The Story of Uber
Uber’s disruptive technology, explosive growth, and constant controversy make it one of the most fascinating companies to emerge over the past decade. The nine-year-old company has rocketed to become the highest valued private startup company in the world. But 2017 has not been kind to Uber and after a series of controversies rocked the company, its lofty $70 billion valuation took a hit.
In November 2017, the Japanese conglomerate Softbank Group, along with a group of investors including Dragoneer Investment Group, offered to buy at least 14% of Uber's stock at a valuation of $48 billion, a 30% discount of the last valuation figure. The deal would give Uber a powerful ally in Asia, and could help turn the tide for the company after a few very public missteps this year.
Despite the lower valuation, Uber would be at par with the market cap of Ford Motor Company (F) and within striking distance of Tesla Inc. (TSLA). It would be interesting to see how the Uber board's plan of taking the company public by 2019 plays out in the wake of this capital infusion.
Founders Meet in Paris
Uber’s story began in Paris in 2008. Two friends, Travis Kalanick and Garrett Camp, were attending the LeWeb, an annual tech conference the Economist describes as “where revolutionaries gather to plot the future".
In 2007, both men had sold startups they co-founded for large sums. Kalanick sold Red Swoosh to Akamai Technologies for $19 million while Camp sold StumbleUpon to eBay (EBAY) for $75 million.
Rumor has it that the concept for Uber was born one winter night during the conference when the pair was unable to get a cab. Initially, the idea was for a timeshare limo service that could be ordered via an app. After the conference, the entrepreneurs went their separate ways, but when Camp returned to San Francisco, he continued to be fixated with the idea and bought the domain name UberCab.com.
UberCab Takes Shape
In 2009, Camp was still CEO of StumbleUpon, but he began working on a prototype for UberCab as a side project. By summer of that year, Camp had persuaded Kalanick to join as UberCab’s ‘Chief Incubator’. The service was tested in New York in early 2010 using only three cars, and the official launch took place in San Francisco in May.
Ryan Graves, who was Uber's General Manager and an important figure in the early stages of the company, became CEO of Uber in August 2010. In December 2010, Kalanick took over again as CEO, while Graves assumed the role of COO and board member.
The ease and simplicity of ordering a car fueled the app’s rising popularity. With the tap of a button a ride could be ordered; GPS identified the location and the cost was automatically charged to the card on the user account. In October of 2010, the company received its first major funding, a $1.25 million round led by First Round Capital.
In October of 2010, the company received a cease-and-desist order from the San Francisco Municipal Transportation Agency. One of the main issues cited was the use of the word “cab” in UberCab’s name. The startup promptly responded by changing the name UberCab to Uber and bought the Uber.com domain name from Universal Music Group.
Uber Takes Off, But Soon Faces Losses
2011 was a crucial year for Uber’s growth. Early in the year, the company raised an $11 million Series A round of funding led by Benchmark Capital and it went on to expand to New York, Seattle, Boston, Chicago, Washington D.C. as well as abroad in Paris. In December at the 2011 LeWeb Conference, Kalanick announced that Uber raised $37 million in Series B funding from Menlo Ventures, Jeff Bezos, and Goldman Sachs. In 2012, the company broadened their offering by launching UberX, which provided a less expensive hybrid car as an alternative to black car service. The latest round was in June, 2016, when Uber raised $3.5 billion from Saudi Arabia's Wealth Fund.
Uber is not public and isn't required to report its earnings publicly, but in April, 2017, Uber opened up about its financial for the first time to Bloomberg, and reported a global loss of $3.8 billion for 2016. This includes losses from its China business, which it sold the summer of 2016 — without it, net adjusted losses were $2.8 billion. The company also told Bloomberg that the more it shifts to its UberPool — the carpooling service — the faster the revenue grows, and this shift made the fourth quarter of 2016 a little brighter with a revenue increase of 76%, while losses increased 5%.
Uber Faces Opposition
During its expansion, Uber has met fierce resistance from the taxi industry and government regulators. As part of their strategy to mitigate the opposition, the company hired David Plouffe, a high-profile political and corporate strategist who worked on the Obama's 2008 presidential campaign.
In 2014, taxi drivers in London, Berlin, Paris and Madrid staged a large-scale protest against Uber. Taxi companies have claimed that since Uber avoids their expensive license fees and bypasses local laws it create s unfair competition. The case was heard by Europe's top court in December, 2016.
Most recently, in New York, it surfaced that Uber had mistakenly charged drivers commission based on pre-tax earning as oppose to after tax earnings — at a cost of tens of millions of dollars to New York drivers. The company said it was an accounting error, and it was committed to pay its drivers back in full as quickly as possible. The issue does raise questions about the fairness of who ends up paying the taxes.
Driver's advocacy groups have argued for some time that Uber is avoiding a tax at the expense of its drivers, something the New York Times found evidence to support. The paper estimated it could have cost drivers hundreds of millions of dollars.
In June of this year, a New York judge ruled that Uber drivers should be considered as employees as opposed being independent contractors like the company had argued, at least in certain cases. This opens up for drivers receive employee benefits, which would likely have a significant impact on the bottom line. Uber has appealed the decision.
Most recently, Uber lost its license to operate in London where the company has 40,000 registered drivers. The current license is up September 30, however, the company has 21 days to file an appeal, something they said they would immediately do. Transport of London (TfL) said Uber was unfit to hold a license, while Uber said the Mayor has caved to a few people who want to restrict consumer choice.
For related reading, see; Scandal-Ridden Uber Loses Its President and Key Engineer (TGT, GOOG).
Surge Pricing Backlash
Uber uses an automated algorithm to increase prices based on supply and demand in the market. On New Year's Eve 2011, prices soared to as much as seven times standard rates, fueling negative feedback from users. Surge pricing triggered outrage again during a snowstorm in New York in December of 2013. More recently Uber committed to cap surge pricing during several blizzards in New York City.
Competition from Lyft
Competition has been ferocious between Uber and its closest rival Lyft. In 2014, both Uber and Lyft claimed that drivers and employees engaged in sabotage by regularly hailing and canceling rides on each other’s services. Kalanick also openly admitted to trying to undermine Lyft’s fundraising efforts in a Vanity Fair article. (For more, see: Key Differences Between Uber and Lyft)
Uber has merchant delivery programs such as its food delivery service, UberEATS and a same-day courier service called UberRUSH. Uber also offers UberPool, which allows drivers to pick up multiple riders on one ride, which makes it a cheaper option compared to UberX and UberBlack. This year, the company in partnership with Barclays has rolled out a co-branded rewards credit card in the U.S. The Uber Visa Card reportedly will be free and come with a $100 starting bonus. It would also offer cash back on spending including dining, airfares and certain online transactions.
Kalanick Out; Khosrowshahi In
2017 has been a rough year for Uber so far. The troubles began in February, when a former female Uber engineer ousted the company for its sexist culture in a 3000 word blog post. It was alleged that Uber's corporate culture was highly hostile, sexist and quite offensive to most people. The post quickly went viral and a number of high-level employees were let go or resigned for reasons relating to the allegations in the following months. Following the blog post, the board called for an internal investigation which became known as the "Holder Investigation" (it was lead by former Attorney General, Eric Holder). The investigation resulted in 47 recommendations intended to improve the culture and work environment, and, according to Uber, the firing of more than 20 staff members.
In the following months scandals seemed to haunt both the company and its CEO. Letters were released to the press which confirmed that sexist attitudes came from the top down — including from Kalanick himself. He was also caught on video arguing with an Uber driver about lowering fares, which did not strengthen his image in the public eye.
Simultaneously, Uber was being sued by Alphabet's (GOOGL), Waymo, claiming that a former employee of their's stole secrets relating to self-driving technology. In addition to that, the New York Times revealed that Uber had used a feature that would allow it to operate in areas where it was illegal, resulting in a criminal investigation. (For more see: Uber Under Criminal Investigation for Use of 'Greyball' Software)
On June 21st, Kalanick resigned after a shareholder revolt. After a little more than two months it was announced that Dara Khosrowshahi — then-CEO of Expedia (EXPE) — would take over. Khosrowshahi came to New York in 1978 with his parents to escape the Iranian revolution. He started his career in finance at an investment bank, and eventually became the CFO of IAC/InterActiveCorp (IAC), a position he held for 7 years before becoming the CEO of Expedia. (Editor's note: Investopedia is an IAC owned company)
The Bottom Line
Like Google (GOOG), Apple Inc. (AAPL) and Tesla Motors (TSLA), Uber is also gearing up for a future of driverless cars. The company is currently planning to get a permit for its self-driving cars in California. However, the road has been bumpy so far, especially since Alphabet Inc's (GOOG) Waymo sued Uber for theft of self-driving technology, not to mention the ousting of its own founder and CEO. Time will tell if Khosrowshahi can turn it around.