Uber, the app-based ride-sharing system, has attracted a lot of attention for its business model. The company has raised successful rounds of both debt and equity financing, to the point where it was eyeing a $50 billion valuation prior to an IPO, making it the world's most highly-capitalized start up (MacMillan & Demos, 2015). This was towards the end of 2014, which means the company's valuation today would almost certainly be higher. Is an app worth billions? How has it become that Uber is so attractive to investors, even knowing that they are facing regulatory hurdles on many fronts, in particular with respect to the issue of licensing. Uber's Operations

Uber is an app-based ride-sharing system. There are other such systems, but Uber is the largest. There are different tiers of Uber. While the top tier provides quality vehicles and professional, licensed drivers, the lowest tier could be any ride in any car, more or less. A customer uses an app to digitally "hail" an Uber driver, using an automated dispatch system. The driver then comes, and the user pays a rate that depends on both the distance traveled and the volume of traffic in the system at that given point in time. Uber has become the dominant player in this market, with more than 65% share globally. With over 400 cities, Uber has greater geographic spread than its app-based competitors (Premium Herald, 2016).

At this point, Uber's main competition comes from established taxi companies, rather than the other app-based systems. Taxi companies provide the same service, and many now use apps as well as part of their intake and dispatch functions. Further, taxis typically have monopolies in their areas, which Uber usually challenges. In a few cases, taxi lobbies have been powerful enough to keep Uber from a city -- Vancouver is one example -- but in most cities Uber has been able to either work around the taxi lobby or otherwise been able to conduct its operations in direct competition with taxis (Young & McQuigge, 2015). Many passengers prefer Uber to taxis because there are more drivers, often lower prices and the app is more feature-rich, for example in terms of mapping and communication.

Aside from its competitiveness and market position versus other apps, Uber is attractive because it has resonated with consumers. This has, in turn, allowed Uber to expand rapidly around the world. The company's growth trajectory has been attractive to investors as it has added most of the world's major cities, and has plans to enter most of the rest of the world's major markets. The market recognizes, rightly, that there is more room for Uber to expand. First, there are suburban markets. If Uber can succeed in urban markets where competition from taxis is strong, then it should surely succeed in the suburbs where taxi service is relatively poor, the thinking goes. Even in smaller cities where there are limited public transportation options, Uber can fill in gaps in the market. The people who started Uber saw an opportunity in the transportation market where needs were going unmet, and that is why they started Uber. There are still market needs unmet, and Uber is now well-positioned to exploit those needs.

There are other elements to Uber's operation that hold promise for growth as well. First, the company can offer split rides, a.k.a ride sharing. With this, the users would share rides if they were going in the same direction. . A good scenario for this would be leaving downtown areas to return to the suburbs late at night -- people can share the ride and lower the cost. This service, Uberpool, is a new innovation that taxi companies have not done much to encourage, but because it is beneficial to consumers, they have responded positively to it. Self-driving cars are another innovation, an emergent technology that in the long run provides tremendous opportunity for Uber to corner that market, the self-driving tax, by virtue of already holding a dominant position on the app side. The market sees the potential in something like this, where Uber can be a major player in disruptive technology in the transportation field, and thereby capture tremendous market gains. This potential is long-run and speculative, but investors are reasonable to think that at least there is potential there for Uber.

Disruptive Technology

Uber is already a disruptive technology in transportation. The original concept was to leverage the space that was already available in vehicles. Vehicle capacity that was not...

Society needs fewer vehicles, drivers can monetize their spare time, and consumers will also benefit from this increased efficiency. The app itself is not disruptive, but Uber has openly challenged the inefficiencies of taxi systems. That it has been disruptive in countries where the taxis are highly-regulated and supply limited is not surprising, but Uber is succeeding even in the developing world where taxi regulation are loose at best. The company is therefore highly disruptive to the taxi business model.
Where much of its promise lies is with the combination of two disruptive technologies, Uber and self-driving cars. The promise here is of a science fiction future where Uber runs transportation networks -- the cars are in use all the time except when being maintained, passengers essentially having self-driving cars at their fingertips, so that no drivers are required and the vehicle capacity it maximized. Such a system could threaten more economic inefficiency than just taxis -- the need for private, personal transportation would be dramatically reduced.

The market success that Uber has experienced thus far is reflective of the level of disruption that it promises. The company has been able to grow its market share rapidly, to the benefit of consumers and its early investors. Even without the strongly hypothetical upside, Uber's growth and popularity with consumers has been enough to attract investors who only see upside in the company and its stock.

There has been speculation that Uber would have its IPO in 2016. Those rumors have been discounted by the CEO Travis Kalanick in recent weeks, highlighting that Uber wishes to grow outside of shareholder control for as long as it can, in order to maximize the value of such an IPO. The company has been able to raise money for its operations without IPO -- an estimated $10 billion in the past 18 months (Cutmore, 2016). This strategy takes advantage of strong investor interest in Uber without ceding control of the company during this key development phase. Further, the longer Uber can go, and grow, without having to commit to the stock markets, the better this will be for the company, but there will come a time when the markets will be required to provide liquidity to the shareholders (Cutmore, 2016).

Based on its current trajectory, however, Uber will continue to grow rapidly, but will eventually need to tap into capital markets in a bigger way than it already has. Still, the current strategy to delay the IPO as long as possible is a shrewd one, and one that will ultimately serve the existing shareholders well. Uber is still learning a lot about being such a major business, and certainly is learning to handle the backlash that comes from entrenched businesses threatened by its disruptive technology (Cutmore, 2016). Thus, knowing that there is still room in the learning curve for the company, Uber is planning to continue to grow without going public for the time being until it can be a stronger and more global company.

Conclusions

The rise of Uber has excited the investment community. It is not only one of the most successful apps, but one of the most successful start-ups in recent memory. This has allowed it to raise significant capital in the market place, and put it on the radar of investment bankers looking for the next big IPO. The main advantage that Uber has here is that it is still growing and building market share. It dominates its space, but it is a direct competitor to traditional taxis as well, and needs to frame its competitive mindset that way. Further, Uber will benefit from thinking bigger in terms of the sort of potential that it might have down the road -- it may end up being a much bigger company that just the world's taxi market leader.

The idea that a company can develop transformative technology and become a giant is not new -- whether it was Google or Ford, it's been done before -- but investors are always excited when they see such a company. Given how large and important a business transportation is, Uber has definitely positioned itself well in terms of its offering, and what it can show investors to get them interested in the company. . Even though the company does not expect to do its initial public offering any time soon, when it does, it will surely be substantial in nature, one of the largest ones of the year, and maybe even a moonshot.

The question of valuation at this point…