Uber Technologies Inc. Is a Massive Risk for Softbank

Uber Technologies Inc. has been valued at $48 billion after Softbank Group Corp. (OTCMKTS:SFTBF) has completed its purchase of 20% of the ride-hailing company.

A previous private funding round said the company was worth $68 billion, making this new round a “down round.” Anyone who bought shares at the $68 billion valuation — and then sold to Softbank — took a loss.

Since most of those exiting were early investors, however, they have taken huge profits. Founder and former-CEO Travis Kalanick sold 29% of his personal stake to Softbank and is now a billionaire. Menlo Ventures, First Round Capital and Benchmark Capital were also among the early backers to take profits. 

Kalanick ran Uber from a startup to a dominant player in the new world of app-based ride-hailing, which has been putting taxi services out of business around the world. But the company now faces challenges from well-heeled competitors and governments bent on regulating or even banning it.

Can Uber Be Saved?

The Softbank deal was designed to put a period on Uber’s past troubles and re-launch the company with $1.25 billion of fresh capital.

Uber tried further distract by announcing on January 7 that they have testing self-driving car chips from Nvidia Corp. (NASDAQ:NVDA), and will use them in their fleet of autonomous vehicles.

Former Expedia Inc. (NASDAQ:EXPE) CEO Dara Khosrowshahi is now in charge at Uber. He hopes to make people forget a hellish year during which the company faced allegations of sexual harassment, a backlash by government regulators, a “delete Uber” campaign, and revelations that it paid to cover up a massive data breach.

A lawsuit filed by Alphabet Inc. (NASDAQ:GOOGL) last February may be the company’s greatest headache. Google is accusing their former employee, Anthony Levandowski, of taking trade secrets from the Waymo self-driving car unit to Uber with him.

That trial has been delayed by the discovery of a letter from former Uber employee Ric Jacobs which alleged that Kalanick personally directed the theft of Waymo’s technology and spied on competitors. 

Is Uber Worth Saving?

Make no mistake. There is something worth saving at Uber, a service that powered 4 billion car rides in 2017. The company has a huge infrastructure, thousands of drivers, and enough brand loyalty to make the word “uber” a verb.

Khosrowshahi has recruited Barney Harford, former CEO of Orbitz — which Expedia bought in 2013 — as the new chief operating officer. Harford is charged with cutting costs so Uber can look profitable in an initial public offering planned for 2019. The company lost nearly $2.5 billion during the middle quarters of 2017 and has yet to announce its fourth-quarter results.

Along with their purchase, Softbank has brought Sprint Corp. (NYSE:S) CEO Marcelo Claure and Rajeev Misra, who runs Softbank’s $100 billion “Vision Fund,” to the Uber board, which now numbers 17 people. Softbank controls Sprint, which has pre-loaded Uber’s app onto its phones in the past.

The Bottom Line

Bigger than all of Uber’s other problems is the fact that its backers were greedy.

They delayed their planned IPO long enough for the company attracted big competitors like Didi Chuxing, a Chinese clone that claims to have powered 7.3 billion rides last year and driven Uber from that market.

Uber has also remained private through government backlash. Taxicab companies and liberal groups claim that Uber used private capital to subsidize the elimination of good (often union) jobs.

The City of London has refused to renew Uber’s operating license, adding itself to the list of places where Uber is banned. This list now includes Denmark, Bulgaria, and Hungary, as well as parts of the U.S., Canada, Australia and many European countries.

My own view is that Uber has missed its moment. And Softbank is going to find it got into the business too late. The Google lawsuit takes Uber out of the self-driving car market, Didi is going to keep it out of most of Asia, and politicians are going to war against it.

That is not a good position to be in. This is a corporate turnaround with all the risks of a venture capital investment. The Softbank “Vision Fund” may prove short-lived if Uber fails.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

 

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