It’s now May 21, 2019. It’s been 11 days since Uber became a “public reporting company” by IPO’ing its business. Its shares, at 2:30 p.m. Eastern Daylight Time, are currently trading at $41.77 per share, more than three dollars below its opening price on May 10th, the day of its IPO. Yet, this morning, in spite of the embarrassment that has become Uber and its smaller competitor, Lyft, Pitchbook is reporting that yet another two companies, ones of which almost no one has ever heard, have scaled those same stratospheric heights that both Uber and Lyft once also scaled to become the first of a herd of new billion-dollar companies, nowadays commonly referred to as “unicorns”.
These two largely unknown companies, Margeta and Ivalua, are doing this by fundraising rounds involving a fraction of their shares at an exalted per share price. This then causes the two companies, by virtue of the extrapolation that has become de rigueur since Facebook’s initial valuation after the sale of a small portion of its shares to Microsoft back in October of 2007[1] (and which has resulted in post-2008 venture capitalists becoming fabulously wealthy), to be valued at more than a billion dollars and, in one of the two cases, at more than two billion dollars. Is it any wonder that, as some studies have suggested, more than half of millennials fully expect to be millionaires by age 50??
The important question to ask here though is, why? Why do these ridiculous and unsupportable valuation practices persist? And, what damage is it doing to an entire generation of Americans who, suffering under severe delusion, will end up destitute, disappointed and very, very disaffected. Can’t you just hear them singing their future refrain, “fool me once, shame on me, fool me twice, shame on you” with a vengeance, and the inevitable draconian political and social consequences that will follow? Fashioning astronomical valuations out of thin air, absent any justification for so doing supplied by things such as, say, “real” revenues or, God-forbid, profit is, ultimately, a recipe for disaster, if not now, then ultimately.
All of which reminds me of a character from Joseph Heller’s Catch 22, a book which viewed the absurd theatre of a world darkened by war and mass insanity with tongue-in-check sarcasm and cutting humor. Right there, in the midst of a novel about an absurd world, stands the character of Milo Minderbinder, who believes, as does Uber and its imitators (and, apparently, as do the most cynical / deluded (pick your choice) investors in companies like Uber), that you can “makeup for lack of profits” simply by “increasing volume”.
Like Uber during its Travis Kalanick days, Milo is an egomaniacal bully who abuses power and, like Uber, managed to build an empire on someone else’s dime (in the case of Milo, the U.S. Government, while in Uber’s case, the money pouring in from its investors, e.g., the 2015 report that only 41 cents of every ride dollar that Uber takes in comes from riders, with the rest being supplied by subsidies from venture capital[2].
The point of all this is that if Milo Minderbinder is, as we can clearly see from his appearances in the novel, a morally-compromised monster, intellectually and mentally impaired, with a business model devoid of any “real world” substance (unless you’re talking about “essential services” that are run, not from a for-profit perspective, but rather by subsidies from the welfare state), where does that leave Uber? Supporters claim, “don’t worry, it’ll all work out in the wash …”, just as soon as Uber becomes an even bigger bully by, supporters gleefully proclaim, becoming a monopolist!
Yet, there have been clear signs on the horizon for quite some time now that Uber will never be able to secure that desired goal, even if one assumes that the economy and the consumers who depend on ride-sharing services would somehow benefit from such arrangement. Already Didi, Lyft and other competitors are eating into Uber’s dream of world conquest. And, as every new accident proves, self-driving cars are a long-way from being perfected, if they ever are, at least in our lifetime and absent major innovations in infrastructure (unlikely, given the current state of the national debt and the inability of Congress to come to any meaningful understanding of how to control it).
So, I come back to my original question: when are we, as a society struggling to move forward and create a meaningful future for our children, their children and their children’s children, going to abandon companies like Uber and its imitators, come to our senses and start to value startups in a reasonable manner predicated upon such important things as real revenues and actual profits. A bright future is not just about addressing climate change, social justice and income inequality; it’s also about using just a smidgen of common sense and calling out the emperor (or Milo Minderbinder-like companies) when, despite all the acclaim to the contrary, he and they are simply “not wearing any clothes”.
[1]“The two companies said on Wednesday that Microsoft would pay $240 million for a 1.6 percent stake in Facebook. The investment values Facebook, which is three and a half years old and will bring in about $150 million in revenue this year, at $15 billion.” Source: New York Times, “Microsoft Buys Stake in Facebook”, Brad Stone, October 25, 2007.
[2]“Uber passengers were paying only 41% of the actual cost of their trips; Uber was using these massive subsidies [from investors] to undercut the fares and provide more capacity than the competitors who had to cover 100% of their costs out of passenger fares … This is critical because it suggests we’re dealing with a charity case in disguise.” Source: Can Uber Ever Deliver? Part One – Understanding Uber’s Bleak Operating Economics posted on Naked Capitalism, November 30, 2016 by Yves Smith (from a four part series by Hubert Horan, a 40+-year transportation industry expert).
Ray Burrasca is the Executive Vice President and Chief Operating Officer of Archimedes’ Offspring, an unincorporated “umbrella” organization whose mission is to make “reasonable returns investing” affordable for the ordinary Joe’s and Jane’s and, in the process, to reinvent innovation in the America.He can be reached at ray@archimedesoffspring.com or by phone at (303 910-2344.
