Uber breaks two key rules as investors must now join regulators in asking serious questions

Whatever the rights and wrongs of the decision by Transport for London not to renew Uber’s licence, the failure by the world’s largest start-up to abide by two simple rules means it still has a long way to go to permanently win over customers, regulators and investors, whether you believe its $68 billion valuation or not.

“Some will argue that TfL’s stance is another classic case of how former US President Ronald Reagan viewed the relationship between the State and private enterprise. The Gipper famously once asserted: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it,” says AJ Bell Investment Director Russ Mould.

“Whether you agree with that or not – and we have not got to the third leg with Uber yet, by any means - the transport service specialist had made life hard for itself by breaking two (unwritten) rules even before the regulatory intervention in London:

“The first rule is that a company must focus on doing something better and not just cheaper. Fans of Uber will point to its app and smooth payment system. But detractors will argue the company is providing a solution to a problem which does not exist, given the presence of licensed cabs and multiple other forms of public transport, and doing so in a way that raises questions over the safety of customers, given cases involving sexual harassment and arguments over drivers’ insurance status and the background checks done on them. It is easy to cut prices. It is hard to win loyalty on that basis alone – and to make a profit, too, for that matter.

“The second is that a company (and its executives) need to show integrity at all times, to win customers (and woo regulators) and then keep their support and sympathy if something goes wrong. The company’s litigious nature, the “Greyball” programme which prevented official inspectors from booking a ride, the boorish behaviours of its former boss Travis Kalanick and the ongoing debate over the level of background checks carried out on drivers all look like a good way of alienating friends, let alone making enemies.

Price check

“Both mean that the company’s $68 billion valuation is now under threat, especially as Uber is thought to be considering a new funding round as it drives toward an eventual initial public offering (IPO).

“The last funding round saw Saudi Arabia buy a 5% stake for $3.5 billion and hence the $68 billion price tag. But regulatory filings show that four fund managers have already cut the book value of their investments and the prospect of a so-called “down round,” when it raises money at lower price tag than previously.

“This is something which start-ups are usually desperate to avoid, as it can start a spiral toward ever-lower valuations. (It can also knock valuations of other start-ups, something which would chill the bones of more than one executive at, or investor in, the billion-dollar-plus so-called Unicorns.)

“And Uber may need a lot more cash yet.

“It has raised over $15 billion in debt and equity and its second-quarter filing revealed the firm had $6.6 billion in cash on its balance sheet.

“But Uber lost $3.1 billion in 2016 and another $1.3 billion in the first half of this year, and that is on an “adjusted” basis, rather than using Generally Accepted Accounting Principles (GAAP). Without a dramatic improvement here, that $6.6 billion might not last very long, to again raise the risk of the dreaded “down round,” especially as London could represent another major reverse after its defeat at the hands of Yandex in Moscow, assuming any legal challenge to the TfL decision proves unsuccessful.”

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