Uber’s underwater investors | Hacker News Reader

Uber’s underwater investors

axios.com

70 pointsspking106 comments

Its weird they'd use Pitchbook as their source for funding when Uber disclosed information in their S1 under the table titled "Redeemable Convertible Preferred Stock". See page F-51 here: https://www.sec.gov/Archives/edgar/data/1543151/000119312519...

From that table, they didn't raise 15B at 48.77 but closer to 8B. The article is off by 50%. Still a stunning amount of money under water.

What's also not highlighted in the article is that holders of that series G preferred stock are entitled to a $3.90 annual dividend per share (again, see the table in the S1). If you assume a 10% discount rate for 5 years of dividends, that dividend is worth like $14 per share today. So maybe they aren't as under water as the article claims. [EDIT:] if you read further along, it looks like Series G got converted to common stock in 2018, so they no longer get paid this dividend.

That said, people who bought common stock do not get dividends as of today.

Sorry for the nitpick, but I've only heard "underwater" to refer to when you own an asset worth less than you owe on it. I've never heard it used to refer to all losses in value from investment. So it doesn't seem to be the correct usage here. Am I wrong?

generally in finance "underwater" simply means you've net lost on your investment (it's worth less than you paid for it, or other costs such as funding, legal etc more than offset any returns)

Interesting. But I checked Investopedia and it only lists the case I gave, plus out-of-the-money options:

https://www.investopedia.com/terms/u/underwater.asp

I've definitely heard the broader use, but I suspect it partly stems from the fuzziness of "owes". If my mortgage exceeds the value of my house, I'm definitely underwater. But if my pension fund owns a ton of CDOs on bad mortgages and can't make payments, it's sorta-kinda underwater too. Broaden things even more, and any institutional investor promising returns can be 'underwater' on a bad investment.

Hm, I could maybe understand if a hedge fund (or other investment firm) were operating on a "high watermark" standard (i.e. they have to get the fund's holdings past their previous all-time-high to get paid at all), then I could accept them being "underwater" in that sense.

People definitely refer to their options as being underwater. pretty common vernacular, I think.

Sure, I wasn't disputing that usage. I only thought it was wrong when they were using it in the broad sense of "any time your investment is worth less than you paid".

I saw the headline and thought the article would be about leveraged investors. I’ve never seen the term used for investors who are just down from where they got in.

Underwater has been used in the context of stock options where the option price is above the current stock price.

This article was written before today's worse selloff - Uber is now less half the expected value earlier in the year. I wonder if this is the end of the current tech bubble. All those unlisted companies really aren't worth what everyone assumes they are.

A few hyped companies with bad business models are not necessarily representative of all tech IPOs. But the problem is that these few bad apples can poison the perception of the entire sector for retail and institutional investors. Nothing wrong with a $1 billion B2B SAAS company going public.

Seems to be normal form. I don't have enough fingers to count the number of times companies go public, primary investors exit, stock slumps. Employees who have been with the company several years get stuck waiting 6 months to sell any shares at which point the stock is well under water preventing an exodus of talent. It's completely by design.

It would be more concerning if these stocks were spiking after IPO because it means the underwriters messed up and the market is irrational.

> Employees who have been with the company several years get stuck waiting 6 months to sell any shares at which point the stock is well under water preventing an exodus of talent.

This is largely only true of employees paid in options right? I thought Uber had been using RSU for a long time, which would prevent 'under water' conditions.

They are, but there are still some startups that use options. At least the liquidation is easier with the RSUs, but it doesn't prevent the fall off post IPO as people wait (rightfully so) to see quarterly results employee cashouts before taking a stake in whatever the narrative is.

Switching to RSUs was a good decision, particularly after so many Google employees were borked with underwater options around 2008 that took until about 2009 to correct.

My experience is that employees who are underwater get demotivated and eventually just quit. That is why companies are switching to RSUs.

However for AMT (Alternative Minimum Tax) purposes, the price as of your IPO is money you earned, even if you couldn't sell. Which during the dot com crash lead to a lot of people owing more in tax than they made, and with shares that couldn't be sold to cover it. I personally knew several who didn't have to pay taxes for several years afterwards because they were able to carry forward the losses from that disaster.

The long term capital gains loss is funny. I think I ended up with something like 30 years worth of LTCG losses I'll be able to carry forward. It's like a reminder that just keeps on reminding year after year how badly you can get shafted.

Many firms who offer RSUs offer double-trigger RSUs (i.e. the RSUs vest only if the vesting period is met AND a liquidity event happens) to prevent these tax consequences you outline. These function as golden handcuffs too.

As I said in the other thread a few days ago, Uber should obviously be shorted, both in the short and the long-term.

Their investors are simply trying to hedge their losses by bringing this stock public.

Uber's entire valuation hinges on the idea that they will be in the big three of autonomous driving, and I simply don't think they A) Can sustain long enough to achieve this, B) have a large enough Moat to prevent outside competition from jumping in (which already happened to their ride-sharing all over Asia) and C) They bet on the wrong horse with LIDAR, vision (camera arrays) will be the future of Autonomous driving.

Why is Lidar the wrong horse? Because Elon Musk made a slideshow and you drank the Koolaid?

I don't like Uber but as far as autonomous driving is involved, Uber and Waymo use Lidar AND camera arrays versus Tesla only using camera arrays. I don't see at all how that is a deal breaker.

^ this.

Just because humans can operate a car with vision-only capabilities doesn't mean that we shouldn't use LIDAR. Every redundancy will be highly valued when human lives are at stake, and we've seen many times with Tesla how cameras alone can be fooled.

I think Elon is correct with an important caveat.

If you are pursuing the Tesla self driving car business model which is selling a mid range luxury self driving car directly to the end consumer (and potentially operated for 4-6 hours a day as an autonomous taxi) then the cost of sensors is paramount.

If you are pursuing other business models such as Uber and Lyft and Waymo, where the taxi will be purchased as a fleet, fleet managed by the operator and operated 24x7 for 5 years straight, then the cost of camera sensors + LIDAR suite will be full amortized over the 5 year life of the car and therefore be somewhat of a rounding error in the total investment return.

Elon may be right, but he isn't saying that because he thinks he's right. He's saying cameras are the only way because it's the only thing equipped on Teslas right now that are supposedly "autonomous ready".

To admit otherwise would be disastrous for stock price and future sales. And to include lidarr at their current sale price would not be possible.

Fundamentally, if a product can exist without an expensive component, it will beat solution's that contain that expensive component.

> it will beat solutions that contain that expensive component

It will beat comparable solutions that contain that expensive component.

The fundamental question is if a product that can exist without an expensive component (lidar) will ever be of the same quality as the one with it.

Self driving cars that are 99.999% safe in a human environment do not exist. Cheaping out on sensors will not improve the safety.

I mean, they can still pursue a vision plan or a lidar vision combo. If we get to self driving cars there will still be competition there though.

> Uber's entire valuation hinges on the idea that they will be in the big three of autonomous driving

No, not even close. Their valuation is as a convenience provider. Their work in the autonomous space it an alternative revenue model, something they can sell/ license to car makers. They can gather a lot of road and driving data through their apps. Anyone who invested in them because of their autonomous driving research is even dumber than those who invested because they'll take over the rideshare market. Uber is a good idea, but it's ALWAYS been a bad investment due to their burn rate.

I believe the point is that when autonomous vehicles are allowed on the road then those companies can undercut Uber's cost by whatever % they pay their drivers (≈40%?).

It's more of survival for Uber to get their own autonomous driving technology than it is an alternative business model. Without it they'll get priced out of the market.

If you were correct, then Uber's valuation would be much much lower. They aren't profitable currently and their professed path to profitability is autonomous.

Why not both? LIDAR and cameras both have their applications

Long term short ? nothing should ever be a long term short.

No.

A company should be a long term short if you think that it is on a one-way path to going bankrupt.

But if it continues operating, be aware that the stock market as a whole goes up most of the time, and a rising tide tends to lift all boats. So odds are good that any individual operational company will go up over time.

What happens if you have a short on a stock and they go private / get delisted / get acquired before the number is hit?

If they go private or acquired, you get the difference (positive or negative) between your short and the price at which this happened.

If they get delisted, you make a pure profit on your short.

Can they simply raise the ride price ? To the point of not losing money ? The only other player, at least in the US is lyft and lyft has to rise their price too if they don't to keep loosing money. Customer won't go back to use old fashioned taxi.

I mean... paper losses. It's going to take more than a few days of trading to figure out whether anyone lost money here.

I'm sure none of those institutional investors were looking at the IPO as their liquidity event.

What's the lockup period for employees? Six months? Is it likely the stock of a company that isn't profitable (except in a few markets) and is rapidly burning through cash reserves is worth more in six months than it is today? Their marketed value isn't on being a profitable cab service in a few major markets, they argue they're taking over the world of mobility (which is obvious they aren't and can't).

Disclaimer: Armchair investor, intend to buy puts when they're available on the hunch there are no further greater fools to buy UBER

Generally speaking, the stock price today is the best indicator of the stock price tomorrow.

Investors know that uber is not profitable and it's expected to be that way in 6 months too. The stock could do good or bad over those 6 months. Shares/options are risky.

Shares are risky. Options (in general) are not, as only the premiums you pay are at risk (versus unlimited risk with shorting shares).

That's like saying lead balls are lighter than rubber ones because they're smaller.

The value at risk is the size of the investment.

Not unlimited. Your losses shorting a stock are capped at the price you borrowed it for (though technically it could be unlimited if you have to continue paying borrowing costs if you can't buy a share and close out your short [1]).

[1] https://www.bloomberg.com/opinion/articles/2018-04-11/-go-to...

There is no limit to how high the price of an equity to go, which is where your unlimited liability comes from.

I do wonder why you're being downvoted. Regarding a naked short, you're entirely correct in this ^

Wrong, you owe the stock, not the purchase price.

Theoretically, the answer to that (and most things) is "the market should already have priced that in". Since we all know Uber isn't profitable and is burning cash, that shouldn't lower the stock price in the future. Given that, the value of Uber is dependent on the belief that they can change that situation. If their burn rate is better in six months (even while staying unprofitable), the stock presumably rises. If it's worse or even the same, the stock presumably drops as people lose hope.

More practically, there were probably a bunch of people playing 'greater fool', and a modest contraction after the hype looks standard for big tech IPOs at the moment.

Paper loses...if the stock increases. Uber already was valued at $80 BILLION, it takes a lot of money and feet in the ground to increase revenue and share, it's different from Google and FB.

As of right now, the stock price has dropped even further to $37. This is a brutal day for Uber stock holders.

I think that is part of the big disconnect between private and public markets. The public market has been valuing simplicity in business models lately with old conglomerates like GE, Honeywell, Phillips, and UTX selling or spinning off units. The private market has been valuing potential and multi industry domination to some extent. Some companies like Apple, Amazon, and Microsoft have been able to have multiple avenues, but this has come after multiple successes, and what I would classify as cleaner underlying objectives.

At this moment in time, Uber and Lyft would be better served proving the underlying unit economics work to receive a better public market price. I think if both could show meaningful progress in this regard, it would help stabilize their stock prices.

> Uber already was valued at $80 BILLION

yes, but remember, that's a valuation based on how much of the company was sold off and for how much. $80bn hasn't been poured into Uber, just a fraction of that. Still way too much, but nowhere near $80bn.

FTA: "The opportunity cost is even greater: Investors in the S&P 500 have seen their money grow by 50% over the same period."

At this point, any retail investor can buy into Uber and experience better returns (or fewer losses) than post-2016 investors and staff.

I'm a bit surprised to see it stated that large investors ended up underwater, simply because they usually protect themselves first. Maybe the demand in Uber was so high they could skimp on their normal protections.

A year or two from now, I'd love to see what the actual paper losses were at this moment.

Yeah I thought they had liquidation preferences. Would they not have some deal where Uber has to make them whole by issuing them more stock up to the valuation price? Maybe that all goes away at the IPO, but surely to get sign off to have the IPO they must have gotten some guarantee.

Knowing nothing about the specific terms of any Uber investment, I'll just say that in every deal I have been a part of, the liquidation preferences and associated protections went away at IPO (when all shares convert to common).

It will be interesting to see if the Uber IPO (if it doesn't bounce back) makes the late-stage pre-IPO investors less supportive of going public in order not to have to give up those protections.

Liquidation preferences go away at an IPO because the preferred shares convert to common.

Right, but if the value was $42 a share at IPO and that is less than what the late stage investors expected, then why would they sign off on the IPO without extra shares being issued?

The late investors aren't forced to liquidate and any liquidation preference is extinguished at IPO... the terms of the IPO having been properly authorized, the formerly-preferred holders simply have no special say in the matter anymore.

> To make billions of dollars out of Uber, like Benchmark Capital did, the secret is to invest millions of dollars in the Series A and then allow other investors to invest the extra billions needed to scale the business and fund ongoing losses.

They missed a step there. The first thing is to get your fund to have Benchmark's reputation to have a chance to look at and invest in a deal like Uber early on.

For those not familiar with Benchmark, they made their name on Ebay. They go way back.

It's funny you're saying this about Benchmark. Didn't they have a bitter lawsuit with some founders they invested in? https://venturebeat.com/2005/01/25/epinions-founders-sue-ben...

> Uber is the ultimate minotaur — a company where billions of dollars of private-market funding were supposed to create a self-fulfilling prophecy of dominance and market power. It hasn't worked out like that.

Ok, ok, so the strategy doesn't work for "the ultimate minotaur" because it's in a commodity business: transportation. It's sorta like airlines, which, taken as a whole industry, also lack dependable high profits.

I wonder if Uber is going to turn out to be a MoviePass

My favorite startup metaphor (originally applied to Groupon) is that the basic "get users, then improve margins" model would justify selling dollar bills for $0.50. After all, there's tons of demand, and it's clearly a real business opportunity because the users all stick around as you move towards profitability! Then you hit that final price hike to $1.00, and discover just how nonlinear demand can be...

I'm sure they'll eventually make a profit. The answer is simple: Volume.

https://www.nbc.com/saturday-night-live/video/first-citiwide...

A question: if you can make one assumption about Uber (or fix one thing about it) such that Uber will be sustainably profitable in the future. What will it be? Why do you think the assumption implies sustainable profitability in high probability?

I feel like you are fishing for "autonomous driving" but I think the real answer is: Lyft going out of business.

I was just curious, not expecting anything particular---I wondered if Uber's business and its problem space are fundamentally bad as some of the comments here suggest. Re: your opinion, I think it's a good news for Uber. If it just takes Lyft going out of business for Uber to surface above water, I would bet there's a realistic chance.

How much more do you think Uber can charge before a different competitor appears?

My bet is on 0. The market seems more restricted on number of players (drivers can't juggle many applications at the same time) than on price, and if Lyft goes away, another competitor will immediately appear.

I'd like to thank all the VCs who have been subsiding my travel needs for the last 4 years. I would also like to extend a future thank you to the retail investors who will be picking up the mantle going forwards - Much obliged!

If 99% of the company's growth has been received pre-ipo, then the word IPO = It's Peaked Forever. Decacorn is short for "greater fool investment".

I wish but unfortunately I think Uber became "too big to fail". When there is that much VC and corporate money behind an entity you can be sure that the rules of the game will be bent so that the big players don't lose to much of their chips.

'Uber loses more money than any other company to ever go public.' Says it all.

Somewhat related, how is the strike price for the employee option holders determined?

Most employees have RSUs.

Presumably Uber followed US securities law, which are pretty strict in regards to giving employees options. Or RSUs.

It’s the Greater Fool theory taken to its logical conclusion.

the whole deck of cards is crumbling and the ones losing money right now are the little investors that bought Uber on IPO day because of the hype.

From TFA: "IPO investors have lost $655 million, while investors from 2016 and 2018 have between them lost $2.27 billion."

At least the consumers benefitted by having their rides subsidized.

I'm going to miss those $10 off coupons.

Riding for 50% off Uber and 40% off Lyft, capped at 10 rides week, really was nice. It almost approached public transit prices in some areas of Seattle.

Consumers did not benefit in the long term if Uber nuked their local taxi industry and wrecked the efficiency of their local bus service before suddenly ceasing operations.

I saw some local initiatives floated where public transportation should "partner" with Uber... I was a bit surprised how willing folks were to support relying so much on a company that doesn't make money and their prospects are questionable.

Not to mention their ethics

Its still "a lot cheaper than the projected bus costs, and more equitable" for towns:

https://www.citylab.com/transportation/2019/04/innisfil-tran...

Correct. Uber is effectively VCs dictating how they’d like the transportation market to work through dumping of services at below cost.

Uber is by no means dumping services below the cost to provide them. Boston's UberX is $0.36/minute + $0.88/mile (plus fees and flag-drop costs). That's well in excess of the marginal cost of providing the transportation.

(I'm an UBER bear and think their shares are comically over-valued. I also think that they're genuinely and sustainably profitable in their core business operation.)

In the case of my area we had neither before Uber. Perhaps other places are different.

On the other hand it surely inspired a round of modernization in many local taxi industries that would not have happened without. But I'm with you, I think that the risk of a dump, destroy, disappear sequence outweighs those benefits.

In the earliest days of Uber, the very large city I live in had mostly taxi services with no online support beyond a phone number. The most tech-savvy service offered a (not actually quite) real time map, but you just used it to guess where to go flag down a cab.

At this point, every major taxi company has a sleek Uber-style call-a-cab app, and most of them work great. Fare prediction has also become common, if not actually a guarantee, and in-app fare payment has mostly killed hearing "the credit card reader is broken" after a ride. (Which was already illegal but omnipresent, so competition solved the problem where regulation failed completely.)

Of course, this wasn't a city with medallions, so Uber couldn't just outcompete taxis by dodging regulation. I'm not sure how NYC et al have changed, since no amount of modernization could fix that problem.

There used to be a phone number, and the guy would tell you to wait an hour and a half, after which the cab probably never showed up. I used to drive airport shuttles (dispatched by VHF and pager!) and we sometimes rescued people who had been completely screwed over.

In my city (Toronto) taxis actually upped their game in response to Uber/Lyft, though not before fighting it tooth and nail. Before, you'd often get an ancient cab that the driver was (illegally) smoking in before you arrived and would often (illegally) refuse shorter trips. Half the time, the the electronic payment machines were "broken" and you'd get drivers threatening you if after arriving at your destination you refuse to go to a bank with the meter still running.

In most of North America, the taxi industry is notoriously corrupt and has been that way to protect their medallion systems. While I do feel for some individual cab ower/operators, I don't feel bad for the industry as a whole despite Uber being a horrible company.

NYC had the same problems. Plus drivers who didn't speak English (or pretended not to), didn't know the city, or purposely took you on long, roundabout routes to collect a higher fare. Oh, and they were usually distracted. It was not uncommon for the driver to be talking to family/friends on the phone for the entire ride, or even watching television while driving (I reported the television driver to the Taxi & Limousine Commission, but I have no idea what the outcome was.)

I don't feel very bad for any taxi medallion owners who were exploitive, as I've heard some have been, nor for officials who let medallions become capital assets, but at least they were playing within the current local regulations. (And, even within the worst taxi medallion systems I've heard of, you'd occasionally hear of a driver who'd been saving up for a medallion, which they saw as their ticket to the American Dream, so they could keep more money from their fares.)

Then Uber comes in, knowingly ignores regulations everyone else played by, spews "sharing" nonsense, pricedumps on fares, temporarily attracts drivers and gets many hooked on loans for the recent-year cars Uber demanded, uses money and popularity of pricedumping rates to lobby politicians for official acceptance, then IPOs to keep the scheme going (and so some people can cash out).

>spews "sharing" nonsense

People forget that is how Uber got into this business - they started skirting medallions (which was an artificial market in the first place) by telling regulators that these drivers were headed in a particular direction and just picked up a fare.

Uber is absolutely a scummy company, but the taxi industry was/is a scummy industry. Google "taxi corruption" and you can find many, many instances of politicians being bribed to maintain the medallion systems.

In Washington DC, there were multiple cases of taxi companies bribing politicians to introduce a medallion system. Even when many of them were caught in stings, they still kept trying (with "good" reason, many of them would become multimillionaires overnight if it passed).

Uber was so successful because we consumers had little choice, though the ride subsidies were definitely helpful.

Horrible things about cabs in Chicago (I literally haven't taken a single one since I started using Uber so idk if some of these got any better)

- Drivers always claimed the credit card reader wasn't working and tried to force payment in cash - the card reader was always just clearly turned off and they would slap it pretending to try to get it to work

- Drivers randomly deciding to charge 1.5x or 2x based on the ride going outside some made-up "zone"

- Drivers all crowding around bars blocking the street and sometimes getting into fistfights over their positioning in front of the bar (this doesn't happen anymore since Uber)

- Most of the cabs had absolutely disgusting interiors

I do agree that Uber's whole pricing competitiveness is a VC-funded greater-fool scheme, but the expectations of service levels in the ride hailing have been greatly improved.

Interesting comment about Chicago. My memories of cabs in San Francisco were always pleasant enough if expensive.

Some older friends mentioned that before Dianne Feinstain was mayor you had unlicensed gypsy cabs that would shuttle random groups for a buck or two each.

Has Uber wrecked local bus services anywhere? I imagine it cut into their revenues for a few years, but everywhere I've seen the major conflict was "taxis vs Uber", with bus services muddling along without changing anything.

Anecdotally, Uber kept coming up in citizen discussions of improving&maintaining public transit, as a reason not to invest in public transit.

Hm, this might be a city-size thing then. I can definitely picture mid-size cities with mediocre bus services looking to Uber as a reason not to invest.

I've mostly seen its effects in big cities (where public transit gets invested in regardless, and lots of people taking buses never moved to more-expensive Ubers), and small cities (where bussing was already atrocious, with no real plans for changing that).

I only have the data point from my major-ish city: Boston's public transit has been suffering from deferred maintenance, and from projects postponed. We're catching up on some deferred maintenance now, but there are daily failures. Uber comes up in conversations about that. Paraphrased typical examples: "Why should we spend all this money, when we can use Uber," "Public transit sucks; I just Uber", "We should let [worker-exploiting and unsustainable] Uber manage transit," etc.

It's not the competition, it's the congestion. The presence of a huge number of terrible TNC drivers double-parked makes it impossible to keep the bus on its timetable.

Pure anecdata, but taxi services are far better today than before Uber and Lyft took off.

I've noticed in particular that prices to Chicago ORD are lower (from the suburbs) and in Miami cabs will actually take credit cards now and show up when you call them.

I'm all for ragging on companies that skirt regulation, but the regulation was 50/50 good for consumers and straight up protectionism for the cabs.

Taxi industry was already nuked everywhere. That's why Uber grew to such extent. Even drivers around here were happy, because they could work for Uber paying a smaller share than they paid to work with their own cars as a taxi.

Now we have a proven market, more competitive taxi industries, and even some competition. We'll be in much better shape if Uber go away than we were before it.

^ this

I am surprised that somebody actually noticed this (I was going to but you beat me to it. Normally we hear only about the exploited drivers or unpaid taxes, but Uber has done so much more for people around the world. Those who like it get a better service than governments provide, those who don't have no obligation to pay for it.

My second (or first, considering the first was yours) point is Uber wouldn't be doing so bad (financially) if it didn't face government obstruction. Tesla, on the other hand, siphoned billions in taxpayer monies and isn't doing better. Uber has a service that can be sold for more than it costs to provide. Tesla does not.

I am not saying Uber will outlast Tesla. But if neither company sucked on the government teat, Uber would win.

Reply on news.ycombinator.com