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 almost ten-year-old company soon grew to become the highest valued private startup company in the world. But with its rapid growth came many controversies that knocked down its valuation from a lofty $70 billion to $48 billion in its last funding round in Jan. 2018. On May 23, 2018, the company announced a new tender offer that would bump the company's value to $62 billion.
Earlier in 2018, Japanese conglomerate Softbank Group, along with a group of investors including Dragoneer Investment Group, successfully bid for 20% of Uber's stock at this lower valuation, a 30% discount of the last valuation figure. The deal reportedly gave Softbank 15% in the ride share company while Uber got a powerful ally in Asia, and could help turn the tide for the company after a few very public missteps. The remaining 5% shares reportedly went to other investors in the group. The year hasn't been all great, though, as a self-driving Uber vehicle was involved in a fatal crash. Additionally, on August 8, 2018, the New York City Council voted to put a pause on new licenses issued to ride-hailing services such as Uber and Lyft.
Despite the lower valuation, Uber today is valued more than the market cap of Ford Motor Company (F) and General Motors Company (GM). It will be interesting to see how the company's plan of going public by 2019 plays out.
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 on 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 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. In June 2016, 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 finances 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 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 creates unfair competition. The case was heard by Europe's top court in December 2016. Uber lost its license to operate in London where the company has 40,000 registered drivers in October 2017. 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. On June 26, 2018, a London judge overturned the ban, effectively allowing Uber to operate under a 15-month license along with conditions.
In New York, it surfaced that Uber had mistakenly charged drivers commission based on pre-tax earning as opposed 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 paying 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.
On June 13, 2017, 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 to receive employee benefits, which would likely have a significant impact on the bottom line.
The August 2018 restriction on licenses by the New York City Council is a blow for Uber and would means a pause on any new licenses for the ride sharing service in the city for a 12-month period.
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 a merchant delivery program for food called UberEATS. 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.
On July 9, 2018, it was announced Uber is investing in the electric scooter rental company, Lime, in collaboration with Alphabet Inc.'s Google Ventures (GOOG). Lime was founded in 2017 and has raised $467 million thus far. These lightweight scooters are available for rent all over cities, as customers leave them on the sidewalk for the next rider, making for a convenience and clean energy-based business model. The deal is part of a $335 million investment round, and the business is valued at $1.1 billion. Uber plans to promote Lime through its app and brand its own logo on the scooters. Uber made similar efforts with the startup JUMP Bikes before acquiring the business for reportedly close to $200 million in April 2018.
Kalanick Out; Khosrowshahi In
2017 was a rough year for Uber. 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. That case was settled in early 2018. 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 21, 2017, 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)
In December 2017, Barney Harford, former CEO of online travel site Orbitz, was appointed as Uber's chief operating officer.
The Bottom Line
Like Google, 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. Uber hit perhaps its worst snag yet in March of 2018, when a self-driving car fatally struck a pedestrian, causing the company to temporarily suspend all testing. In May 2018, Uber announced that it would halt its Arizona testing program but would conduct it elsewhere. In July 2018, Uber's self driving cars made their return in Pittsburgh. Time will tell if Khosrowshahi can turn it around.