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Uber Wrecked Their IPO Three Years Ago

2 | By Shah Gilani

Uber Technologies Inc., the smartphone-based cab hailing company that operates in 633 cities worldwide, announced this week it might be going public as early as 2019.

That gives the beleaguered private company, which has a reported $50 billion valuation, about a year and a half to get its house in order… And to hopefully sell shares to the public at a significantly higher valuation.

Good luck with that.

The once high-flying unicorn has made an ass out of itself and lost $3 billion last year. This company has probably blown its chances of selling itself to the public for a crazy valuation that it could have commanded years ago.

Here’s how Uber blew it, what they should have done instead, and what you should do when the company finally does offer itself to the public…

Going Public vs Staying Private

Companies want to sell equity stakes in themselves for lots of reasons, but only a few really matter.

First, founders and principal stakeholders make a lot of money when their private company goes public.

When founders and principal investors sell shares in their company for the first time, they usually sell “new” shares and don’t have to sell any of their own.

According to the SEC, “Existing shareholders can sell their shares in the IPO if their shares are included in and registered as part of the offering. Most large IPOs include only new shares that the company sells in order to raise capital. However, in some cases, shares held by existing shareholders are included in the IPO and the shareholders are called “selling shareholders”. The proceeds from the sales by selling shareholders do not go to the company and instead go to the selling shareholders.”

There’s no minimum amount of a company that has to be sold to the public and no maximum amount.

For example, a private company that has 100 million shares can issue 10 million new shares to the public. It now has 110 million shares outstanding, which means it’s sold only 9% of itself to the public.

The per-share price the public shares trade at determines the valuation of all shares of the same class.

If the 10 million shares our theoretical company sells trade at $20 each, then the whole company is worth 110 million x $20, or $2200 million. The founders and principal stakeholders (if they didn’t sell any of their shares) are worth a tidy $200 million. Of course, everyone’s worth more if the stock appreciates.

Now, imagine multiples of those numbers. That’s how billionaires are minted in the IPO process.

Besides founders and principal investors becoming rich, selling shares to the public enriches employees.

Employees are often granted stock in start-ups and issued stock as compensation or as part of a bonus. But that stock isn’t tradable. There’s no easy way to cash in on issued stock. There’s no market for it.

When companies go public, anyone who owns stock has a place to sell it. There may be restrictions on insiders selling, and where the price of the stock is on any given day are considerations. But, basically, going public provides liquidity to stakeholders.

Publicly traded shares are a type of capital. Public companies can raise capital by selling more shares.

Public companies have strict financial reporting and filing requirements, which often imposes much-needed discipline on the company. Because of this they are more transparent to investors, including debt investors.

Being a public company usually makes it easier to raise capital by issuing debt securities, typically bonds.

But just because a company can do an IPO, doesn’t mean it’s going to list its shares. There are plenty of reasons why companies stay private.

There are no public financial reporting requirements for private companies. Private companies can lavish their owners, executives and employees with whatever compensation or perks they want, while public company compensation, perks and expenses are closely scrutinized and sometimes debated on public forums.

The bottom-line of not going public is that if your company’s increasingly profitable, it’s all yours.

Breeding Unicorns

For almost 10 years now there’s been a new way of looking at going public. It’s more of a wait and see, wait and grow process.

The idea is that by staying private and growing the business, you’re making it worth more and more. When it’s time to cash out, the company can be sold to another company, to a private equity company, or taken public when the company might command a fantastic valuation.

Companies that stay private, that are expected to go public one day, and reach a private valuation of $1 billion or more are called unicorns.

Unicorns have never been the norm. They are outliers. The trend, the ability to hopefully breed unicorns, has strictly been a function of tons of investor money floating around – thanks to central bank liquidity pumps having been fully open for the same ten years now.

Lots of cheap financing for growing start-ups coincided with a rising stock market. While it hasn’t been conducive to IPOs, it has inflamed unicorn backers with hopes of an extraordinary payday when they deem the timing right for an IPO.

That time’s probably come and gone for several of the giant unicorns kicking in their stalls.

Uber is the best example.

Before I bash Uber’s management and bad timing, let me show you when it’s a good time to IPO.

The simple explanation of when it’s optimal to go public is best explained by an S-curve graph.

The sweet spot for going public is after a company’s made a name for itself. It doesn’t have to even be making money. It just has to have a lot of “adopters” of its products or services.

As the rate of adopters increases, the potential for growth increases. With growth comes the potential to monetize adopters or increase product pricing or margins and make lots of profits, eventually.

Ideally, a company would seek to go public while they’re in a great growth phase, long before they “peak” and look like they’re on the road to “maturing.” That’s because as successful companies grow they draw lots of attention and competitors plow onto fertile fields.

It really is that simple.

Here’s what it looks like:

wsii-time-revenue-curve

Uber is at that third point on the graph. Good-looking growth, but there’s not a lot of track left and the ride is slowing.

Dara Khosrowshahi, Uber’s newly anointed CEO, gets it. He was brought in to clean up the mess founder Travis Kalanick made of the company, essentially holding onto it for too long.

Uber has a public relations problem. It has internal management and executive problems. It has a problem with its outside “contractors,” its drivers. It has a problem with cities around the world. It has a problem with federal, state, municipal and “local” governments. It’s losing money. It’s never made money. It’s got competitors gnawing at its heels and in some places overtaking it.

This isn’t an Uber bashing article. There’s been plenty of ink spilled on Uber’s problems.

My issue with the company is IPO timing.

Uber should have gone public three years ago, when it initially had close to a $50 billion valuation. Then again, that was always a “private” valuation and not based on any publicly disclosed metrics.

The company’s new CEO has a lot to fix.

I wish him well. But I won’t be investing in the company in another year and a half or two years or whenever it hopes to come to market.

This little piggy should have been taken to the market when it was fat, and not when it’s losing its muscle.

Sincerely,

Shah

2 Responses to Uber Wrecked Their IPO Three Years Ago

  1. Joseph says:

    Thanks for the article. I was curious.. Why can’t Uber still go public and raise just as much moneybas they would have raised when “valued” at $50B? Everyone ran to Snapchat even though they lost money. Couldn’t Uber still go public and just have that much more capital to correct their mistakes? Don’t you think there’s enough people who would invest based off the name alone?

    Thanks.

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