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Thought experiment: Say I spent 1 billion dollars paying someone to create a new Uber app and the necessary infrastructure. I'm quite confident that for 1 BILL

by mcherm 12y ago

Thought experiment: Say I spent 1 billion dollars paying someone to create a new Uber app and the necessary infrastructure. I'm quite confident that for 1 BILLION DOLLARS that could be recreated. Then say I spent 16 billion dollars on advertising. With world advertising budget of around 500 billion per year, that means that 3 out of every hundred TV ads would be for my new company. 3 out of every hundred online banners. 3 out of every hundred posters on the side of a bus. And that's world-wide (if I focused just on the US with a market around $150B it would be nearly 10% of all ads everywhere). It would be the most talked-about company anywhere. I think this company would blow Uber away. And it is still a BILLION dollars cheaper. That is the trouble with these absurdly high valuations -- to compare fairly you have to consider what ELSE could be done with that money, and multiple billions of dollars could do an awful lot.

gdilla 12y ago
Well part of their last huge money raise is to carry out a landgrab and expand as much as possible.
- mcherm 12y ago
  True. Instead of comparing that valuation against Uber today, I should be comparing it against what Uber today will become now that it has a big pot of cash to spend. (But that pot is 360 million, a paltry 2 or 3 percent of the advertising budget I gave to my hypothetical competitor.)
opendais 12y ago
Pretty much. But it would be 500 million per year, not 500 billion. ;) Uber is a quality 10 billion dollar company, it isn't worth anything close to 18 billion.
tomp 12y ago
Better yet, reduce the margin (Uber has a 20% margin, so e.g. offer 10%), funding the company with the other $16B until it becomes profitable. I assume it would take you a lot less than $16B. That's what I think is missing with Uber's business plan: network effect. There is literally nothing preventing another company entering the market and undercutting Uber's prices, benefiting both customer and taxi drivers. I.e. there's no way Uber's margins can stay so high.
- opendais 12y ago
  Getting a critical mass of drivers is Uber's network effect. However, when we are talking about $1 billion in funding that can be ripped apart pretty easily.
  - illumen 12y ago
    Contacting those drivers is as easy as using Uber to book a cab. That is how some countries are fining them, and their drivers for breaking laws.
- illumen 12y ago
  There are already freemium car sharing apps/websites doing quite well already. They are already winning in some markets. There's plenty that have been going for longer than Uber too. But Uber has the cash. So you keep hearing about them because of their PR spend. So now Uber has to buy up the competition, or try and beat free. Which is why I think they need more money. It's more money (not sure how much will be enough), or all the investors lose.
- Dwolb 12y ago
  One day when I was feeling mischievous, I was thinking of an app called SubUber where you'd coordinate with your favorite Uber driver(s) directly and call (or one button press) to request from them a ride. Then, your ride fee could be Uber's original fee minus 20% (or whatever you negotiate or some other meter-based fee). What I'm saying is, if you as a passenger create your own approved driver's list network, you could get the same services much cheaper.
mason55 12y ago
A lot of that 18 billion valuation is predicated on Uber expanding beyond the "taxi" market. People are betting on them being able to use what they've learned to become the king of local logistics - see their recent bike messenger expansion. And if they win the driverless car game then they could be looking at replacing much of the auto industry. Whether it's the stock market or PE or VC, investing is not a bet on what currently exists but what you think the future will hold. The numbers that exist are generally priced in already. Yes, fundraising is frothy right now but you're still talking about tons and tons of money and relatively sophisticated investors. It's not like they haven't run these same numbers.
legutierr 12y ago
Your experiment fails, I think, because it's not making an apples-to-apples comparison. No one has spent $18 billion on Uber; total investment to date has been ~$1.5 billion. To do what you're describing, someone with $17 billion in liquidity would have to want to spend it on creating an Uber clone, and would have to have the organizational resources and wherewithal to use that cash productively. It's one thing to make an over-valued investment; it's another to spend 17x that amount on a green-field project.
- mcherm 12y ago
  Really? Because I think it's very much the same thing. I think that a company which wishes to invest should always compare to the price of a green-field investment. If someone were purchasing Uber for $18 billion, they should do so only if it would be more effective then dumping 18 billion into a green-field startup. If someone is investing by purchasing some shares at an $18 billion valuation then the comparison is slightly harder: own 100% of a startup with a much lower investment or x% of the market leader. The comparison is now always trivial, but I think that anyone looking at these sorts of investments needs to be doing this comparison before spending the money.

by mcherm 12y ago

gdilla 12y ago

Well part of their last huge money raise is to carry out a landgrab and expand as much as possible.

mcherm 12y ago
True. Instead of comparing that valuation against Uber today, I should be comparing it against what Uber today will become now that it has a big pot of cash to spend. (But that pot is 360 million, a paltry 2 or 3 percent of the advertising budget I gave to my hypothetical competitor.)

opendais 12y ago

Pretty much. But it would be 500 million per year, not 500 billion. ;) Uber is a quality 10 billion dollar company, it isn't worth anything close to 18 billion.

tomp 12y ago

Better yet, reduce the margin (Uber has a 20% margin, so e.g. offer 10%), funding the company with the other $16B until it becomes profitable. I assume it would take you a lot less than $16B. That's what I think is missing with Uber's business plan: network effect. There is literally nothing preventing another company entering the market and undercutting Uber's prices, benefiting both customer and taxi drivers. I.e. there's no way Uber's margins can stay so high.

opendais 12y ago
Getting a critical mass of drivers is Uber's network effect. However, when we are talking about $1 billion in funding that can be ripped apart pretty easily.
- illumen 12y ago
  Contacting those drivers is as easy as using Uber to book a cab. That is how some countries are fining them, and their drivers for breaking laws.
illumen 12y ago
There are already freemium car sharing apps/websites doing quite well already. They are already winning in some markets. There's plenty that have been going for longer than Uber too. But Uber has the cash. So you keep hearing about them because of their PR spend. So now Uber has to buy up the competition, or try and beat free. Which is why I think they need more money. It's more money (not sure how much will be enough), or all the investors lose.
Dwolb 12y ago
One day when I was feeling mischievous, I was thinking of an app called SubUber where you'd coordinate with your favorite Uber driver(s) directly and call (or one button press) to request from them a ride. Then, your ride fee could be Uber's original fee minus 20% (or whatever you negotiate or some other meter-based fee). What I'm saying is, if you as a passenger create your own approved driver's list network, you could get the same services much cheaper.

mason55 12y ago

A lot of that 18 billion valuation is predicated on Uber expanding beyond the "taxi" market. People are betting on them being able to use what they've learned to become the king of local logistics - see their recent bike messenger expansion. And if they win the driverless car game then they could be looking at replacing much of the auto industry. Whether it's the stock market or PE or VC, investing is not a bet on what currently exists but what you think the future will hold. The numbers that exist are generally priced in already. Yes, fundraising is frothy right now but you're still talking about tons and tons of money and relatively sophisticated investors. It's not like they haven't run these same numbers.

legutierr 12y ago

Your experiment fails, I think, because it's not making an apples-to-apples comparison. No one has spent $18 billion on Uber; total investment to date has been ~$1.5 billion. To do what you're describing, someone with $17 billion in liquidity would have to want to spend it on creating an Uber clone, and would have to have the organizational resources and wherewithal to use that cash productively. It's one thing to make an over-valued investment; it's another to spend 17x that amount on a green-field project.

mcherm 12y ago
Really? Because I think it's very much the same thing. I think that a company which wishes to invest should always compare to the price of a green-field investment. If someone were purchasing Uber for $18 billion, they should do so only if it would be more effective then dumping 18 billion into a green-field startup. If someone is investing by purchasing some shares at an $18 billion valuation then the comparison is slightly harder: own 100% of a startup with a much lower investment or x% of the market leader. The comparison is now always trivial, but I think that anyone looking at these sorts of investments needs to be doing this comparison before spending the money.