Jin S. Lee
- Mark Cuban says that Uber’s IPO is a warning sign for Silicon Valley that the whole unicorn thing wasn’t a good plan.
- Uber, he says, "isn’t a growth company" making its stock a hard sell to investors looking at its losses and mounting debt.
- He blames the VCs, who coached CEOs to wait too long before going public.
- He suggests that late-stage startups recruiting employees might have a harder time of it.
- Visit Business Insider’s homepage for more stories.
Uber’s IPO was a flop, even though their bankers were using every trick in the book to keep the stock price from crashing on day 1, including reportedly buying shares themselves in a tactic called the ‘naked short.’
But investors who were looking at Uber’s revenue, burn rate, mounting debt, growth rate weren’t biting and now billionaire Marc Cuban has weighed in saying he’s not surprised at the rough time Uber had.
He told CNBC on Tuesday that he blames the Silicon Valley venture capital industry.
"It’s not a growth company. It’s a brand. They just waited too long. There’s nothing exciting about it," Cuban said.
"The reality is you’re nine years in and you’re still having to buy your revenue? That’s not a good sign," said Cuban, who is an investor in ride-sharing rival Lyft.
Many young-ish Silicon Valley companies go public when they are unprofitable but make investors comfortable with the all the red ink by showing how the current spending will translate into explosive growth down the road.
While Uber’s bankers and executives are pitching Uber as the next Amazon, the numbers tell a different story. Amazon went public in 1997 after it grew its revenues from $511,000 to $15.75 million in one year. True, it also grew losses from $304,000 just under $6 million but everything about Amazon’s business is different from Uber’s.
Blame the VCs
"You’re nine years in, and the gig economy is challenged when the unemployment is low and the overall economy is growing, because it’s a not a primary job for most people. It’s a job of last resort," said Cuban. (Technically, Uber was founded in 2009, so it’s 10 years old, but it launched its first beta black-car ride hailing service in 2010.)
To be fair, Uber’s revenue rose in 2018 over 2017, as did its expenses. And although it’s the market leader in ride share, it has other promising businesses, like food delivery.
But Uber only showed a profit in 2018 because it sold one of its business units. That’s not the typical sign of a growth a company.
Cuban blames the Silicon Valley VC system, the love of unicorns that keeps companies private during their biggest growth years, concentrating huge returns to the early investors and growth-fund investors.
"I just think we’re seeing a reflection of the Silicon Valley ethos in the public market. The whole attitude was wait, wait, wait, wait. You don’t want to deal with IPO. But at some point, all of those VCs need a liquidity event. It also suggests that they are not very good at valuing companies."
Many of those investors sold portions of their stakes at the $45 IPO price and still did well with the IPO.
But most of them still have the majority of their stakes locked up for at least six months before they’ll be allowed to sell. And, while they’ll all make money on stock they bought for as little as 33 cents to $3.50 a share, they’ll obviously do better if the public stock does better.
"Obviously, the didn’t listen"
Cuban is an investor in Lyft and wasn’t thrilled with Lyft’s IPO, either.
"I’m still up a little bit on my stock. It was $1 million position, so it was big but not huge for me. No, I haven’t bought any more. When I bought in Lyft it was four years ago, and I’ve been pushing for them to go public from that moment on. Obviously, they didn’t listen."
While Uber’s sagging stock price still turned the company’s founders, early investors and top executives into very wealthy people, it’s harder on the rank-and-file employees. In Silicon Valley, many people get a chunk of their compensation in stock.
In 2017, with the company’s value soaring, Uber granted 2.9 million stock options and 41.2 million shares known as restricted share units in 2017 at an average strike price of $41.39, as Business Insider’s Troy Wolverton reported. RSUs are typically tied to performance expectations and unlocked over time. Shares that employees bought at that price, or must buy at that price as their shares unlock, are now under water with Uber’s trading well under $40.
Employees that joined, or were issued stock, in 2018 are in a little better shape. Uber’s valuation dropped, thanks to its much publicized board room brawls that included Softbank buying a large stake at a discount. Employees options from 2018 have an average strike price of $33.45, while the restricted shares had a grant value of $36.73 per share.
At Uber’s current under $36-$39/share stock price, those shares will not generate employees much of a return.
The company no doubt hoped for a far better IPO. It offered CEO Dara Khosrowshahi an enormous bonus worth over $100 million if the company’s valuation hit a lofty $120 billion and stayed there for three months. He’s not close to meeting that figure yet, but the board will be likely be happy to honor it if he can pull it off sometime in the future.
So the unicorn waiting game isn’t really paying off for almost anyone who joins these companies late.
"It’s not a very efficient market when it comes to late-stage companies in evaluating IPOs," Cuban said. While the profitable Zoom did well, "Pinterest, Lyft, Uber all of them, I think its a real challenge."
Cuban hopes these difficult IPOs will change the mindset of investors in the Valley, many of whom are not jumping in early to invest in young companies, but "prefer to invest later, and later and later," he said because when "you have a bunch of unicorns, even if it’s paper unicorns, it looks good in your portfolio."
He says the sad IPOs of 2019 could serve as a wake-up call for CEOs and, especially, employees who are recruited by later stage companies and offered stock as part of their pay. They will be asking themselves if their stock will make them any money.
Here’s the full interview with Cuban:
- Uber had the worst first-day dollar loss ever of any US IPO
- The Uber strike should worry investors and the company because it points to a fundamental problem with its business model
- Former Uber exec says it slumped at IPO because investors don’t ‘understand the Uber story,’ and predicts a comeback fueled by autonomous technology