A world with less pollution and no traffic jams, where taxis are cheap and safe and you never have to wait for a pickup: It's a rosy vision Uber is peddling, and venture capitalists, those professional optimists, are fully on board. An app-based service that lets anyone in need of a ride summon one within minutes, Uber recently raised $1.2 billion at a valuation of $18 billion, making it, on paper, one of the world's biggest transportation companies, more valuable than such venerable competitors as Hertz, Avis and United Airlines.
It's a bold upside bet, one in which the five-year-old startup not only continues to dominate the peer-to-peer rides market it created but transforms everything from urban planning to parcel delivery. Yet the people behind Uber think it's conservative: CEO Travis Kalanick has said he thinks public markets would price Uber even higher. Benchmark Capital's Bill Gurley, who sits on its board, argues that the company could easily attain a $150 billion valuation, and his fellow director Bill Maris has tossed out $200 billion.
Less speculative appraisals suggest a lower number; a fine-grained analysis by Aswath Damodaran, a finance professor who teaches equity valuation at NYU's Stern School of Business, pegged Uber's intrinsic worth at $6 billion — though he produced that number without ever having tried the service. "It's undoubtedly inflated simply because of all the hype," says Wharton professor David Reibstein. He sees a similarity to Groupon, the daily deals provider, which debuted on the public markets with a market cap of nearly $20 billion, only to see its shares fall 90% within a few months.
That's not to say it's all hype. Whereas Groupon was still losing money when it went public, Uber has real profits to go along with its other metrics. Public comments by Kalanick suggest an annual gross revenue run rate of more than $2 billion already, with the top line doubling every six months as Uber pours money into recruiting new drivers and passengers and upgrading its technology platform. By comparison, when Facebook booked its first $2 billion year, it was already valued at $50 billion despite slower revenue growth (though Facebook didn't have to pay 80% of its gross to drivers).
But if there are sane reasons to be bullish on Uber, there are equally solid grounds for doubt. The scenario implied by Uber's valuation is only one way things could break. There are others in which the company finds its ambitions constrained or even disappears. Competitors will steal market share, encouraged by the lack of any strong barrier to entry. Regulators will keep imposing new costs, and cities will continue to ban Uber outright. Looking further down the road, a new technology, be it driverless cars or a nonprofit collective, will inevitably threaten Uber's business in the same way Uber has unsettled the taxi industry's.
"Right now, I would consider it to be the fat, dumb and happy phase of disruption to transportation," says Mohanjit Jolly, a partner at the venture Draper Fisher Jurvetson, whose investments include Tesla Motors. "I don't know if we have enough data points thus far to crisply identify what the gotchas are just yet."
Even in the let's-disrupt-transportation church, Uber has no shortage of competitors pecking away at it from every angle. The biggest, Lyft, competes primarily in the arena of low-cost service, but in May it added a premium tier, Lyft Plus, challenging for the market where Uber makes its biggest profits. There are services that specialize in traditional taxis (Hailo, Flywheel), services for riders willing to share the backseat with strangers (Hitch), services for those who just want a cheap car for a few hours but no driver (Getaround, Relayrides) or a driver but no car (Redcap). And of course there are the traditional taxi and car-service companies and rental providers.
Uber bulls think none of that matters much — that Uber's head start will only snowball with time in a pattern of increasing returns. In digital marketplaces that connect buyers and sellers, "typically, there are strong first-mover advantages," says Jeff Jordan, a partner at Andreessen Horowitz, whose investments include Lyft and Instacart, an Uber-like grocery delivery service. The existence of so-called network effects causes big companies like Uber and Lyft to get bigger and starves small ones as consumers flock to the services with the most providers, he says.
It's a common view in Silicon Valley, but not necessarily a reliable one in this instance. "The idea that there is this first-mover advantage where essentially customers are locked in — history just does not support that," says Peter Golder, professor of marketing at Dartmouth's Tuck School of Business. Predictions of a winner-take-all market usually don't pan out, he says, pointing to has-beens like Netscape and MySpace.
Network effects are strongest when each new user adds utility for other users; think Facebook, which is more fun if your friends are on it. Uber doesn't work that way. In fact, riders compete with each other for cars, and drivers for fares. Even Gurley, he of the Uber board seat and $150 billion prediction, acknowledges this. "It's indirect, but [additional users] do add value because it allows the system to get better," he says.
Strong network effects also correspond to high switching costs. Quitting Facebook potentially means leaving behind years' worth of accumulated contacts and photos. Quitting Uber carries no such penalties. In fact, there are powerful switching benefits in the form of the rich incentives just about every ride-sharing company is now offering to lure new customers and drivers. Uber guarantees some new full-time drivers a minimum of $45 per hour for their first two months, about what a New York City cab driver makes in a peak hour, and has dangled $1,000 signing bonuses and $5,000 guaranteed pay; Lyft offered customers free rides for two weeks when it launched in New York, and $750 bonuses to attract SUV drivers; and so on. "Throwing money at you kind of shows you there really isn't that much on the services or technology side they can do to differentiate," says Gartner transportation analyst Thilo Koslowski. "At the end of the day, this is isn't something that has a whole lot of magic sauce to it."