Community-based businesses enter the corporate world

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| The European | 20th February 2019
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Businessmen who are in their late 50s wonder how the world of business has evolved into what it is today. In their time they had to buy or rent their business premises, worry about working capital to meet minimum inventory level, hire employees and perform many other time-consuming activities just to keep their setup running and earn reasonable profits.

The age of information technology radically transformed the traditional way of doing business, but it was the human mind which was the driving force behind this change. School and college dropouts with a penchant for business, unique business models and friends with technical skills built startups using one computer and turned those gigs into full-time businesses worth billions of dollars.

The story of Uber, a start-up founded in March 2009, is a bit different from its brethren in the start-up fraternity. The idea was unique (community-based business model), but the founders were already millionaires thanks to their success in building and selling their previous start-ups.

Uber started as a community ride-sharing business. The concept of cheap and on-demand travel through a mobile app threatened the businesses of traditional cabbies. Soon Uber had to experience a hostile business environment. Europe became a battleground for the company. The iconic black cabs of London were the first ones to register their protests. These protests spread to other countries of Europe too. After dozens of lawsuits and compliance (by Uber) with state public transport regulations, everyone called a truce.

Uber is now much more than a ride-sharing service. Following are other business services offered by Uber:

  • Uber for Business is on-demand or contracted rides for businesses
  • Uber Eats is a food delivery service
  • Uber Freight matches carriers with shippers
  • Uber Health is tailored to serve the healthcare industry (on-demand, flexible rides for patients and healthcare professionals)
  • Uber Bike is a bike (pedal-assisted electric bikes) renting service

Projects under development

  • Uber self-driving vehicles
  • Uber Elevate (air transport sharing)

Uber always remained on the radar because of its scandals and questionable business practices. The start-up’s darkest time came when its co-founder and CEO Travis Kalanick had to resign (June 2017) for unethical office conduct. However, the company recovered well from its difficult times and filed for an IPO last December. It is expected that the IPO will be launched in the second quarter of 2019.

Key financial information (for the year ended 2018) Source: CNBC (15 February 2019)

Full-year revenue

$11.3 billion (up 43 percent from the previous year)

Gross bookings (amount collected “before” driver payouts)

$50 billion (up 45 percent from the previous year)

Adjusted loss

$1.8 billion {down 15 percent from previous (US $2.2 billion) year}

Uber: IPO, mainstream media and analysts

The consensus is that Uber’s IPO will value the company up to US $120 billion, but it is the financial results over which the media and analysts have a divided opinion.

CNBC (15 Feb 2019) states Uber’s growth de-accelerated in 2018. Reuters, of the same date, is neutral in its views but states that Uber’s quarterly earnings were erratic. According to Reuters, the full year’s financial figures are a better indicator of Uber’s future growth.

Uber’s CFO, Nelson Chai, claims 2018 was “the company’s strongest year yet”.

Commenting (Reuters, 15 Feb 2019) on Uber’s financial results and its IPO plans, David Brophy, Professor of Finance at the University of Michigan’s Ross School of Business says,

“Uber needs to show it can control costs and can make money, basically provide a strong argument that its business model is not broken and that it can achieve and sustain profitability despite issues with drivers, customers and politicians”.

Outlook

Uber is the leader in the ride-sharing industry, but it has several competitors. India’s Ola, China’s Didi and Careem of Middle East are just a few. These competitors have pressed the pedal to chase Uber by offering low fares to the customers and paying high commissions to the drivers.

Within America, Uber has to compete with a new kid on the block, Lyft. Lyft is also a ride-sharing company; albeit it has not spread its business thin and is laser-focused on its base service. Last year, Lyft’s share of US ride-sharing market was 35 percent. Lyft is also planning for an IPO this year and expects to grab 40 percent of US ride-sharing market before the launch of its IPO.

Although Lyft’s worth is between $20 billion and $30 billion, the competition between the two ride-sharing companies is heating up.

To compare Uber and Lyft is like comparing apples with oranges. Lyft is better positioned to attract investors’ attention because of its low valuation and high growth potential whereas Uber is not an appealing investment because of its high valuation and slim chances of offering any additional business service in the near future. However, both companies will be remembered for bringing community-based businesses to the stock market.

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