Uber’s Serial Crises Deliver Big, Important Lessons to All Startups
We all have lots to learn from the nonstop Uber debacles. Success is about traction, product quality, happy workers and more–that’s what drives valuations.
PHOTO CREDIT: Getty Images
As a battered survivor of the last Internet Bubble way back in year 2000, I've been waiting for the startup world to wake up and remember its past, hypermanic sins. Wednesday's New York Times lead business story heralds that awakening. Watch out, startups: The 33 percent implied markdown of Uber's valuation is likely the first, sadly, of many startup valuation bubble-poppings to come.
I've never been able to discern how Uber would become a scalable, profitable business. There are more than 200 taxi dispatching apps today, according to Arkenea consultants. What, please tell me, differentiates Uber enough to trigger its September valuation around $70 billion?
Little seems protectable, unique, or obscenely profitable. There's a lengthening list of missteps, problems, and disgruntled customers (which include drivers, regulators and passengers).
This week's news heralds another Uber "achievement." Asian multibillionaire Masayoshi Sun, the Softbank founder, invested $1 billion in the company. It brings Uber's permission, and almost certainly board encouragement, to repurchase up to 15 percent of Uber's shares from disgruntled shareholders at discounts estimated by the media at about 30 percent below last week's valuation.
Softbank's reward for taking out disgruntled sellers? Lots of Uber stock and two Uber board seats if they succeed, yielding Softbank a better deal than at least the last few Uber investors.
It feels like the replay of a movie neither I nor my bank account enjoyed. Scenes from pets.com, Webvan, and Webtv redux--and more recent failures like Quirky and Color. All were cheered on by lots of very smart people, including top venture capitalists (many far smarter than me).
Short-term growth, hype, and dice-rolling too often drive buzz for clever ideas and spike valuations quickly, But buzz-building distracts boards' focus from issues delivering sustainable startup success: repeatable, scalable growth, and a steady path toward profit. This focus is vital: life versus death for startups.
Problems under the Uber hood:
- The company behaves like a seed-stage startup on television's "Silicon Valley," about hyper 25-year-old startup kids. Flagrantly abusing regulations, regulators, and employees in everything from regulator-deceiving software to sex parties, office misogyny, underpaid drivers, and worse. This cost Uber one of its most lucrative markets, London (for now, anyway), as has been widely reported.
- The company is regularly accused of deceiving its core asset, its drivers. It promises them income, yet fails to acknowledge out-of-pocket expenses (leases, insurance, gas, tolls, repairs, and more).
- When an honest, ambitious competitor shows up, Uber often loses. Lyft is growing market share rapidly in the U.S. at Uber's expense. Uber abandoned the Chinese market, where its then-CEO Travis Kalanick was quoted as "losing a billion dollars a year." Local startup Didi Chuxing kicked Uber's proverbial tailpipe, with the trouncing smoothed over in the press as a "sale" to or merger with Didi. Venture capitalists fondly call these deals "shotgun weddings."
- The business seems inherently unprofitable. 75 cents or more of every revenue dollar goes directly to drivers. Tons more is spent recruiting drivers. Then there's overhead, bandwidth, tech, payroll and perhaps corporate taxes. Uber lost at least $1.27 billion in the first half of 2016, according to Bloomberg's Eric Newcomer, who cites people familiar with the matter. Multinational legal challenges, market share declines, and the costs of ousting Kalanick drive more red ink.
- The worst may yet be ahead. Courts in many nations and U.S. states are ruling on whether Uber drivers are truly "independent contractors." That status saves Uber at least ten if not 12-15 percent its payroll cost. Rulings that drivers are employees could destroy profitability.
What Uber--and any flailing startup--should do
It's about time Uber woke up and replaced Kalanick, who never behaved like the CEO of a multinational, multi-billion dollar company. He's been publicly reported demeaning some of Uber's several hundred thousand employees (oops--I mean independent contractors).
Some unsolicited advice for the new, smart adult CEO, Dara Khosrowshahi:
- Pull back, slow down the growth, and pare back some of the insanity. (It seems like he's already starting.)
- Strip away hype and be more open and honest with regulators, drivers, and passengers.
- Attack bloated headquarters costs in search for better eventual profits.
- Turn off the damn hype machine and get to work. (I think he knows this already.)
I've trained lots of startups, and everyone always asks, "How did Uber get so successful so quickly?" My answer: "Successful is defined by three words: repeatable, scalable, and ultimately profitable."
It'll be a long hard road for Uber and its new CEO. I wish them well. Personally, I'll continue hailing a NYC yellow cab myself, since Uber's made them much more available. I like the big yellow ones, like the Checker (now a relic) my late Great Uncle Max Gluckstern drove for 50 years. Without a smartphone or app, Max fed his family well and sent his kids to college.