Uber's nightmare scenario: How everything could go wrong for the world's hottest new company
Uber is the most valuable private tech company in the world right now.
In July, Uber closed a $1 billion round of funding from Microsoft and Indian media company Bennett Coleman & Co.'s investment subsidiary.
The new funding valued the company at $50 billion, making Uber the most valuable private tech company in the world. Since it was founded five years ago, Uber has raised an astounding $8.2 billion in funding.
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Uber's $50 billion valuation also means that Facebook is no longer the only company to have a valuation of that level before going public.
But Uber isn't infallible. The company has competitors, it's working through regulatory battles, and it relies on independent contractors. So we decided to look at some of the nightmare scenarios Uber could potentially find itself facing in the future.
More public relations blunders could cause public opinion of Uber to shift.
In 2014, Uber put its foot in its mouth several times. In November at a dinner for "influencers," an Uber executive named Emil Michael suggested the company could theoretically dig up personal information on reporters who are critical of the company. BuzzFeed Editor-in-Chief Ben Smith then reported on those comments.
Lyft reported it had its best week ever during the same week that Uber's executives were caught up in all that drama. If that's any indication, future public relation blunders could cause public opinion of Uber to shift, and consumers could choose rival companies over Uber.
Uber needs its drivers for now — but drivers don't need Uber.
Uber relies heavily on a team of drivers, independent contractors who work for the company.
Groups of these drivers across the country have protested the company in the past year. They're upset with Uber's competitive pricing, which affects drivers' incomes. Some have said they're barely making minimum wage. They don't understand why Uber hasn't integrated a feature to let them accept tips from customers. They're terrified of Uber's five-star rating system, and say that even one bad rating could be enough to knock them out of Uber's driving system and prevent them from driving for the service in the future.
Uber's drivers are volatile. They aren't required to work for Uber; they can stop and start whenever they want. They know they have options — there are alternatives for them within the same space, like driving for Lyft or Gett. Some could get out of the black-car driving game altogether. If Uber's drivers were, as a group, to suddenly up and stop driving for the company, Uber might feel it.
Its drivers can also be a liability for the company.
Drivers are unpredictable, and can occasionally be a liability for Uber.
An Uber driver in San Francisco was charged with vehicular manslaughter after killing a six-year-old girl in San Francisco on New Year's Eve last year. In September 2014, an Uber driver was accused of smashing a passenger in the head with a hammer and driving away. That same month, an Uber driver in Orlando was accused of groping a female passenger and then blaming it on the way the woman was dressed.
The list of stories about Uber drivers behaving badly goes on. It's not unique to Uber — taxi drivers don't have a totally clean track record, either — but city taxis aren't in the public eye the way Uber is. Additionally, city taxi services usually don't promote themselves with the same level of security screenings that Uber promises to hold its drivers to.
Some customers who say they've been assaulted by drivers are taking legal action. A woman who was allegedly raped and beaten by her Uber driver in Delhi, India, tried to sue the company in US court (She later dropped the suit). While Uber has the money and time to deal with lawsuits like these, they could still take a toll on the company.
Google's self-driving cars could run Uber off the road.
Bloomberg has reported that Google is "going to war" with Uber. According to Bloomberg, Google is actively seeking its own car-hailing technology. Google is also, famously, researching self-driving cars. Bloomberg's report indicated that this could topple Uber, bringing self-driving cars-on-demand to roads before Uber ever has a chance to get into autonomous cars.
The Wall Street Journal later reported that Google was simply testing an internal program, a carpooling service for its employees, and that the entire issue had been "blown out of proportion." Additionally, this internal service "isn't associated with the company's driverless car program."
And though Uber has a seemingly bottomless war chest of funding, Google has a $446.4 billion market cap.
In the future, Uber CEO Travis Kalanick has said, its drivers will be replaced with driverless cars. Earlier this year, Uber announced it was partnering with Carnegie Mellon University to research self-driving cars. It's no secret that autonomous cars are an area Uber wants to explore. But if Google could eventually get there first and do it just as well as Uber can, it would give Uber a run for its money, or at least create some competition.
Uber could lose out in Asia.
Uber's December fundraising round — in which Uber raised a massive $1.2 billion — was intended to allow Uber to "make significant investments, particularly in the Asia Pacific region."
However, a global car-hailing startup alliance could cripple Uber's efforts there.
Didi Kuaidi — Uber's biggest competitor in China — and Lyft, Uber's biggest US rival, recently announced the two companies were teaming up to take on Uber.
The strategic partnership will let the companies share technology, product development, and local resources, and when US users of Lyft go to China (or when Didi users come visit the US), they'll be able to pay in their native currency on each app.
But this global alliance against Uber could extend beyond just the US and China, ostensibly giving Uber a run for its money.
According to The Wall Street Journal, Lyft and Didi are in talks to expand their alliance with other Asian ride-hailing companies: India's Ola and Singapore's GrabTaxi.
Ths isn't entirely unexpected. Earlier this year, BuzzFeed News reported that Softbank Capital, which has funded on-demand ride-hailing startups GrabTaxi and Ola, was behind a global alliance to take on Uber. Executives at both GrabTaxi and Ola, which are Asia-based companies that use taxis instead of private drivers, told BuzzFeed News they were working on "forming a global alliance of regional players."
Though Uber operates in a number of Asian markets, including Beijing, Bangkok, and Tokyo, Uber has faced obstacles in Asia. South Korea has vowed to shut down Uber's operations in the country. As TechCrunch notes, "Korean law doesn't allow technology companies to store payment data as part of their purchase workflow, but instead requires consumers to retype their information with every purchase, ostensibly for security reasons."
By providing a similar service that is familiar with local laws and cooperates with local governments, this alliance could kneecap Uber in Asia, a huge potential market that relies heavily on taxi services.
Government crackdowns could close the regulatory loopholes that have helped Uber operate.
Uber's aggressive business model has ostensibly helped it much more than it has hurt the company. It sets up business in cities without asking permission from local governments. Once it's up and running, Uber will either work with or in defiance of local government.
Last year Uber focused on its policy team, hiring former Obama strategist David Plouffe as its SVP of policy and strategy. This team has allowed Uber to expand into politics, effectively making Plouffe Uber's "campaign manager." Uber's policy team has most recently shed the company's aggressive image to work with cities as opposed to working in defiance of them. A recent example of this is Portland, Oregon. In December, Uber agreed to stop operating in Portland while city officials create new regulations for taxis.
But cities, states, and countries aren't universally welcome to working with Uber. Amid regulatory concerns, Nevada became the first US state to suspend Uber's operations, though Uber now operates in Las Vegas.
Uber is having a different set of challenges in other countries, especially Germany: Uber's services aren't taking off there in part because the country's taxis are Mercedes, and thus much nicer than a typical American taxi. Germans don't seem enticed by a service like Uber even if it's much cheaper. Courts in Hamburg and Berlin previously upheld a ban on the service, saying that Uber doesn't comply with German laws. Uber, for its part, has since started working within the law in Germany, launching a licensed driver service that complies with local laws.
France has banned Uber's low-cost UberPop service. A Dutch court also ruled that in The Netherlands, Uber couldn't work with unlicensed drivers (drivers with licenses and drivers who don't seek payment can still legally operate, however).
This is all to say that if governments around the world continue cracking down on Uber, and if Uber isn't complicit with local laws, it could spell trouble for the company, which has emphasized its focus on international growth.
Nobody knows what Uber's IPO will hold.
After its $1 billion round of funding in July, Uber was valued at $50 billion — the highest valuation of any private company. As early as this year or next, Uber could go public. But some analysts say Uber's huge valuation could present the company with a lot of expectations Uber may struggle to meet.
One such expectation: "Analysts say Uber must at least double its current market value at the time of its IPO to satisfy investors, which would put the company in the same league as Facebook, which was valued at $104 billion at the time of its public offering," says Heather Somerville, in a bearish story about Uber in the San Jose Mercury News.
Aswath Damodaran, a professor of finance at Stern School of Business at New York University, told the Mercury News: "By raising this amount of money, they are setting themselves up to be the next Facebook. Does Uber have the potential to be the next Facebook? Absolutely. But keep in mind the first big disrupter might not always be the winner."
Whe Uber files for its IPO — which it will, especially given that the company reportedly has a deal with Goldman Sachs that says if Uber doesn't go public in four years it will have to pay interest to Goldman Sachs — Uber will have to disclose its finances. Company filings may show that Uber's not growing as fast as investors thought it would.
As a public company, Uber will also not be allowed to make the same public relations missteps that it's made in the past.
Uber is reportedly losing a lot of money.
Uber has traditionally been tight-lipped about its finances, but a leaked document, obtained by Gawker, suggests the $50 billion company is wildly unprofitable.
The documents that Gawker obtained, which appear to show Uber's profits and losses for 2012, 2013, and some of 2014, suggest the company is losing a significant amount each year.
Uber's net revenue in the first and second quarters of 2013 was a combined $32 million, according to the document, and its numbers for the second half of the year were about $72 million, bringing its 2013 annual revenue to $104 million in total.
Gawker's documents also show that while the company's revenue has been growing quarter over quarter, its losses are also increasing. Its losses in 2012, according to Biddle, totaled $20.4 million. In the first half of 2013 the company lost more than $15 million.
That's not totally surprising, and it certainly doesn't mean the company is in any grave danger.
Many tech companies that raise a lot of money aren't profitable, and many go public while they're in the red. Just look at Amazon.
"Shock, horror, Uber makes a loss. This is hardly news and old news at that," Uber told Business Insider in a statement at the time. "It's the case of business 101: you raise money, you invest money, you grow (hopefully), you make a profit and that generates a return for investors."
One lawsuit could alter Uber's business model.
Uber is in the midst of a lawsuit brought on by drivers that could change the company's business model.
The gist of the lawsuit argues that the company's drivers should be reclassified as employees as opposed to independent contractors. As independent contractors for Uber, drivers pay all their expenses out of pocket: gas, maintenance, insurance, and detailing, just to name a few.
Uber suffered a major legal setback when a San Francisco judge ruled that the jobs of Uber drivers in California are similar enough that workers can sue the company as a class instead of as individuals.
Last week, Uber filed to appeal the class-action status of its lawsuit, The Wall Street Journal reported.
Startups use contractors for the simple reason that they are a lot cheaper than employees. When you're an independent contractor, your employer does not have to consider paying into Social Security or withholding taxes.
When the home-cleaning startup MyClean switched from an independent-contractor model to one with full-time employees, the startup saw its labor costs go up 40%, according to Kevin Roose, writing for New York magazine. If MyClean is any indication, Uber losing the lawsuit against the group of its California drivers could set a precedent for future lawsuits and other startups that rely on independent-contractor models, and could mean its labor costs could go way up.
None of these scenarios will likely cause Uber serious harm in the long run. Uber is excellent at what it does, and investors are going crazy for Uber.
Some of Uber's earliest markets are basically minting money, generating hundreds of millions of dollars in revenue annually. In November, Business Insider obtained an internal Uber presentation that was created in early 2014. Most of the data is just from December 2013, but even so, the data within the document gives every indication that Uber is far from being done growing.
In its biggest markets — Washington, D.C., New York City, Chicago, San Francisco, and Los Angeles — Uber logged more than 100,000 trips per week as of last December. Here's Business Insider's Alyson Shontell:
In December 2013, Uber generated about $11.7 million in Washington, D.C. (a ~$141 million annual run rate). It generated $26 million in New York City, or an annual run rate of $312 million. In Chicago, Uber generated $12.7 million for a run rate of $152.4 million. In San Francisco, Uber generated $17.7 million, a run rate of $212.4 million. Los Angeles generated somewhere between the revenue of New York and San Francisco.
These run rates would generate about $1 billion a year, and that doesn't even take into account Uber's growth in 2014. Year over year from New Year's Eve 2012 to New Year's Eve 2013, Uber's growth rate was a whopping 369%.
Sources close to the company have said Uber's gross revenue is expected to hit about $10 billion by 2015. Since Uber keeps 20% of gross revenue, the company would be keeping about $2 billion in net revenue.
Business Insider's Henry Blodget adds that Uber's revenue growth rate was 300% this year, and next year it's expected to be another 300%. Blodget also says investors expect the company to have an initial public offering in the next few years, at a valuation of $50 billion to $100 billion.
For comparison's sake, not only has Uber reached a $50 billion valuation in an impressive five years since it launched — it did so much faster than Facebook. According to BI Intelligence, it took three years for the social media giant to get to a billion-dollar "unicorn" valuation, and it was "only" worth $15 billion by its fifth year. It took almost 8 years for Facebook to get to the $50 billion threshold, before hitting its massive $100 billion IPO in 2012. Facebook is now worth around $225 billion.
The reason this is happening is Uber provides something of value: It gets you anywhere you need to go at a reasonable price. It sounds like a simple concept, but Uber was the first to perfect this process. You just tap a couple of buttons on your phone and you can see your car and driver on a map, heading your way. The driver won't pick up anyone else, so you don't need to fight people off the street to get a ride.
And unlike cabs, Uber drivers must be on their best behavior, since negative reviews can affect their ability to drive for Uber in the future. Moreover, your credit-card information is always saved in the app, so you don't need to fumble for your wallet at the end of the ride. It's not perfect, but it's exceedingly better than taking a random yellow cab off the street.
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