Last week, Venture investor Fred Wilson gave an onstage interview at the Upfront conference which made headlines. He argued that Uber should go public. One of my favorite VC bloggers Mark Suster also weighed in (as did many others) on the subject.
As someone who has written a book on How to Go Public, it may come as a surprise for me to say that I do not think Uber should go public. At least not right now. Going public is not fun, that is the whole point of Chapter 2 in my book. And while eventually they will have to go public, there are many reasons to hold off. And for what it’s worth, Chapter 3 of my book concludes that eventually all companies have to go public (or sell) because Venture Investors on the Board will insist on it. So a group of VCs arguing in favor of company IPOs is not exactly a novel position.
Uber has several good reasons for delaying. The most talked-about reason is the current market turmoil. I think that is a moot point. The world is not ending, we are not entering another financial crisis. Right now the IPO window is closed, but it will open again, and probably soon. Uber management has strongly discouraged internal discussions of an IPO in order to keep their employees focussed on the actual business. So even if they made the decision to pull the IPO trigger, it is going to take them many months to have everything ready (i.e. accounting, compliance, control, etc.) By that time, the markets will be different.
A more important reason for delaying is that company’s operations are not ready. They are still investing heavily for growth. The last batch of leaked financials allegedly had Uber losing $1 billion in 2015. Given their aspirations, that is probably a reasonable investment for them to make. Lose a lot of money now to cement their position for years to come. The problem is the Street will hate that. The company will have to go public on the back of revenue growth with no forecast for profitability for at least two years. That kind of IPO only works at the peaks of Bubbles. The problem is not the losses, the problem is the forecast. Uber should probably delay its IPO until it has a one year roadmap for reaching profitability. I say this not from the point of view of an investor, but for Uber’s own sake. They need to focus on building the business, and if they think that means a few more years of losses, then they need to do what’s right for the business.
A second big concern is that Uber is still a young company. My sense is that their internal processes and structures are still underdeveloped. That is natural for a company of their age, it just looks a bit odd for a company with their valuation. The biggest risk Uber faces in going public is that it disrupts their business. IPOs have a way of stressing corporate policies, and if a company lacks sufficient structure then the IPO puts the whole business at risk.
The comparison here is with Groupon. And this is an analogy I heard a big hedge fund manager make. Groupon was a hot company once, growing faster than anything. But it grew haphazardly and clearly lacked a strong corporate management function (not necessarily bad managers, just a weak structure). How are decisions made? How is power delegated? What happens when things break? How are issues coordinated across functions? The CEO can handle these kinds of things at small companies. At big companies there needs to be some degree of bureaucracy. Groupon lacked that, and when they went public and then hit a speed bump it created a self-reinforcing downward spiral. Uber may have more structure in place than Groupon did at this stage, but it does not have enough. Wall Street investors, for the most part, have spent most of their careers on the Street. They have little understanding, as a group, of these kinds of issues. Their compensation is largely tied to their own performance, and group coordination is minimal. So when companies stumble on these kinds of problems, the Street assumes there are bigger problems with the underlying business itself. That puts pressure on the stock, which seriously demotivates employees (who have been riding the IPO hype), and then key people start to leave. At that point, the real problems begin.
Finally, Uber is making some big bets beyond its core ride-sharing business. “Uber for Everything”, their delivery service looks very promising, but it is also years away from being a real business. That is fine, Uber Everything should not be a core part of the IPO story, it should be the Pixie Dust, the little glimmer off in the future of something bigger. (For those following along, see Chapter 13 in my book.) For Uber’s IPO to really succeed Uber Everything or any other non-core business has to have some degree of predictability. The ideal situation would be to go public saying Uber Everything will arrive “in a few years”, when in reality it is already a $50 million business.
As I have argued repeatedly, the key for a successful IPO is predictability. Once Uber gets to the point that it can predict things with a fair degree of accuracy it will be ready to go public. My sense is that they are not there right now. Maybe they are close, but there is no reason to rush things.
Once Uber goes public, something in their business will break, because we live in the real world, and things break. It is important that Uber have the internal structure to fix whatever breaks, and enough credibility with investors that they can fix it. Going public too soon would not allow management the time needed to build that credibility.
That all being said, I do agree with everyone that eventually Uber has to go public. They have raised a lot of money, and I would question how much more they can raise outside of the public markets. They have already tapped into high net worth retail clients, an investor base that has historically done very little Venture stage investing. There are probably a few more pools of capital outside the US who may invest (China? Singapore? Gulf States?), but it is hard to see Uber funding mega-losses for too much longer.
So the key for management is to “prepare to prepare” for the IPO. Keep the team internal. Do not reach out to bankers. Do not tell the Board too much. Swear the team to secrecy, and tell no other employees. But start making plans and milestones on that path.