Will Uber Ever IPO and Allow Early Investors Out

Introduction
One global company that has taken off like a rocket in recent years is Uber—the ride-sharing corporation whose business is based entirely on an app and the concept that people are willing to pick up other people in their own cars for a small fee, with transactions conducted entirely through the app. Uber became immensely popular following its inception in 2009 and has expanded across the world in short order, launching into various other forays and offshoots from the ride share concept: now there is Uber Eats, a food delivery service, and Uber’s investment in autonomous cars that drive themselves (the supposed future of driving). Questions remain, however, about Uber’s financials, particularly in the wake of its mounting cash burn problems, its dwindling valuation, and its exodus of financial officers and executives (). This paper will discuss Uber’s credibility and the financial issues it faces and how the company can turn its problems around.
Background
Uber is a private company that is currently facing a host of government probes and public criticisms regarding its use of consumer data, its business model, its finances, and its ethics (Newcomer, 2016; Romm & Bhuiyan, 2017). As a private company and investment unicorn for venture capitalists, Uber shot straight up in terms of valuation, with a promise of growing into profitability through monopolistic enterprise (Kaminska, 2016). However, as the public has gotten more and more interested in Uber and the talk of an IPO has escalated, the company has been obliged to share more of its finances and EBITDA in order to satisfy curious investors outside Silicon Valley. The result has been bewildering. As Huston (2017) notes, “if Uber Technologies Inc. had been a public company in 2016, it would have been among the top 10 biggest money losers.” Net losses of $2.8 billion on net revenue of $6.5 billion in the West with another $1 billion net loss in China for total net loss in 2016 fast approaching $4 billion. This comes on top of a valuation of $68 billion from a round of funding in mid-2016, though its nearest competitor, Lyft, is valued only at 7.5 billion USD. Uber’s EBIDTA—earnings before interest, tax, depreciation and amortization-basis—indicates, at least from what the private company has been willing to reveal so far—that its $68 billion valuation is extremely high considering its mounting losses. Nonetheless, as McKenna, Owens and Huston (2017) report, “Uber Technologies Inc. says the Securities and Exchange Commission has signed off on its preferred description of its business model, giving investors the first inkling of how regulators might treat the company if and when it files for an Initial public offering.” In other words, the firm says the SEC has given it the green light to allow initial investors to dump their shares in the retail market with an IPO based on a deplorable EBITDA.
What to Do
While Uber is currently facing at least five separate Justice Department criminal investigations, the company is still planning a 2019 IPO (Blumberg, 2018). The sense is that early investors want to exit their positions before the company’s valuation dips any further (it has descended about 33% from its 2016 valuation already). Currently Uber’s debt as equity approach has allowed it to expand but “the core problems with the current business model of subsidizing drivers and riders will catch up with them,” according to Hawkins (2017). In order to get itself into better legal and ethical standing from a financial point of view, Uber has a few options and it has already begun to engage in them.
First, it has to divest of unprofitable subsidiaries. It has done this in China already by dumping its China ride share program, which was weighing on the company’s books. But this is just the beginning. Uber has an investor problem and its need to cover its tracks in terms of debt as equity to help get itself to IPO is causing waves among its biggest investors today. As Smith (2017) notes, Benchmark has a substantial stake in Uber that is worth billions and sits on the Board—but ex-CEO Kalanick wanted Benchmark off the Board: “That’s impossible unless they get Benchmark to give up, as in sell, its stake. And despite this group making an offer to buy Benchmark out, no one with an operating brain cell thinks they can round up the money.” This is important considering Uber’s exaggerated EBITDA promises. Smith (2017) reveals why: “Benchmark contributed only 0.2% of Uber’s capital ($27M/$13B) but has 13% of equity ($8.7B/$68B) probably more if you count voting shares. This suggests that later investors put staggeringly larger sums in, for much smaller equity shares, and are facing much greater risk than Gurley and Pishevar of never seeing returns on the money they’ve put in. So there may be even more intra-Board warfare that hasn’t reached the surface yet.” Benchmark used the “Softbank is looking to invest” story to try to oust Kalanick as CEO, due to the poor EBITDA—the ploy did eventually work and now the new CEO wants an IPO to happen stat—presumably so that investors like Benchmark can dump their shares to retailers and capitalize enormously on their initial investment. However, none of this looks good for Uber’s IPO prospects—and in order for Uber to comply legally and ethically with the SEC, it must clear up the actual nature of its financial reporting.
What must Uber do? First, it must actually file its S-1. McKenna et al. (2017) state that “the move to adopt new accounting rules formulated by the Financial Accounting Standards Board eliminates a major obstacle for an Uber public stock offering by resolving a complex issue slowing down offerings by other private companies. According to a poll by Deloitte, only 8% of companies planning to go public have already adopted the new revenue-recognition requirements.” However, this might not go smoothly: “The SEC may revisit the issue when Uber files its S-1 because the facts have changed, or because the regulatory agency has changed its views based on its experience with other companies as they adopt the new rules. Finally, the SEC may see something in Uber’s filing that’s different from what was presented during the preclearance.” In other words, Uber has not been exactly transparent in its dealings, and now that its valuation is dwindling, early investors are anxious to unload as soon as possible.
For Uber, it is an issue of gross versus net revenue presentation. The former has been the method preferred for years for the firm, but now that regulators are paying closer attention, Uber has a duty to be in compliance with standards and in particularly with the new revenue-recognition rules in effect as of January 2018.
The other issue that Uber faces is the fact that its business model is predicated on a slanted and most likely illegal application of its drivers as employees take. For instance, “the determination that Uber is the agent in its ride-sharing transactions is consistent with the company’s messaging regarding its business model, which rests heavily on the premise that Uber drivers are correctly classified as independent contractors, not employees” (McKenna et al., 2017). However, Uber’s use of drivers in this way is misleading and has become a major court issue. As McKenna et al. (2017) show, “that claim has been challenged in court, and a legal ruling that forced the company to reclassify drivers as employees would significantly disrupt the company’s business model and place in question its $68 billion valuation. Its revenue and cost-of-sales accounting likely would have to change as well, since drivers’ portion of the revenue and their salaries would be on Uber’s books.” In other words, Uber must correct its drivers as employees situation in order to be in full compliance with the law, and this will in turn impact its financials. In order to right its situation, make itself once again appealing to big investors, and to be in full compliance with the law, Uber must therefore comply with the new revenue reporting policy of the SEC and conform to tax standards in terms of how it classifies its drivers as employees.
Conclusion
In conclusion, Uber has come a long way since 2009, but to keep this company from losing more of its valuation, it must address the issues that investors, the SEC and the DOJ are interested in. Currently, the company is facing numerous investigations and lawsuits, but with the right guidance it can take the necessary steps that will allow early investors to exit their investment profitably and allow the company to enter into a new legal and ethical standing with new investors. The company must therefore clarify its employees/drivers situation, adjust its EBITDA as a result, be in compliance with SEC revenue reporting policy, and manage clean up its image as a company that has been rocked by scandals, over-exaggerated promises of revenue (not net), and its unicorn status as a Silicon Valley VC dream come true that so far has proven to be overambitious and not focused enough on its core business.
References
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https://www.bloomberg.com/news/articles/2018-01-16/why-uber-needs-to-take-the-high-road-to-an-ipo-quicktake-q-a
Hawkins, A. (2017). Can Uber be saved from itself? Retrieved from
https://www.theverge.com/2017/3/6/14791080/uber-sexism-scandal-strike-waymo-lawsuit-travis-kalanick
Huston, C. (2017). Uber losses would have ranked near top among public companies in
2016. Retrieved from https://www.marketwatch.com/story/uber-losses-would-have-ranked-near-top-among-public-companies-in-2016-2017-04-14
Kaminska, I. (2016). The taxi unicorn’s new clothes. Retrieved from
https://ftalphaville.ft.com/2016/12/01/2180647/the-taxi-unicorns-new-clothes/
McKenna, F., Owens, J. & Huston, C. (2017). Uber believes it has SEC nod for earnings
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Newcomer, E. (2016). Uber isn’t profitable in the U.S. and is on track to lose $3 billion
in 2016. Retrieved from https://skift.com/2016/12/21/uber-isnt-profitable-in-the-u-s-and-is-on-track-to-lose-3-billion-in-2016/
Romm, T. & Bhuiyan, J. (2017). Uber is under investigation by multiple states over a
2016 data breach. Retrieved from https://www.recode.net/2017/11/22/16690556/uber-data-hack-57-million-state-investigation
Smith, Y. (2017). Uber: Battle to the death. Retrieved from
https://www.nakedcapitalism.com/2017/08/uber-battle-death-benchmarkkalanick-power-struggle.html