31 August, 2015

Uber (Part 4a) - Consensus view of on-demand ride economics and the implications

Part of my beliefs on Uber is that marginal cost pricing will drive the end-state economics of both drivers and platforms (4.b and 4.g in the framework).  Because of this, I'll (later) share specifics of how I believe vehicle cost curves are relevant to Uber's strategic imperatives.

My original plan to bring readers up to speed with the "consensus view" of expert analysis in this corner of the business world was to post my own narrative over the weekend - including some wonky discussion of a recent NBER working paper titled "Peer-to-peer markets," authored by Stanford's Jon Levin et al.

Then I read Alex Rubalcava's piece "A roadmap for a world without drivers," published last Wednesday on Medium.  Alex is a VC in a "family office" firm with several investments in the automotive space.

Rather than reinvent the wheel, I offer you Alex's good-enough summary consensus (slightly reordered, in bold, with my beliefs indented below).

TL;DR All you really need to know is that experts agree this industry is headed towards marginal cost pricing, with or without autonomy.  Autonomy could help Uber in the medium-term, if it can survive that long

Alex's autonomous vehicle discussion is essentially the same economic structure as our Uber discussion, except with driver costs approaching zero.  For further detail, read his piece and in particular follow his links to expert published views on various aspects of the discussion.

22 August, 2015

Simon Says: A wealth of information creates a poverty of attention

A post by Tim Taylor earlier this week caught my attention.

It focused on Herb Simon's 1971 article "Designing Organizations for an Information-Rich World" (hand-edited draft here), an essay which seems as relevant today as ever - including in the emerging study of "attention economies" such as YouTube.

Perhaps the idea is also somewhat related to this famous (and humorous) selective attention test.

In that (now) 45-year-old article, Simon wrote:
A large share of the costs of an information-rich environment are carried by information users, not information providers... [and] humans may be poorly adapted to disregard information enough...

21 August, 2015

Uber (Part 3b) - Does fundraising through foreign subsidiaries raise a Yahoo/Alibaba question?

This is a speculative post, prompted by this morning's news that Uber plans an IPO in 12-18 months and has been actively fundraising through foreign subsidiaries since at least late 2014.

I'd like to briefly discuss the latter point, which for the purposes of our ongoing conversation is a bit of a buried lede.

Among the challenges I outlined for Uber is the degree to which they'll need to raise dilutive external funds to expand operations, particularly in high-potential markets such as India and China.  The negotiation on allocating upside/downside that goes along with that fundraising (points 3.e through 3.h in my discussion framework) is a concern because Uber's $50b valuation already prices in a substantial global win.

Fundraising through a foreign subsidiary is one such dilutive source.

15 August, 2015

Uber (Part 3a) - A primer on valuation

One of the fundamental questions of strategy: "Is the prize worth the chase?" 

The purpose of this third post is to provide a short primer on business valuation, so readers better understand the link between Uber's recently established private-market-based valuation of $50b and the strategic imperatives implied for the managers tasked with earning into it.

In this series' first post I laid out my conclusion that Uber's "prize is likely not worth the chase."  In the second post I laid out an analysis & discussion framework in support of that view.  Section 3 of that framework proposed a quick revenue-multiple valuation which was used in section 4 to develop a view of those strategic imperatives - essentially, what you'd have to believe about Uber in order to invest.

This primer is centered around supporting my choice of a ~5x revenue multiple valuation for a "mature" Uber as reasonably conservative, then asks what else we might consider since a revenue multiple clearly doesn't highlight enough value.

Prizes and chases contain both financial and other considerations (such as wait time, political capital, happiness, etc).  Though it makes many people uncomfortable to do so, almost any consideration can be reduced to its financial equivalent through highlighting the implicit trade-offs being made.  Often, people are surprised to see how much (little) they implicitly "value" a non-financial consideration.

"Unknowable" financials can usually be reduced to scenario descriptions of "what you'd have to believe."

This post has four sections:
  1. The "intrinsic value" of a business is based on replacement of its free cash flows (essentially revenue minus costs), the so-called "Discounted Cash Flow" (DCF) analysis
  2. Revenue multiples are often used to compare companies' valuations because it's a quick and easy shortcut to a full DCF. 
  3. Revenue multiple is close enough for our purposes, and it's more transparent than a full DCF
  4. Other valuation techniques could help us ballpark the value of access to Uber's user network.  Valuing Uber's network at $100/user shows one way to narrow the valuation gap

Disclaimers/disclosures: This author is not an investment banker and holds no professional licenses upon which a reader can rely.  These posts are not investment advice.  This author does have professional experience in M&A which enables him to identify and build off expert valuation assessments for use in the context of a strategic discussion.  Any errors here are solely my own and not those of the links I included.  See end of post for more detail

08 August, 2015

Uber (Part 2b) - A framework for analysis & discussion

A long-form "Uber" framework for analysis & discussion:

Below I offer a 5-point discussion framework in support of my view on Uber, developed while teaching a recent class on business strategy.  Hopefully it offers sufficient footholds for readers to challenge my facts, offer contrasting views on important points, and introduce ideas I haven't considered.  I'll continue to expand on several sub-bullet points in a series of follow-on posts over the upcoming weeks.

  1. Uber is large and growing quickly...
  2. ... and needs money to fund continued growth into "new" cities
  3. External fundraising will prove increasingly difficult because Uber's current valuation already prices in a "win" of much more than the existing global taxi market
  4. Internal funding by "mature" cities is likely difficult due to low current cash flow and possible margin erosion; the high capital costs of responding to any erosion increase the challenge further.  Counterintuitively, embracing drivers as employees may help
  5. Uber risks ending up more like Groupon than Amazon.  Uber may experience a value collapse if not outright failure; but in the process will fundamentally reshape local transit around the world