The price of getting some things wrong

Enrique Dans
Dec 31, 2017 · 4 min read

Uber has finally concluded negotiations that will see Japan’s SoftBank take a 17.5% share in the ride hailing/food delivery firm based on a $48 billion valuation, 30% lower than its previous valuation of $67.5 billion, meaning Uber is no longer the world’s most valuable startup.

This has been Uber’s worst year in its short existence, plagued by scandals to do with the toxic culture encouraged by its co-founder, Travis Kalanick. After being forced out of the company in June by its leading investors, it’s worth looking at why the company’s value has fallen: contrary to what taxi drivers say, Uber did not break the law by competing with them – it continues to operate in most of the cities it moved into, be it with drivers without a license, with a VTC license or some variation. Instead, Uber’s problems are rooted in other issues, ranging from sexual harassment to trying to avoid supervision of its activities. Evidence that the taxi licensing system is outdated and no longer represents the interest of users, is not, and should not be, a crime.

But encouraging a business culture in which managers were free to do whatever it took to meet their targets and considered themselves above the law comes at a price. When I started talking about Uber in my classes, the company was enormously attractive to the vast majority of my students: now, many of them would refuse to work there. As I said at the time, Travis Kalanick has proven himself to be a highly aggressive manager capable of getting from point A to point B quickly based on an end justifies the means approach: without him, the company would never have reached the valuation and brand recognition it enjoys. But in exchange for doing so, his successor, Dara Khosrowshahi and his new macro-board of directors now have to deal with a loss of about a third of the value of the company.

Was it worth it? The company’s price fluctuates due to its reputational scandals, but the fundamental factor that determines its valuation is whether it can eliminate the most important cost factor of a car trip from the equation: the driver. All Uber investors know perfectly well that the company will never be worth what it claims to be worth – nor a third less than that amount – if it continues to operate as it currently does. In fact, many users who have spoken admiringly about the quality / price ratio of Uber now say the service has become more expensive, that drivers’ attitude is no longer what it was, or that the controls of hiring those drivers have relaxed and passengers increasingly find themselves being driven by somebody who should not be behind a wheel. There is also the question of a service that is far from uniform around the world, raising questions about how country managers run their outfits. The company has abandoned China and Russia, which will also have impacted its valuation. However, the main factor in the equation that determines the value of the company, the development of autonomous driving technology, seems to go from strength to strength: its vehicles are increasingly capable of operating without drivers, and could soon reach Waymo’s levels, which from the first quarter of 2018 is expected to operate as a driverless taxi service in Phoenix, Arizona (and from there, to any other cities that will allow it to operate).

Conclusions? The first, that despite shedding one third of its value, many investors accept this as the price that must be paid to join the ranks of the main technology companies, and that Uber can still go public and be among the first to exploit autonomous transport at all levels, and that sometimes, risks have to be taken. If the company, after allowing the dust to settle, decides to go public – and it will – I am pretty sure it will overtake its previous valuation. All of which will show that sometimes, the end justifies the means: cheating, lying, harassment, bribery and any other number of bad practices. Ethically, not good, but this is hardly a surprise after several centuries of capitalism.

The second conclusion is that the threat to taxi drivers’ livelihood comes not from Uber, but the autonomous vehicle. Uber has showed that the taxi licensing system no longer makes sense, and is now set on recovering its valuation and proving within a few years that nobody will want to travel in a taxi driven by a person, because they will not only be less safe, but also more expensive. In many cities today, such as Mexico City, Bogota or Lima, people have told me they prefer an Uber or a similar service than a conventional taxi, because it feels safer. Soon, with the arrival of the autonomous vehicle, people all over the world will share that perception: if a safer and cheaper autonomous vehicle is on offer, why use one driven by a human? As long as technology continues to progress, Uber’s valuation be safe, as SoftBank knows all too well.


(En español, aquí)

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

Enrique Dans

Written by

Professor of Innovation at IE Business School and blogger at enriquedans.com

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

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