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Comment by CPLX | Hacker News Reader

Sincere question, can someone explain to me a plausible scenario at this point by which early investors actually receive a payout even slightly commensurate with their supposedly incredible investment?

For example, how can someone in the seed round genuinely be able to cash out given the unbelievable amount of dilution that has taken place. What are the plausible scenarios where this occurs?

EDIT: Specifically asking in the context of a valuation that seems to way outstrip any plausible IPO (or complete takeover) valuation, and almost certain liquidation preferences that accompanied these later institutional rounds.

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As long as the valuation of the company is going up more than the dilution, the value of existing shares goes up.

In an early stage company that might mean raising a Series A where the valuation of the company goes up 100% and shares are diluted by 35%. Value still going up.

For an ultra late stage company like Uber that means ~5% dilution in this round and the total value of the company might go up 10-20%. The value of your shares is still going up.

For simple back of the envelope math, assume you invested 10k into Uber's seed round valued at 3.5 MM. Then we'll simulate some excessive amounts of dilution, so let's say our 0.28% stake is diluted by 30% 10 times (which is a ton of dilution and way more than would have reasonably happened).

You are now down to 0.007% of Uber. 0.007% of 65 billion is $5.1 MM. Not bad for a 10k investment.

Based on more reasonable dilution estimates my guess is a 10k investment in Uber's seed round is worth somewhere between 25-50 million.

You aren't taking into account multiple liquidation preferences, ratchets, and profit guarantees on a downround IPO that are in the term sheets for this round.

Warning of such "dirty term sheets" is Benchmark's Bill Gurley. http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/

http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/

Did Uber accept any such preferences when taking investments? I thought only clueless entrepreneurs fell for such trickery.

It is widespread suspicion that Gurley's post was directed at Uber's latest fundraising round (as an early investor, they take a hit from these dirty terms)

How did you calculate the 5% dilution figure? I didn't see where in the article that they mentioned what percentage of the company the would give for that 3.5 billion. Different sourc?

I haven't worked out the specific numbers, but $60 billion is reasonable if you expect Uber to become a global near-monopoly on hired ride services and related logistical services they're branching out into. Whether that scenario is reasonable, is itself an open question, of course.

It seems divorced from reality to me, though I claim no real special expertise. They seem to have no more ability to be a monopoly than any other logistics or transportation powerhouse. The market cap of UPS is ~$90bn, and FedEx ~$40bn. And those companies have a lot of real actual assets* and (arguably) much stronger network effects than a local taxi replacement company.

It's not that it's so implausible it couldn't happen, it just seems to insert some very serious risk for a large swath of the equity holders, and makes me wonder why the company is so keen to assume that risk.

[* UPS has over $40bn worth of stuff like airplanes, trucks, land, and buildings on their books.]

Wow, you're right, hadn't thought of that. When you account for the (large) risk of Uber not reaching that stage, that should put them at $20 billion optimistically.

In fairness, though, neither FedEx nor UPS count as a near-monopoly either, but the probability of a real one is correspondingly less probable anyway.

> In fairness, though, neither FedEx nor UPS count as a near-monopoly either

True, but look through their annual reports to see their capital spending to compete against them. There simply is no other way then spending that money.

For example, Amazon leased a fleet of cargo planes:

http://www.seattletimes.com/business/boeing-aerospace/amazon...

One thing I'd like to know (and I am sure someone has answered this somewhere) is the amount of people using Uber in their own town vs. people who travel and use Uber.

If in their own town, it seems entirely possible for a local strong competitor to offer a better product or service. For travelers that is less of a risk since you go with the brand you know (which traditionally has been a taxi cab).

In particular some markets are so large that it would be a juicy target to attack just the one geographic area regardless of whether you planned to compete elsewhere (NYC for example).

Now of course someone could argue that this could have happened to opentable and it hasn't. But that is a much harder thing to knock off with the tie in to reservation systems.

In my experience this is actually happening. For example many of my friends are now using Dial-7 to get to and from the airport these days for business trips. It's just more predictable than wondering if there will be surge pricing when you need to leave, they actually are slightly cheaper, and you know what you're going to get.

Uber's user experience has a lot going for it but it's very, very far from flawless or unbeatable as a product.

For getting to/from the airport in my own city, I still use the old limo driver that I was using before Uber took off. Literally the same guy, not just the same service/company. When friends or family members fly down to visit I sometimes book him for them as well.

It's about the same price as Uber (I voluntarily pay more because I tip him generously), but it's a 100% guaranteed fantastic experience. With Uber, you never know who your driver is going to be. I've had some pretty bad ones and some pretty unfriendly ones who made me or someone with me feel uncomfortable.

Normal people don't take limos to the airport.

"limo" may be a reference to what is sometimes called a black car -- a scheduled livery service -- and not what we generally think of as a large limousine. Still, though, most people don't use those either.

Limo can just mean black Town Car.

They do. A "limo" is just a towncar. It's no different from something like UberBlack. Go to any major airport and you'll see a bunch of them lined up waiting for passengers nearby the taxis.

I started using this service before Uber because taxis were extraordinarily unreliable and this service was always spot on. And as time has went on I see no reason to switch to Uber for this particular well-defined and scheduled-in-advance ride.

I think you view of the world is rather skewed if you think "normal" people take a town car to the airport.

Even as a well-paid software engineer, I never use UberBlack—only UberX.

I just looked up a fare estimate and UberBlack is about twice as expensive as what I pay. So I suspect you're just as abnormal as me if you pay anyone at all to drive you to the airport instead of driving yourself. That actually drives home my point of not using Uber in this case. Why bother when I'm getting the same service for 50% of the cost with someone I know, trust, and have actually become friends with?

If UberBlack is 2x the price you pay, what you pay is close to 2x what UberX costs (depending on the market).

It's fairly normal to take a taxi to the airport (particularly at your destination), but paying 2x the cost of a taxi for a private car service is definitely "luxury."

4x is not the ratio of the prices that I'm seeing from the fare estimator. Regardless, if you want to believe that I'm not normal, that's your prerogative, though I'm not sure what benefit you derive from insisting on this. Additionally I am highly suspect of your implicit claim that you're more "normal" than me if you regularly take Uber to and from the airport. I rarely even fly. If you fly more than twice a year and take Uber each time, you are spending more than me on rides to and from the airport.

Your choice of words is curious to me as well. For instance, you distinguish the limo service I use as being "private". What does that mean in this context, and how is Uber not private? You've misunderstood me if you think I have a personal chauffeur who exclusively works for me. That's not how towncar services work. It's basically just a guy and a few friends who have a tiny company where they drive people to and from the airport.

By the way, I want to point out that Uber's surge pricing could easily make UberX cost more than what I pay. And surge pricing is fairly likely to be in effect any time I'm trying to get to the airport.

It's very location-dependent. In Pittsburgh, a taxi to the airport can be $55, and a towncar service $75. More importantly, you can make a reservation for the towncar in advance, and know that they'll be there, instead of playing 6am taxi roulette, which often does not work well. A lot of the faculty at CMU use towncar services for that reason.

Pittsburgh's monopoly taxi service from yellow cab is remarkably terrible, though, so this may not generalize. They're famous for simply not bothering to show up after you call them.

It's the same deal for me. I stopped using taxis for getting to the airport years ago when they simply failed to show up even remotely on time (either not at all or 30+ minutes late).

UberX is showing that it would cost about $60 to get to the airport with no surge pricing. With even 1.5x, though, that'd balloon to $90, and I've seen it as high as 2x during some times when I've needed to get to the airport after work.

No normal ( :) ) person cares about getting a fantastic experience when taking a taxi. They just want to get from A to B reliably and safely and without messing about with tipping.

Geez, yes, they absolutely do care. That's the entire reason why Uber took off to begin with. Taxis suck and entirely normal people hated them because of that.

"Normal" people are going to get upset when they need to be at the airport and their taxi that they called 30 minutes ago is still not there, so they call again and are informed that there are no taxis available in the area, then call again and suddenly one is right around the corner, but the driver's in a bad mood, demands a big tip, and berates you if you don't want to use cash. That was my typical experience with taxis before Uber, and that's why almost everyone I knew avoided them at all costs. It's also why I started taking a towncar to the airport instead -- because they were actually capable of being on-time and were only barely more expensive.

Now almost everyone I know uses Uber at least occasionally and many use it quite a lot.

We're mis-communicating, sorry. I agree with you. I really like Uber, hate old taxis for the reasons you say, and don't like Lyft because they force me to think about tipping and I think tipping is a nasty way to give everyone people a little moment of power where they can judge someone else's monetary worth.

By fantastic experience I meant bottled water and stuff. It seems that we agree that the main things are: reliable, easy to book, no messing about with money or tips.

My guess would be 90-95% locals in most/all towns.

You're talking about current market size, but world markets of such goods and services are growing, especially in developing countries.

There are no monopolies in this business. In NYC, Juno already has lots of drivers aboard. All the drivers here just keep all the apps open.

That's what an Uber driver told me the other day. He also works for a local taxi firm and uses Uber when there's little business from his firm.

I guess they're trying to put local firms out of business by subsidising fairs.

Uber has apparently raised $12.5 billion[1] and is valued at over $60 bilion. So seed investors are in fat city as long as the valuation holds. If the valuation goes down, it all depends on the preference multiples (which are likely greater than 1), and how low the value goes.

Uber has very significant revenue and growth (see the new Mary Meeker presentation), so they are a very valuable company. It may not be wise the way they are burning cash in China but hey we're all just spectators.

[1] Crunchbase says $9B and hasn't been updated to add in this money), https://www.crunchbase.com/organization/uber#/entity

It's only Fat city if there's an exit at that valuation. We're talking Theranos style valuations here that can disappear at any time. They better find an exit scenario before the music stops or it's a world of hurt, especially for the later stage investors.

True, but those are the obvious risks you take as an investor. And late stage investors often negotiate downside protection in the form of liquidation multiples or ratchets.

You can ratchet your way all the way to 100% of zero, but getting a greater percentage of negative is not the way to positive. I think what we're all sensing here is there's a colossal infusion of cash that's not supported by the business model and at some point, there won't be any more cash available. They better find a business model that's not so negative quickly.

Yes precisely. But early stage investors almost never get those kind of protections. How can they possibly not be getting wiped out just a little more with every sky-high valuation round with a preference attached?

The only thing that can ''take out'' Uber is widespread adoption of autonomous vehicles, whereupon ride sharing becomes a physical-capital intensive business (cars) rather than the current human-capital intensive business (drivers/their driver network). Autonomous vehicles (and the infrastructure to support them) significantly reduce the amazing network efforts that Uber has enjoyed to date. An investment into Uber at these valuations is a bet that this future adoption (to the point where it would disrupt the massive revenue Uber realizes from places like LA, NYC, and SF) is decades further out than some futurists predict. Even transitioning into this brave new world Uber still has a lot of brand value, although there will be a ton of competition (all auto makers such as Tesla, GM, Ford, and new entrants such as Apple, Google, and Amazon), ultimately benefiting consumers: enjoy your $12.50 ride (est. 35% of which will be local and state taxes) from SFO to 3rd and Market.

> The only thing that can ''take out'' Uber is widespread adoption of autonomous vehicles

That's ridiculous. It's not even a little hard to imagine that they could be overtaken by a similar competitor such as Lyft given a plausible sequence of events. In fact it's basically a certainty that they would be if they ever abandoned competing based on price. Which defeats a hell of a lot of the point of paying to acquire a monopoly in the first place.

Agreed. They wouldn't even need to be overtaken. It seems that a lot of the valuation is based on the premise that this is a global winner takes all market. If it turns out that's not true and there is in fact space for multiple competitors then the valuation could turn out to be a lot less.

If Uber has a moat of any sort to protect itself from competition, I'm not seeing it.

Once Uber has executed a tactical blitzkreig in a new city and incited a pogrom against the cab drivers, and fought the legislative battles with resistant city councils; the door is open for any rideshare company to glide in on Uber's coatails and take advantage of all that costly trailblazing without paying a dime.

Cynically: that's why Uber doesn't want to win that kind of war.

They want to get in, and then work with the locals to establish some `sensible regulation'. Regulation that just happens to be cumbersome enough to deter new small-scale entrants.

This is not true in Austin. The city passed a fingerprint and registration requirement and uber and lyft both left the following weekend. Smaller competitors are growing fast. I miss the nice apps and cheap prices but the alternatives are ok.

Oh, I didn't say it always works (or even that it works most of the time.) Just that it's an obvious strategy for Uber to pursue.

I didn't mean to imply they had a Windows-like monopoly. I do think there are some real network efforts around driver and rider density (especially if pool takes off). I think they settle somewhere in the middle between monopoly and commodity, and the fact that the transportation market is so huge helps them carve out a nice valuation so long as they have only a handful of competitors. I spend around $100/week on Uber and I haven't switched to Lyft even though I heard it would be a bit cheaper. On the other hand if Tesla offered me 50% cheaper fares to ride in their autonomous vehicle fleet, even if it was just available in my city, I would do it in a heartbeat.

There is also a definite risk that legislation will hit them hard. I'd say that's much bigger than the risk posed by autonomous cars.

I agree but I think it's more along the lines of ''we will tax you'' than ''we will shut you down''. Once the Gov starts to make money from you then you've turned them into a business partner with a vested interest in keeping you alive (see Airbnb).

>> Autonomous vehicles (and the infrastructure to support them) significantly reduce the amazing network efforts that Uber has enjoyed to date.

Still there might be a political play(using million of drivers, etc) to delay the entrance of self-driving-cars until 2 competitors are about equal, and than it might be better for one company to cooperate with UBER and get some advantage than to try to go alone.

>The only thing that can ''take out'' Uber is widespread adoption of autonomous vehicles

Or their customers losing interest as driver/fare subsidies are slowly dialed back. I've already begun planning on Uber with hesitation as I have now twice been left "stranded" for ~30 minutes without an active driver available in my city.

I'm fine with the surge pricing which comes along with that but Uber is becoming increasingly unattractive to drivers and that's a real problem alongside increasing fares. Most of the casual drivers who fuelled Uber's early explosive growth are long gone now that the true costs of using your personal vehicle as a taxi became clear. Even the dedicated drivers are staying in on weekdays because Uber oversaturated the driver pool in small markets while cutting back on payouts. There aren't enough riders on a Tuesday evening for more than 1-2 drivers to dedicate their time and when those 1-2 call it a night, there's no one willing to stay up for a single $7 fare.

What city do you live in? I've traveled all over the US in the past year and haven't experienced this. I can imagine in a relatively remote, low-density city with sub 50k population it could become an issue at the most off-peak hours.

It's possible to sell those shares on a secondary market, i.e. seed investors might have already cashed out by now.

Except in Uber's case where they are famous for keeping tight control on secondary sales.

http://fortune.com/2014/06/20/uber-plays-hardball-with-early...

Since I don't have Uber shares, I wouldn't know. But that's how it usually works.

Can someone who does have Uber shares chime in anonymously here?

I can't find the link because the huge media churn makes it impossible to find anything that isn't the most recent story, but didn't they ban Chris Sacca from the Uber office for hanging around and buying secondary shares from people?

I think the lockdown happened after that.

You're probably thinking of Sacca and Twitter:

http://techcrunch.com/2011/02/27/jp-morgan-twitter-chris-sac...

He may have done the same for Uber, but I haven't heard anything about that at all.

http://www.forbes.com/sites/alexkonrad/2015/03/25/how-ventur...

"the Uber CEO got upset with Sacca for trying to repeat his Twitter move of buying up secondary shares in Uber from other initial investors."

Ah good eye, thanks, hadn't heard anything at all about that.

I wonder why management would want to keep anyone from bidding up the share price?

It starts to create a secondary market for the shares, which means over time a price gets set. So the next time they try to raise money, this price becomes an anchor point rather than whatever arbitrary price Uber tries to set based on perceived supply & demand.

Yeah, probably. Even though at first the secondary market props up the price, it is indeed a price.

Doesn't matter for Saudi Arabia. As long as their investment in Uber starts paying out before their oil runs out they'll be golden.

>plausible scenario

Uber becomes the cab of choice for 2.5bn people, the rough number who have cell phones. Value those at $50 each and you have a $125bn valuation for the floatation.

Not sure it'll happen but that's probably the kind of thing the investors are thinking.

"Uber becomes the cab of choice for 2.5bn people, the rough number who have cell phones."

I don't think they'll get anywhere close that number.

- First, it assumes that Uber has no competition, but there's Lyft, Didi (in China) and lots of local cab companies, some of which even have apps of their own.

- It's much easier to afford a cell phone than it is to be able to afford taking cabs on a regular basis. Many of the 2.5bn people who have cell phones live in poverty.

- Many of the 2.5bn people who have cell phones own their own cars, and would only use a cab if they were on a business trip.

- These 2.5bn people live in many countries, not all of which will agree that Uber drivers can be independent contractors. Uber might not want to enter markets under those conditions (they left Austin merely because of a dispute over background checks[1]).

[1] https://news.ycombinator.com/item?id=11652614

Google Play Store says between 50 and 100M installations...

Sure there is dilution, but the overall valuation has increased faster. I.e. the share of the pie is smaller but the pie has gotten a lot bigger, so you end up with a bigger piece.

Plenty of people can envision a $100B to $1T valuation at some point.

I don't understand your point about seed round investors since they are sitting on some of the biggest returns ever in the history of investing.

>Plenty of people can envision a $100B to $1T valuation at some point.

$100B sure. $1T ... maybe if you wait a while to let inflation catch up.

Alphabet, Google's parent and briefly the most valuable company on the planet has a market cap of 510.2B USD right now.

And no debt to speak of, I think. Normally you need to add the equity market cap and the debt to get the total financial structure of the company. (I just googled, and I think that sum is called the `enterprise value', if you subtract any cash holdings.)

See http://arstechnica.com/apple/2011/08/does-this-metric-make-m...

You're talking about one of the most successful companies in the history of business, in Google. Their speed to their present scale in terms of profit - from founding to now - is unprecedented. Add to that that they make most of their money from operating a hyper-margin software service in terms of costs (with nothing at all similar to Uber's drivers and regulatory problems), one that has been almost entirely unregulated (until now) and that also happens to be a quasi-monopoly. Using Google as the standard for what Uber could achieve, is extremely far fetched.

Perhaps I was too subtle. That was exactly my point.

(And if you discount my need to look smart, I think I got it across---you had exactly the thought I was intending to create in the reader.)

I really think that this isn't the place to be playing rhetorical games. I think discussions would be much simpler and clearer if people state their points clearly and unambiguously.

Presenting the evidence to help people come to their own conclusions can be more effective than hitting them over the head with a hammer.

My point was ambiguous to begin with: yes, Uber might very well grow to a trillion USD in valuation, but doing so would give it twice the market cap of any other company so far.

Nuances are important.

You can use a lot of superlatives to describe Uber's ascent. For starters, much faster revenue and valuation growth.

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