Quick thoughts about Uber's recent fundraising of $1.2B at $40B

The young company and its CEO sure know how to make splashes.

A mere 6 months after closing a $1.2B at a $18.2B valuation round from six investors, a mix of ventures and growth capital funds in June 2014, Uber semi-shocked the whole world by announcing another $1.2B fund raising at a valuation of $40B – and the round is not closed yet.

That's $2.4B of cash in 6 months pouring into their bank account. How much is $2.4B? Well, the French homerun startup that debuted at Nasdaq in late 2013, Criteo, currently has a market cap of about $2.3B – and that's a valuation, not cash. Uber managed to pull in more additional cash in the past six months than what the market theoretically would be willing to pay for the entirety of a well-respected adtech public company.

All articles covering this ongoing Series E have already talked a lot about what Uber claimed to do with the fresh money and all of them also didn't miss the chance to recap the recent blunders of this highly controversial startup. I will however talk about the investors in this round. According to Crunchbase, funds that happily hit the transfer button this time include:

  • Qatar Investment Authority
  • Valiant Capital Partners
  • Lone Pine Capital
  • New Enterprise Associates

That's a sovereign wealth fund followed by two hedge funds and one multi-stage venture firm that also invested in growth stage.

Note: Despite the fancy quant-inspiring name, hedge funds have been putting money in venture investments for more than a decade. The most famous example was when Peter Thiel invested his own Hedge Fund money to co-found PayPal with Max Levchin.

In the previous article about Xiaomi, I highlighted the distinctly different required rates of return for early-stage VCs (30%) and growth capital funds (10%). These are not precise figures but rather mere guidelines – again, more art than science. It has though great implications on the expectations of the investors coming in. As 30% cost of capital would expect a 2.2X valuation – or better, market cap upon IPO – in 3 years while 10% cost of capital would only ask for 1.331X.

Recall that Series D of Uber puzzled people not already in this business a little bit by having a mix of well respected VCs, like Menlo Ventures and Kleiner Perkins, as well as more traditional institutional investors such as Blackrock and Fidelity. One infers then that the expected return was probably not 30% but more in-between.

Take a look at the Series E investors so far then there should be no doubt that this round is clearly a growth capital round with a stylized 10% required rate of return. At $40B valuation, that means investors are expecting the company to be valued – again, hopefully at an IPO – at $53.2B three years down the road.

In a very stimulating, albeit hardcore finance, article in June 2014, NYU Stern's Prof. Aswath Damodaran estimated an overall global market for taxi/limo services at $100B and a 6% growth rate. Without referring again to his full DCF intrinsic valuation spreadsheet, we could quickly do a valuation using the quick-and-dirty Gordon Growth Model by assuming:

  • Uber stablizes at 10% global market share: in many developing countries of their focus such as India they're already almost on equal footing with the existing tax pricing due to competition. The hyper growth in those emerging markets mostly comes from the fact that supply fails to catch up with demand.
  • Uber has a FCFF of about 20% of its revenue
  • Cost of capital of 12%

The GGM will give us the following valuation:

($100B x 10% x 20% x (1+6%))/(12%-6%) = $35.33B

Okay, that's a very very rough estimation but we see that at least it's on the same order with $40B. And in a season when Marc Andreesen openly defended that this is not another tech bubble, we have to understand that there's definitely some dry-powder-chasing-headline-investments effects here for this Series E, no?

A final reminder to readers that are entrepreneur-wannabes: it's very dangerous to treat successful fund-raising and valuation growth as a success. It's not. It's just a process. As an entrepreneur you have to love your company so much that you want to grow old with it so we're talking about a 20~30 year time frame. For VCs we are a bit more short-sighted with a 7~10-year time frame but still much more long-term than the market security investors, which on average hold a certain stock for no more than 2 years.

Given the 7-, 10-, 20- or 30-year timeframe, a successful round of fundraising is but a necessary step of a long and winding process. It's not a goal, although I can be sure that many recent employees of Uber won't might seeing the paper values of their yet-to-vest options rocket up...

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