Tag Archives: value

Is Uber really worth $40 Billion? What is value?

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Today it was discovered that Uber raised about $1.2 Billion in its latest round of VC funding. This puts Uber at the stratospheric valuation of $40 billion. This valuation makes Uber worth more than companies like Haliburton, CBS, Yum! Brand (Pepsi, Pizza Hut, Taco Bell, KFC), Northrup Grumman Corp, Kraft Foods, and basically 72% of the Fortune 500, according to this Fortune article, that means there are only 140 companies in the world valued more than Uber. On the other hand, its revenue is only $400 million which is one fifth the revenue of the smallest company on the Fortune 500.

Clearly this means that investors expect a massive IPO and that the company will continue to double revenue every 6 months. This is one of the major reasons for this round of funding as well – Uber needs to be able to expand in Asia and this money will allow them to do so. They’ll have to hire staff, fight law suits, bribe people, and who knows what else. It begs the question, are we going to see Uber Rickshaws?

With this astronomical valuation of the company, it makes you ask what is value, who is receiving this value, and how long can this valuation truly be valid? There are only two stakeholders that are truly receiving $40 billion in value, that’s the startup founders and the early investors. With the bad press that the company has been receiving, it’s clear that it’s not Uber’s customers, whom expect privacy and discretion on the part of Uber, whenever they are not receiving it. Ok, maybe that’s not completely fair, as a large number of people use Uber today, it’s clearly filling a void that aging regulations wasn’t really filling. However, it’s clear that this benefit is coming at great cost to the “employees” of Uber where aribitrary rate cuts in some areas prevents it from being possible to make a true living wage. Furthermore, this valuation will only last as long as Uber is able to continually grow, as soon as the company fails to show that they are continuing to grow, their stock prices (as they will be public by then) will eventually fall back to much more realistic prices. This is similar to what initially happened with Facebook and more recently with prices falling for Twitter. The major difference being that Uber has a much clearer revenue model than either of those companies that does not rely on ads, simply drivers and riders. Furthermore, we only know what the revenue for Uber is, we do not know what the profit margins on that revenue are, clearly they are looking good, because for a given city the overhead for Uber can’t be more than half a million dollars, which means they are likely doing rather well.

Compare this to companies that actually make things that drive the economy through providing many jobs, like Kraft, it makes you wonder where these valuations come from and what it is that investors truly see in companies like Uber. To me, it’s an interesting company that has an aggressive approach to business, but that isn’t worth that kind of money. Maybe I’ll see things differently if it comes to Portland.

Video Games, not just for Kids

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So, today was one of those days where I had a few different topics that I wanted to write about. I had a request to write about video games. I’ve written one or two blogs about video games in the past. However, I think that there’s always more to be said about them.

I think it’s fair to say that video games are a bit of the red headed step child in the entertainment industry. They aren’t taken as seriously as movies and it’s not as culturally acceptable to geek out over video games as it is to geek out over movies (some movies) or television shows. However, I think that this is going to change and it’s not because of the video game designers and publishers.

I think that Twitch is going to drive to make video games more acceptable and shift video games location in culture. Through events like Intel’s championship series or DreamHack which is a collection of tournaments for games like DOTA 2, League of Legends, Star Craft, and many more, I believe that there is an opportunity for video games to reach an acceptance level akin to golf. For the most part these games are multiplayer and very team based. There are leagues, trading of players and everything else you would expect in a major league “sport.”

It’s not just these events, it’s the personalities that drive watching live streaming. As I’ve mentioned in the past I have a few friends that stream and there is a community that has sprung up around watching these guys play. It’s pretty awesome.

Through these streamers, I’ve been able to experience many more interesting games than I can actually play or even afford to play. This allows me to keep abreast of the video game landscape without having to really play (I play Civ V, Binding of Isaac, Super Meat Boy mostly). In the case where the streamers are playing single player games it’s similar to watching a movie with someone guiding the movie. It’s a lot of fun, especially since you’re able to have a conversation with the star and his fans all at the same time.

Furthermore, I think that video games have not been given enough credit for pushing the boundaries of technology. Game designers and players for PC together drive companies like Intel, AMD, and Nvidia to keep designing newer and more powerful products. Intel is able to make a massive profit on their platforms designed for gaming – they know it, they’ve changed their strategy a few times in regard to selling stand alone chips because of gamer’s demands. We should be praising the hardcore gamer because they are helping us continue to advance in one of the few bright spots in our economy.

Each video game community has it’s own quirks and idiosyncrasies, which can be seen in how new games are developed as well as in business practices for the developer. For example, Valve has several economists studying the naturally occurring economy around trading in games like TF2, I believe that through controlled economic settings like TF2 where there is no central control (Blizzard I’m looking at you!) unique economic conditions can emerge that will shape how the designers develop future releases in the game. This has been clearly shown in how Valve continually releases new hats (yes, hats).

Compared to Eve (a massive multiplayer online role playing space video game) TF2’s economic system is rudementary. In Eve you can buy, build, trade and develop true economic systems. Furthermore, it’s possible to see the effect of war and diplomatic missteps on the economy. Recently nearly $200k worth of money was wiped out because someone missed a monthly payment. It’s possible to see how various factions have recovered after a serious economic, material, and military shock hit the entire game.

Games are vital to our culture. We’ve always had both physical (sports) and mental (chess) games. I believe that video games are simply a new extension to both of those. Many games require you to think quickly and have quick moving fingers (Star Craft) while others are almost as passive as watching TV. Understanding the value of video games and the culture about them is important to understand how our culture can grow and develop in new ways.

Facebook, IPO and valuing a company

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This week we’ve been hearing about the debacle that was the Facebook IPO.Which has revealed that some of the underwriters for the IPO were doing shady things. Matt Taibbi believes that this indicates that there are essentially two markets. One for the insiders and one for the schumcks, the every day investors.

Why is this important? Well, based on the discussions I’ve read online, there’s a lot of concern of the validity of the whole IPO process, the valuation methods of companies and how investors think of companies. The valuation of Facebook had a great deal of discussion before the final IPO price of $38/share, this was partially driven by two articles that came out. In the first one it was mentioned that GM was pulling it’s account because “Facebook ads don’t work.” The other article of note relates that researchers found that 44% of Facebook users will NEVER click an ad. This research is important because some of the valuation is based on the conversion rates of ad views to ad clicks. On average Facebook was only able to earn around $4.34 per user. The valuation of $100 billion puts the life time earning potential per user at $100 (at 1 billion users). This is pretty low, but at the same time, if only 560 million users ever click ad, that pushes means the people that do click ads need to be earning Facebook roughly $200.

MIT Technology Review discusses how this is an unsustainable growth model for Facebook. Essentially, Facebook will begin to drive down the cost per view for their advertisers to try to increase their total revenue. This falls into the race to the bottom mentality that crushes industries. Advertisers will be able to say to any website, why should we pay you x amount per ad when we only pay Facebook y there is no way that you can get me more views than Facebook. The only way that a site could get more revenue if they can show data for a higher click through and conversion rates than Facebook. That might be tough. The Review article argues that this will eventually kill Facebook and a lot of the ad driven website business models.

The other aspect of the IPO is a difference in the way that business and technology media are reporting on Facebook. Things have shifted from all the non-business related activities to focusing solely on this aspect of Facebook. This will likely shift over time, but I believe that these considerations will be discussed in any article related to Facebook. If Facebook wants to remain a haven for activists it will be difficult if there are potential suits over people being activists. There will be an increase of risk aversion within the “owners” of the company as there will be influence from investors.

Zuckerberg has said that he plans on doing what is best for the long term and try to ignore the demands of investors. He might be able to do that because he still owns 57% of the voting rights for the company. However, it will be difficult for him to avoid the influence of the discourse of media outlets. Even if he gets all his news from his friends on Facebook, there will likely be articles posted that will give him news about the company and things that he probably won’t want to read.

Essentially, discussions will shift from being about the risk of privacy for users to how changes to Facebook will impact investors bottom line. I don’t think this is healthy for businesses, consumers of Facebook or the general public. There are other things companies do that are unrelated to investors that are important for society as a whole. The Facebook coverage really indicates that we don’t look at businesses in a long term sustainable manner. We need to change this if we want to save capitalism.