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15 min read

    15 min read

    For all the hand-wringing about Uber’s solvency and ability to turn a profit, we have to admit that Uber has done an incredible job of re-shaping the ridesharing industry. From upending the taxi system to battling (and winning, in most cases) local government regulations, Uber has incredible staying presence. However, with some investors turning on Uber, could this be its final stand? Today, senior RSG contributor John Ince covers the legal challenges facing Uber internally, and whether or not Uber will be able to fight off these challenges. 

    Today, John Ince covers the legal challenges facing Uber internally, and whether or not Uber will be able to fight off these challenges. 

    Uber’s Days Are Numbered — With or Without Travis Kalanick [The Bold Italic]

    Sum and Substance: The company’s bro-culture is losing them customers. But there are more fundamental flaws in its business model. … The resignation of Travis Kalanick as Uber’s CEO in June was seen by many as a culmination of sorts. A series of negative reports had forced Uber to finally address its toxic culture in an attempt to rehabilitate its image and win back its customers. But the culture problem is only one of the issues the company is facing. The bigger problem is its unsustainable business model — which means Uber’s days are numbered, whether Kalanick is there or not.

    … A Backward Culture:  It’s worth remembering that Kalanick was only forced out by investors because the amount of bad press had reached a point where no other move would placate them. It was revealed that Uber had developed a program to deceive authorities; Google had sued the company for using stolen documents to improve its self-driving vehicles; twenty employees were fired after an investigation into sexual harassment; and Kalanick himself was filmed arguing with an Uber driver. The toxic boys’ club that Kalanick symbolized was unbefitting a company valued at up to $70 billion — a number which took a hit after the successive scandals. Whether the culture can really be changed simply because Kalanick is gone is up for debate. …

    However, while the fate of Kalanick and the culture he created at Uber may impact the company’s fortunes, such things will not cause its ultimate downfall. The real problem that Uber faces is not one of culture, but of economics. Its business model is fundamentally unsustainable, and despite continuing passenger growth, it has no clear path to profitability. … 

    Uber presents itself as a cheap, convenient, and modern alternative to taking a taxi, which is fantastic from the consumer side. It would have its users believe that its labor model is what allows it to offer such cheap fares when compared to taxis, but that isn’t the reality. The advantages customers get from using the rail-hailing service are a result of massive losses funded by venture capitalist (V.C.) money, and the huge burden it places on its drivers.

    Uber is an astonishingly unprofitable company. In 2016, it lost $2.8 billion, and its losses haven’t slowed in 2017. In the first quarter, it lost an additional $708 million. It’s not uncommon for tech companies to operate at a loss in their early days. Amazon did the same, and was able to take advantage of the savings that came with running at a large scale to turn a profit. However, what worked for an e-commerce giant won’t necessarily work for a transportation company like Uber.

    If anything, Kalanick’s resignation shows that investors are becoming increasingly uncertain about Uber’s future. They wouldn’t have intervened to oust Kalanick if everything was going well. Perhaps they are starting to wonder when they’ll get their money back. Self-driving cars won’t rescue the company, and while taxis and public transit are feeling the impacts, they’re far from being in peril. While Uber is trying to restore its image by reworking its internal culture, the real problems are its huge losses and lack of a path to profitability. Uber’s low cost is its real point of differentiation, yet eventually it will have no other choice but to raise prices, and at that point many of its customers will simply go back to their old pre-Uber ways, and Uber’s days — at least as a ride-hailing service — will be over.

    My Take: Okay, this author presents one side of the Uber story and does it quite convincingly. His points resonate with what I’ve been thinking, especially on economics.  But what about the other side? See if you find this next story as convincing.

    It Will Take a Lot to Kill Uber [Bloomberg]

    Sum and Substance:  For six months now, almost all the news about Uber has been bad. Even before then, the ride-hailing company’s combative executive team displayed a remarkable facility for generating negative headlines, … This does not mean Uber’s business is shrinking, though. The company reported that revenue rose 18 percent in the first quarter of this year, to $3.4 billion, and has told investors that bookings were up more than 10 percent in the second quarter. Lyft is growing even faster, but Uber’s competition with Lyft is not a zero-sum game — at least not yet.

    For one thing, both companies are still taking market share from taxis. This is from Certify Inc., which runs a travel and expense-management platform for businesses:… Looked at this way, Uber’s market share is flat, not falling. Throw in rental cars, and Uber’s share of all business-travel spending on ground transportation is still rising, to 55 percent in the second quarter from 53 percent in the first. That’s just among business travelers, but it seems reasonable to extrapolate that a similar dynamic is playing out among non-travelers choosing to leave their cars at home (or dispense with them entirely) and taking an Uber or a Lyft instead.

    In short, despite shooting itself in the foot again and again and again, Uber continues to hold a pretty commanding share of what is still a growing market. That’s partly because of the kind of business it is: a platform that connects customers with providers. Once you’ve got a critical mass of both signed up, it can be pretty hard to unseat you. Such two-sided markets existed before the internet (credit card companies, for example), but in the online era, they seem to be the default business form. Online platforms such as Airbnb and Uber, Andrew McAfee and Erik Brynjolfsson of the Massachusetts Institute of Technology write in their new book “Machine, Platform, Crowd,” represent the richest combination we’ve yet seen of the economics of bits and the economics of atoms. As they scale, these platforms handle huge volumes of information — about members and their choices and activities, the availability and pricing of goods and services, payments and problems, and so on. All of this information approaches the ideals of free, perfect, and instant. It’s very cheap to store, process, and transmit, and it’s getting cheaper. This means that all relevant and useful information can be everywhere on the platform, all the time. It also means that the demand-side economies of scale — the network effects, in other words — can eventually grow much faster than costs.

    That all sounds like good news for Uber. So why is it that the company lost $708 million in the first quarter?

    One theory popular among the most skeptical observers is that the potential market for ride hailing actually isn’t all that big, and Uber and Lyft have been continuing to grow only by offering unsustainably low fares. Eventually their venture capital riches will run out, they’ll have to stop subsidizing fares, and their growth will shift into reverse.

    There’s surely something to this worry — and to concerns that Uber and Lyft will eventually be forced to take on their independent-contractor drivers as employees or at least spend more on benefits for them. Focus on these issues too much, though, and you risk missing that Uber and Lyft really do provide a useful service that wasn’t being provided nearly as well before they came along. … 

    So Uber and Lyft provide a service that is worth something. Some company (or maybe more than one) should eventually be able to turn a profit by providing it. Despite all its recent troubles, Uber still seems to have the best shot at becoming that company. … 

    Of course, Kalanick talked investors into giving Uber a $69 billion valuation based on a wildly ambitious vision that included a presence in every major global market, brand extensions such as UberEats — a meal-delivery service — and Uber’s very own self-driving cars. It has ratcheted back those global ambitions over the past year by getting out of China and Russia, and there’s probably more retrenchment to come. I don’t think Uber is in a death spiral. I do think some of its investors will be sorely disappointed.

    My Take: The author’s perspective is well worth considering, and it goes against much of the prevailing narrative about Uber in the media these days.  While almost all the news about Uber has been bad, they still dominate the ridehailing market.

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    It amazes me how little of the bad news about Uber seems to filter through to the average Joe – be they drivers or passengers.  I make a point of asking my passengers whether they’ve been reading all the bad news about Uber. I estimate that a good 40% of them say something like, “Bad news? No, haven’t heard anything … what happened?” This could be a good thing for Uber.

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    Uber investor Shervin Pishevar claims Benchmark wants to remove Arianna Huffington from the board [CNBC News]

    Sum and Substance: Early Uber investor Shervin Pishevar sent Benchmark Capital another letter asking the firm to step away from the company’s board of directors. In the letter, which Recode obtained, Pishevar claims that Benchmark is working with another major investor — Lowercase Capital — in its effort to remove former CEO Travis Kalanick from the board. Pishevar also claims that Benchmark is seeking to remove Arianna Huffington from the board of directors.

    … Benchmark, which sits on Uber’s board, is suing Kalanick for fraud, breach of fiduciary duty and breach of contract, claiming he was attempting to control the board for his own “selfish needs.” The storied venture firm said in response to Pishevar’s letter that it had no choice but to file the suit. It declined to respond to his specific claims. More from Recode … Benchmark has about 13 percent of Uber and has been approached to sell some of the stock it holds in the company. A constellation of outside investors, including Dragoneer Investment Group, General Atlantic and SoftBank, have been talking to Uber and shareholders like Benchmark about buying a large chunk of stock, although it is unclear if that will occur. Pishevar also has offered to buy 75 percent of Benchmark’s stake, but sources close to the firm said it is not interested in selling to him. This is the second letter Pishevar has sent to Benchmark; the first was signed by a few other Uber investors. In the first letter, the group of investors asked Benchmark to divest its shares in the company.

    “We have investors ready to acquire these shares as soon as we receive communication from Benchmark that they are willing to withdraw their lawsuit and sell a minimum of 75% of their holdings,” the first letter read.

    This time, Pishevar is accusing Benchmark of threatening to block investments in the company…. Here’s are some sections from Pishavar’s second letter:

    August 15, 2017

    Benchmark Partners,

    Many investors and shareholders are confounded by Benchmark’s behavior regarding Uber Technologies. The lawsuit filed by you last week against our co-founder, the company and the thousands of hardworking employees is irrational in the extreme, seemingly designed to achieve the exact opposite of the goals expressed in your recent letter to the Uber family. Furthermore, your position on the board gives you privileged access to facts that you know are counter to what you state in your own complaint. The litigation is making it difficult for the company and its employees to move on and hire a world class CEO and raise additional funds from strategic investors that would create tremendous value for all…. Benchmark is holding the company hostage and not allowing it to move forward in its critical executive search. The claim in your letter that your litigation efforts speed up on-boarding a CEO disingenuous or delusional. Benchmark has threatened to block investments that could bolster Uber’s competitive position in global markets by bargaining over board seats and its own control.

    Benchmark has turned their $27M investment into a $8.4B position in the company. Benchmark’s stake in Uber is worth as much as every exit Benchmark has had in the last 10 years combined. Those are historic potential returns, however, your litigation and letter to employees is unprecedented in the history of Silicon Valley. … Please leave the employees alone and let them be at peace so that they can continue to build a a great company without these unnecessary obstacles. Your actions are culpably wrong-headed and can only be corrected by ceasing and desisting from any further interference with employees and the business of the company.

    Sincerely,

    Shervin Pishevar

    Uber Investor, Former Uber Board Observer (2011-2015) and Advisor

    Coordinator, Uber Shareholder Alliance

    My Take:  For those of you who are watching from the edge of your seats as Uber’s board seeks to right the ship, you must read this article in its entirety. Could things have gotten any more nasty? Could Uber be any more dysfunctional than this?  For those wondering exactly what Benchmark is trying to accomplish with their strategy, this next article gives a highly plausible explanation.  I can’t help but feel that Benchmark is going to come out of this fight smelling not quite as bad as the other side.

    Why Benchmark’s Suit Against Travis Kalanick Is a Brilliant Move [Inc.com]

    Sum and Substance: The VC firm is sitting, and squirming, on an $8 billion gain with no exit in view. Suing the ex-CEO of Uber could flush out a buyer while sending the message to startups that the grownups are in charge again. For the umpteenth time, especially in the last few months, we are seeing why the Valley isn’t just hyper-insular; it’s often flat-out ignorant of how people think about and react to things in the real world. They’re so out of touch with basic commonsense considerations that they fail to see or recognize things that seem frightfully obvious to mere mortals. I guess, as the old Simon and Garfunkel song goes, we sometimes hear what we want to hear and disregard the rest. I’m not talking about the blowup at Google over gender stereotyping (I’ll save that one for a later column). I’m talking about Benchmark’s suit against former Uber CEO Travis Kalanick for fraud, breach of fiduciary duty, and breach of contractual obligations.

    Notwithstanding the SV community’s phony protestations to the contrary, Benchmark’s suit is a brilliant move–not a blunder–a strong opening gambit to pull off something that was increasingly looking like a distant and faint hope. It’s a classic strategy cross that melds market manipulation and a variation on Brer Rabbit’s briar patch pitch, where the rabbit begged Brer Fox not to toss him in the brambles, knowing full well that if the fox did exactly that he could escape. I see Benchmark–having bitten the hand that has theoretically fed it billions–hoping and praying that someone will “shame” it into selling its position in Uber. What a clever way to bail on a bad situation: claiming that you were trying to be the bigger person, or at least a good sport under trying circumstances. Otherwise, Benchmark has no easy way to exit an investment that is sinking in value daily.

    … Forget about the fact that the bozos at Benchmark agreed to the terms of the deal they made (and are now trying to renege on) regardless of what or when they knew about the ongoing behavior at “Boober” because, for years, greed has totally trumped governance in all of these “unicorn” companies. The little boys have all the control, and the different classes of voting stock allow them to run the show in ways and with degrees of freedom that would never have been acceptable to any prudent investor in the past.

    It’s even more remarkable to hear that the SV community at large is so allegedly upset and utterly unnerved by Benchmark’s radical failure to follow good form and just swallow hard and “suffer” in silence. I’m talking about all the handwringing and “oh my goodness gracious” teeth-gnashing over the idea that–in the simplest terms–a VC firm sued an entrepreneur. And, worse yet, that the guy initiating and directing the suit was a director of the company up until about 15 minutes ago, when he replaced himself with a younger guy from his firm. This is just not cricket and it’s no way for a grown-up VC firm to act because it could spoil the likelihood of future deals.

    My Take:  This really was the stage of intrigue that I’ve been anticipating for over a year – how the smartest of Uber’s early investors were going to try to lock in their gains with some alternative exit to the increasingly improbable IPO. One would have hoped for a graceful exit that wouldn’t rock the market value of the other’s shares. But alas, these investor maneuvers toward the exit ramp are looking more and more like the situation us drivers face when our passenger is antsy, the the freeway is at a standstill, nerves are getting frayed and the next exit is five miles away.

    Readers, what do you think of this week’s roundup? Is there a future for Uber after the lawsuits settle?
    -John @ RSG
    John Ince

    John Ince

    John Ince is a former Fortune reporter and Wall Street banker. He has about 1,000 rides under his belt driving part time for Uber and Lyft.  He’s writing a book about his experiences entitled:  Travels With Vanessa:  A Rideshare Driver Tries To Make Sense of It all - For a sneak peak visit the link above.

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