Uber Technologies Inc. is now claiming that it is worth $30 billion in its attempt to talk investors out of another $1 to $2 billion in financing. The Financial Times and The Wall Street Journal reported that the car-booking service needs the money for “expansion.”
The move raises a lot of questions about Uber because the company was able to raise $1.2 billion from a group of investors organized by Fidelity Investment and Wellington Management in June. For those of you unfamiliar with it, Uber is an app that allows you to turn your car into a do-it-yourself taxi cab. Uber makes money off that arrangement by taking a percentage of the proceeds.
There is also a lot of unfounded speculation out there that privately held Uber intends to challenge FedEx (NYSE: FDX) and UPS (NYSE: UPS) by setting up a delivery service. The problem with those claims is that the only deliveries Uber is currently offering are from a few bicycle messengers in New York City. Uber also offers something called Uber Essentials, which is a delivery service for retail purchases similar to Google’s Google Express in Washington, D.C., and moving services in Atlanta and Nashville.
Uber CEO, Travis Kalanick, claims his company is doubling in size every six months. If that claim is true, why does Uber need another $2 billion in financing? Is Uber really expanding, or is it using debt to mask the illusion of expansion.
What Uber Is Not Telling You
Another problem is that Uber is running into serious problems and stiff legal and political resistance that could block its future expansion. Some recent news show some of the problems that could block Uber’s expansion and cloud any potential Uber IPO:
- A class action lawsuit filed by Boston labor lawyer Shannon Liss-Riordan accuses Uber of violating labor laws by classifying its drivers as independent contractors instead of employees. If the lawsuit succeeds, Uber would effectively be out of business because it would have to pay its employees a salary, benefits, and unemployment insurance. Under Obamacare, Uber might also have to provide employees with health insurance.
- U.S. District Judge Edward Chen in San Francisco effectively threw out Uber’s employment contract, which mandates arbitration instead of lawsuits to settle disputes. Chen’s action allows Uber drivers to sue the ride-sharing company. It could open the floodgates for class action lawsuits against Uber by its drivers.
- Uber has effectively pulled out of one U.S. market—Eugene, Oregon—because of a dispute with the city of Eugene. The city ordered Uber to cease operations in Eugene and its suburb of Springfield on October 30 because it did not have a taxi cab license. The Register-Guard newspaper reported that Uber drivers in the city were told to stop picking up passengers. Interestingly, Uber had been hiring drivers in Eugene as late as October 20. Uber is apparently waiting to see if the city council in Uber amends the law before returning.
- Uber might have pulled out of Eugene to avoid a repeat of the disaster that occurred in Nevada. The Nevada Transportation Authority impounded at least 15 Uber drivers’ cars between October 23 and October 30, The Reno Gazette Journal reported. The Authority seized the vehicles because it and the state’s attorney general believe Uber violates the state’s taxi cab regulations. Nevada Attorney General Catherine Cortez Masto asked for a restraining order to keep the service out. District Court Judge James Russell ruled that Uber is legal, which foreshadows a nasty court battle for the service’s future in the Silver State.
- Uber could face greater liabilities because of attacks on riders by Uber drivers. A San Francisco man might lose his eye because an UberX driver attacked him with a hammer during a ride. UberX is Uber’s discount service. Not surprisingly, Uber is facing a lawsuit, and the driver is in jail. Uber claims it is not responsible, but it did refund the rider’s fee. Uber claims it is not responsible because the driver passed a criminal background check. Part of the reason why Uber classifies its employees as drivers is to avoid lawsuit liabilities. There has been at least one other attack on an Uber rider by a driver; a San Francisco woman alleged that an Uber driver clubbed her over the head with her own phone.
- Uber also faces far more regulation in some markets. To operate in Washington, D.C., Uber had to agree to a list of strict of demands from the District of Columbia’s taxicab commission; The Washington Post reported that Uber will have to purchase $1 million in insurance for each driver and submit all vehicles to safety inspections and drivers to criminal background checks.
- Uber is preparing for a costly political battle. Bloomberg reported that it has hired veteran political fixer David Plouffe as its “senior vice president of policy and strategy.” Plouffe certainly has a lot of political clout; he managed Barrack Obama’s successful 2008 presidential campaign. Plouffe’s major job will be to fight the taxi cab industry and local governments’ attempts to run or keep Uber out of town.
One has to wonder how a company with all those potential problems is worth $30 billion. One also wonders why a company that is supposedly doubling in size every six months needs to borrow so much money.
A possible reason is that instead of raking in the dough, Uber is deeply in debt and is using debt to pay off the loans it has taken out. Another is to cover the costs for all those political payoffs, lawsuit payouts, and legal bills it is going to face in the near future.
Despite the hype, it looks as if short-term rental options such as the Avis Budget Group’s (NASDAQ: CAR) Zipcar and not Uber are the real future of car sharing. Such companies have a legitimate business model and no legal baggage.
Uber’s future looks clear from the Madhouse. It will probably borrow or raise large amounts of debt through venture capital and investment banking. Then, to pay that off, it’ll issue an IPO and sell stock, which might go up for a while before the house of cards comes tumbling down on Mr. Kalanick and his investors’ heads. Stay away from Uber—far away.