Uber and Lyft should be a wake-up call for easy money and the irresponsible investor.
Buried in their regulatory filings are facts that highlight the possibility that access to capital may have already been drying for Uber and Lyft.
Uber and Lyft changed our perception of “personal mobility”. For me they have been a godsend as I live in Southern California but hate to drive. For millennials, they, and their ilk, have been credited with – or blamed for – a mindset away from ownership of an automobile. In many countries, including in India, it has significantly expanded options for getting around. In many cases, people have taken to driving for these platforms as a profession. In cities like New York, driving for Uber has replaced being a cab-driver as the dominant first job of a low-skilled new immigrant.
But that does not necessarily justify valuation they are asking.
As a former Analyst who enjoyed combing through regulatory filings, I spent some time on their offering documents (“S-1”) recently. First, I was stuck by the grandiosity of their aspirations. Numbers in the regions of trillions of dollars, billions of miles, millions of riders and drivers were everywhere. It does not set them apart – American Capitalism is built on the backs of ambitions that span the globe and audacity that bridges gaps between continents.
No matter how anybody sees them, it is without question Uber and Lyft truly believe they are changing the world for the better. And they do have many numbers to show for.
Buried deep inside S-1 are “accumulated deficit” data. My training and years in the profession taught me one primary objective of going public is establishing valuation as a support for growth capital in the future. Say, I believe my franchise should be “worth” a hundred dollars while my book value is only ten. If I am right, I can issue shares at hundred, thereby insuring a 10X multiple to the last pre-IPO investor. Venture Capital industry is built on the rat-race of being the pre-IPO investor, and rightly so.
As an entrepreneur, I would also want to build some reserve for growth capital and possible capital source for future acquisitions. For any startup, it is inevitable that it will have accumulated deficits – incurred losses on investments by pre-IPO investors, or the business, on a cash basis. One of my objectives will be to use IPO proceeds to wipe away these deficits, any excess of which adds to my cushion for such activities.
Uber has had pre-IPO funding of USD 24.7 Billion, cumulative, while they raised USD 8.1 Billion at IPO, according to Crunchbase; for Lyft figures are USD 4.9 Billion and USD 2.3 Billion. Uber made USD 3 Billion loss from operations in 2018, USD 4 Billion in 2017; Lyft made almost USD 1 Billion in losses in 2018, and about USD 700 MM the year before. None talks about making profit from operations in 2019, 2020, or 2021 even.
In other words, their IPO is truly meant to work as a mechanism for establishing a valuation for future capital raise. That is where accumulated deficit comes in. As of 2018, Uber had accumulated deficit of USD 7.9 Billion, and by IPO day it might well be north of USD 8.2 Billion. Lyft had an accumulated deficit of USD 2.9 Billion in 2018. Both accumulated deficit data closely match amounts raised at IPO. Combined with the fact that both of them are expected to make an operating loss in 2019, we can expect them to be back to capital raise very soon.
For pre-IPO investors, an accumulated deficit means not much, until they do a lot. VC funds are marked to market on presumed valuation or contractual valuation of a later round. It, therefore, is not necessary to match IPO funding to the accumulated deficit number. Unless the bests are large enough and the possibility of recouping through share sale when permitted is remote.
For both Uber and Lyft, accumulated deficit roughly match amounts raised in IPO. Even in a world of easy money, cash on cash loss is verboten for most. The fact that the amount raised is not tangibly larger than accumulated deficit might mean they could not garner enough third-party interest. Fearful that a house of cards is sure to come down one day, pre-IPO investors might have had to contend with just getting deficit wiped away. It could be that these companies are losing access to capital making pre-IPO investors contemplate such a move. We just do not know, but it looks awfully coincidental.
One of the big ironies of easy money is that each round aims to be cleverer than the one next. It feeds on fear of missing out on University Avenue where up valuation propped by participation in a later round might actually help in investors in a VC fund who also participated in a previous one.
That is irresponsible investing and at worst a Ponzi-like scheme. Let’s wake up to it.
[Partha Chakraborty is CEO of Switchboard Systems. All opinions are of the Author alone and do not necessarily represent that of Switchboard Systems. The author alone is responsible for any error or omission.]