By Carolyn Said
San Francisco Chronicle.
Uber is as relentless in raising money as it is ruthless in its business strategy.
Chinese Internet giant Baidu partnered with the San Francisco on-demand ride service on Wednesday, plunking down a strategic investment pegged at around a quarter of a billion dollars.
Two weeks ago, Uber hauled in an additional $1.2 billion, giving it a valuation of $41 billion. In June, Uber also landed $1.2 billion in funding and was valued at $18 billion. In summer 2013, it was worth a “mere” $3.5 billion after a $258 million funding round.
Why amass such a massive war chest?
“It’s because they can,” said Sam Hamadeh, CEO and founder of PrivCo, which analyzes privately held companies and estimates that Baidu invested $200 million to $250 million. “It’s partly as a trophy, consistent with their culture. At a practical level, it’s ammunition to compete in markets where they lack other natural advantages.”
Uber is on a march toward world domination, doing business in 250 cities in 50 countries — up from 60 cities and 21 countries a year ago. “It’s the fastest-growing company we’ve ever been involved with,” early investor Bill Gurley, a partner at Benchmark Capital, told CNBC last month.
With the highest valuation of any private U.S. tech company, Uber is in a league of its own among startups when it comes to valuation, total funds raised and attracting oversized rounds in such quick succession, Hamadeh said.
“When you plan to conquer the world, you’ve got to get the resources,” said Aswath Damodaran, professor of finance at New York University’s Stern School of Business. He grabbed headlines in June disputing the “mind-boggling” $18 billion valuation and ballparking Uber’s actual value as $6 billion. He thinks it’s now worth about $9 billion or $10 billion.
But perception matters. “When people think you are going to conquer the world, that’s the time to go out and raise the money,” Damodaran said. “Uber feels the best way to dominate is to go big and go quick. Their view is if you get in first and become the dominant player, you can become the Google of this particular business.”
It helps that Uber seeks to disrupt a sector that is both essential and woefully inefficient, he said.
Uber doesn’t have the kind of expenses of traditional car services — it doesn’t need to buy a fleet of cars to set up shop in a new city. It uses its hefty bank balance to help pour rocket fuel on its rapid expansion.
And that cash may help it tackle its outsized ambitions. The company aims to replace private car ownership and eventually conquer logistics. Its technology infrastructure and legions of drivers are well suited to handle “last-mile” deliveries, for instance.
“The only way that Uber justifies the $41 billion valuation is if it changes the way we use cars and transportation worldwide,” said Steven Davidoff Solomon, a professor of law at UC Berkeley who analyzes why startup valuations are hurtling into what he calls “bubblicious” territory. “It may change how people get around in San Francisco and New York. But will it in Columbus, Ohio — or Beijing?”
While Uber dominates smartphone-summoned ride services in the United States, it faces fierce rivals overseas. All that money lets it slash prices to undercut competitors. Once it has weakened them, it can raise prices back up, Hamadeh said.
“This is trench warfare, being fought one hill at a time,” he said. “Often the winner is the first to get into a city or country who knows that country extremely well. In many cases, that’s not Uber.”
China, one of the world’s largest transportation markets, is a case in point. Uber is a latecomer and an underdog there, in operation for just a year and outmuscled by local companies with deep-pocketed backers.
Didi Dache and Kuaidi Dache, funded by Internet giants Tencent Holding and Alibaba, respectively, have a grip on about 90 percent of the Chinese market for e-hailed rides.
The Baidu deal will give Uber access to 500 million monthly users of the Mobile Baidu search engine and 240 million users of Baidu Maps. The maps app probably will integrate Uber in the way that Google Maps now does. Google Ventures led last summer’s funding round in Uber.
“From a strategic, chessboard standpoint, this is probably the smartest move Uber and Baidu could have made,” said Ryan Weidenmiller, an entrepreneur who spent seven years building a venture-capital firm in China. Still, he said, Tencent would have been a better partner if it were available, as it’s particularly strong in helping localize overseas products.
Uber referred requests for comments to blog posts in which CEO and co-founder Travis Kalanick discussed the need for capital to fuel growth and the Baidu deal.
Why do investors keep showering cash upon Uber — as well as other companies with more-dubioius growth prospects?
Solomon said several factors fuel the feeding frenzy. Many venture capital investments are not performing well and there’s a very small number of hot startups. Most significantly there are buyers in the market — like Google and Facebook — ready, willing and able to pay top dollar for the right play.
“When Facebook is willing to pay $20-something-billion for Whatsapp, that increases the valuations and the exits,” he said.
Damodaran sees a simpler dynamic at work.
“They’re investing in Uber basically because of greed,” he said. “They don’t want to be left out of the next Facebook. I don’t think deep thinking is going on; they want to be in this game because everyone else is.”
Uber has the highest valuation, most money raised and most rapid succession of huge funding rounds of any U.S. startup. Here are other private U.S. companies that are members of the large-dollar startup club.
Airbnb, San Francisco
Total raised: $885 million
Most recent round: $475 million at $10 billion valuation, April 2014
Previous round: $83 million, Feb. 2014
Dropbox, San Francisco
Total raised: $1.1 billion
Most recent round: $500 million debt funding, April 2014
Previous round: $325 million at $10 billion valuation, Jan. 2014
Pure Storage, Mountain View
Total raised: $468 million
Most recent round: $225 million at $3 billion valuation, April 2014
Previous round: $150 million, August 2013
Snapchat, Venice (Los Angeles County)
Total raised: $250 million
Most recent round: $100 million at $10 billion valuation, August 2014
Previous round: $54 million at $2 billion valuation, Dec. 2013