flexibility and growth-centric business strategies in the private markets. These factors, however, are not static. Each factor determining the private cost of capital is predicated on the belief that an investment in Uber will yield a high return over time. As investors become worried that Uber is postponing its IPO and resulting liquidity event indefinitely, there could be resistance towards the continued funding of its operations. In order to both maintain investor enthusiasm while avoiding the public market, Uber should look towards new cash strategies.

Uber can address investor demands for an IPO style “cash-out” event by exploring liquidity alternatives in the private markets. As the period between a company’s first financing round and its public exit increases, it becomes more important for the company to provide its early investors financial incentives to remain engaged and supportive of future funding. Over the past few years, activity in the secondary markets has grown significantly to meet this need.[xiii] Central to this expansion was a provision in the 2012 JOBS Act that raised the total number of allowed shareholders in a private company from 500 to 2,000.[xiv] This change enables Uber to access the secondary markets more readily through tender offers.[xv] A tender offer is a process by which a company issues equity to outside investors and uses those proceeds to buy back shares from existing investors. By utilizing this provision, Uber can reward some of its early investors monetarily and at the same time encourage future investments through the precedent set of successful liquidity exits. Other large privately owned technology companies such as Airbnb, Square, and Dropbox have completed such sales in the past. Although in the current market environment there is still high demand for Uber’s funding rounds, market conditions can change in an instant. Uber should hedge its ability to continue raising funds by showing its commitment to providing high returns for its investors through an instrument in the secondary markets.

No longer is an IPO the de facto solution to continued funding for high growth technology companies. With an understanding of how going public affects long-term business strategies and competitive advantages, smarter alternatives are clear. Secondary markets can augment Uber’s ability to raise money privately and continue its operations unaffected by public scrutiny. Simply put, Uber does not currently have an IPO problem. Given market conditions and Uber’s demonstrated vision for the future, remaining private is both financially prudent and attractive for current and prospective investors. However, there are causes for concern on the horizon. In the past few weeks many venture capitalists have indicated a sentiment of over-exuberance in the private markets that may result in a future slowdown in activity.[xvi] With more than 100 companies privately valued at greater than $1B (so-called unicorns), an increase in scrutiny and financial discipline may see some companies struggle to raise future funds.[xvii] Uber, though, is in a unique position to use a market downturn to its advantage. If it positions itself correctly in the private markets, investors fleeing companies that have no demonstrated business models or routes to profitability will gravitate towards Uber. This trend will keep Uber’s private cost of capital low for the foreseeable future, rounding out the net positive impact of remaining private. Coincidentally, for a company that prides itself on revolutionizing transportation, Uber is on track to also be remembered for its unprecedented utilization of private markets for growth and expansion. In this sense, and in many others, Uber’s most transformative days are still ahead of it.

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Selected Bibliography

Academic Sources:

Brau, James C., and Stanley E. Fawcett. “Initial Public Offerings: An Analysis of Theory and Practice.” American Finance Association 61.1 (2006): 399-436. Web.

Foster, Tom. “Do You Really Want Your Business to Go Public?” Inc.com. N.p., 11 Nov. 2015. Web. 16 Nov. 2015.

Guo, Re-Jin, Baruch Lev, and Nan Zhou. “Competitive Costs of Disclosure by Biotech IPOs.” J Accounting Res Journal of Accounting Research 42.2 (2004): 319-55. Web.

Mantecon, Tomas, and Percy Poon. “An Analysis of the Liquidity Benefits Provided by Secondary Markets.” Journal of Banking & Finance 33.2 (2009): 335-46. Web.

Non-Academic Sources:

Cohan, Peter. “4 Signs That Silicon Valley’s Tech Bubble Is Bursting.” Forbes, 11 Oct. 2015. Web. 16 Nov. 2015.

Demos, Telis. “More Startups Aim to Keep It Private.” WSJ. Wall Street Journal, 1 Jan. 2015. Web. 17 Nov. 2015.

Hook, Leslie. “Private Share Trading Takes off as Tech Companies Shun IPOs.” Financial Times. N.p., June 2015. Web. 17 Nov. 2015.

Macmillan, Douglass. “Uber Valued at More Than $50 Billion.” WSJ. Wall Street Journal, 31 July 2015. Web. 17 Nov. 2015.

Sharf, Samantha. “Is The IPO Outmoded? Why Venture Backed…e Waiting Longer To Go Public.” Forbes. Forbes Magazine, 24 Dec. 2014. Web. 17 Nov. 2015.

“U.S. On Track To Break $70 Billion In Venture Capital Funding In 2015: KPMG Report.” KPMG, Nov. 2015. Web. 17 Nov. 2015.

Winkler, Rolfe. “Tech Firms Are Notably Scarce in IPO Market.” WSJ. Wall Street Journal, 10 Sept. 2015. Web. 17 Nov. 2015.

[i] Demos (2015)

[ii] Macmillian (2015)

[iii] Brau p. 400 (2006)

[iv] Sharf (2014)

[v] Brau p. 401 (2006)

[vi] Macmillian (2015)

[vii] Brau p. 400 (2006)

[viii] Brau p. 400 (2006)

[ix] Foster (2015)

[x] Guo p. 320 (2004)

[xi] “U.S. On…” (2015)

[xii] “U.S. On…” (2015)

[xiii] Mantecon p. 335 (2009)

[xiv] Hook (2015)

[xv] Hook (2015)

[xvi] Cohan (2015)

[xvii] Cohan (2015)

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I grew up in a small town called Orinda, about 20 minutes to the East of San Francisco. Naturally curious, eager to learn, intuitively organized and empathically geared – I strive to make conscious decisions to drive impact. My mind never stops working. Whether in the classroom, professional environments, volunteering capacities or personal hobbies, I enjoy thinking critically about my surroundings and problem solving to find solutions.

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