Uber's Financial Crisis: IPO Challenges and SEC Compliance

Introduction

One global company that has grown explosively in recent years is Uber — the ride-sharing corporation whose business is built entirely on a smartphone app and the premise that people are willing to transport others in their own vehicles for a small fee, with all transactions conducted through the platform. Uber became immensely popular following its inception in 2009 and expanded across the world rapidly, branching into various offshoots of the ride-share concept: Uber Eats, a food delivery service, and significant investment in autonomous vehicle technology — the supposed future of transportation. Questions remain, however, about Uber's financials, particularly in the wake of mounting cash burn problems, a dwindling valuation, and an exodus of financial officers and senior executives. This paper discusses Uber's credibility, the financial issues it faces, and how the company can turn those problems around.

Background: Uber's Financial Position

Uber is a private company that has faced 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's valuation shot upward with the promise of growing into profitability through near-monopolistic enterprise (Kaminska, 2016). However, as public interest in Uber intensified and talk of an IPO escalated, the company was obliged to share more of its finances and EBITDA in order to satisfy curious investors outside Silicon Valley. The result has been troubling.

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." The company posted net losses of $2.8 billion on net revenue of $6.5 billion in the West, with an additional $1 billion net loss in China — bringing total net losses in 2016 to nearly $4 billion. This came alongside a valuation of $68 billion from a mid-2016 funding round, even though its nearest competitor, Lyft, was valued at only $7.5 billion. Uber's EBITDA — earnings before interest, tax, depreciation, and amortization — indicates, based on what the private company has been willing to reveal, that its $68 billion valuation is extremely high given 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 asserts that the SEC has given it the green light to allow initial investors to sell their shares on the retail market through an IPO, despite a deeply problematic EBITDA picture.

Divestiture and Investor Conflicts

While Uber was facing at least five separate Department of Justice criminal investigations, the company was still planning a 2019 IPO (Blumberg, 2018). The prevailing sense was that early investors wanted to exit their positions before the company's valuation declined further — it had already fallen approximately 33% from its 2016 peak. Uber's debt-as-equity approach had enabled its expansion, but, according to Hawkins (2017), "the core problems with the current business model of subsidizing drivers and riders will catch up with them." In order to achieve better legal and ethical standing from a financial perspective, Uber had a few options, and it had already begun to pursue them.

First, it needed to divest unprofitable subsidiaries. It had already done this in China by exiting its China ride-share program, which had weighed heavily on the company's books. However, this was only the beginning. Uber faced a serious investor relations problem, and its need to manage debt as equity in preparation for an IPO was creating friction among its largest investors. As Smith (2017) notes, Benchmark held a substantial multi-billion-dollar stake in Uber and held a Board seat — but former CEO Travis Kalanick wanted Benchmark removed from the Board. Smith (2017) explains the financial stakes: "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... of never seeing returns on the money they've put in."

Benchmark reportedly used the prospect of a SoftBank investment to help oust Kalanick as CEO, citing poor EBITDA performance. The strategy ultimately succeeded, and the new CEO moved to accelerate the IPO — presumably so that investors like Benchmark could sell their shares to retail buyers and capitalize enormously on their initial positions. None of this, however, improved Uber's IPO prospects in a meaningful way. For the company to comply legally and ethically with the SEC, it would need to clarify the actual nature of its financial reporting.

Specifically, Uber needed to file its S-1. McKenna et al. (2017) note 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 Deloitte poll, only 8% of companies planning to go public had already adopted the new revenue-recognition requirements at the time. The path forward was not guaranteed to be smooth: "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." In other words, Uber had not been fully transparent in its dealings, and as its valuation contracted, early investors grew increasingly anxious to exit as quickly as possible.

Conclusion

Uber has come a long way since 2009, but to prevent further erosion of its valuation, the company must address the issues that investors, the SEC, and the DOJ have raised. Facing numerous investigations and lawsuits, the company nonetheless has a viable path forward if it takes the steps necessary to allow early investors to exit profitably while establishing a new legal and ethical foundation for incoming investors. Specifically, Uber must clarify its employee and driver classification, adjust its EBITDA reporting accordingly, achieve full compliance with SEC revenue-reporting policy, and work to repair its public image — one that has been damaged by scandal, overstated revenue projections, and the bursting of its Silicon Valley unicorn mythology. A leaner, more transparent Uber is the only version of the company capable of sustaining long-term growth and investor confidence.

References

Blumberg, P. (2018). Why Uber needs to take the high road to an IPO. Retrieved from 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 approach that mirrors business model. Retrieved from https://www.marketwatch.com/story/uber-an-early-adopter-of-new-revenue-recognition-rules-believes-it-has-secs-blessing-of-its-business-model-2017-10-25

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

Smith, Y. (2017). Uber: Battle to the death. Retrieved from