How to prove that there's no tech bubble through Uber's latest financing round: Uber's Series G is frequently brought in as an example of the perceived tech bubble that should be afflicting Silicon Valley and most of the startup world.
I personally don't think there such a bubble as I see Uber's 2.1B$ fundraise (than oversubscribed at 3.5B$) by the Saudi Wealth Fund as a simple debt transaction disguised as equity.
What I mean by that: What I think is that the Saudi Wealth Fund basically said: "Take whatever valuation you want, but we are going to set a senior 2x non-participative liquidation preference". This way the sovereign fund will have a position which is not linked to performance but guarantees a nice return, risk-free. Much better than corporate bonds with the boon that the company witnesses an increase in the perceived valuation and therefore might command a higher initial share price in the case of an IPO.
Proving such a thing would show how the real valuation is lower than hugely critiqued 70B$ valuation, and that in general behind high valuation there's not a blind belief in the potential of a company but a traditional lending process.
What do you think?
Not sure if trolling but I'll bite...
As people mentioned before, the nature of preferred shares have both debt and equity components attached. I would say non-participating preferred are more akin to vanilla preferred equity in a more mature company's capital structure. The key here is that you don't have covenants as a preferred equity holder to really bite into the company if business operations go south. There's no forced call feature I'm assuming (maybe I'm wrong) with the Saudi investment unlike actual debt. There's basically no way to force the company to give you your money back in the event of adverse business conditions, which is one of the hallmarks of debt financing (no 'teeth' so to speak).
You can get primed down the capital structure. Uber has already begun to issue leveraged loans (basically because they don't have any EBITDA; think leveraged loans are typically categorized above 4x) and convertible debt. If valuation comes down even as Kalanick and co. continue to issue debt to prevent dilution, the non-participating preferred really gets screwed. Basically the non-participating preferred is a thin stack of capital stuck in the middle of the capital structure with a real chance of not getting paid in the event that valuation plummets, while sharing none of the upside of traditional equity. Not great at all.
The recent trend of venture-backed businesses staying private is concerning. Especially since Uber is still running at negative cash flow, Uber quite obviously needs to continue to tap the equity (and now debt) capital markets. Said another way: Uber basically needs to refinance quite frequently to continue business operations/expand. What happens if the capital spigot gets turned off?
In terms of business valuation, I'll take your point that we shouldn't think of valuation at $70bn. But even if we mark valuation down to $50bn which is more than generous in my opinion, I still think that valuation is ridiculous. At $50bn, that's around the EV of Delta Airlines for reference. And before you start arguing that Delta is a capital intensive business etc etc, I would say any business that burned through $10bn+ in five years is capital intensive - no matter how you book that accounting wise.
I really don't think that the valuation takes into account the effects of competition in the industry. We've seen price wars most notably in China and other international markets; even with less brutal competition in the US, the US segment lost $100mm in the last quarter if I recall correctly. There's very little barrier to entry in this business with anyone with a bit of capital. There's no way to lock up drivers and diminish the supply of drivers in a market. Uber in China was an inferior product (which is why I personally think they lost there); Didi sold an entire ecosystem centered around Wechat while Uber was a standalone app.
Just because valuation is lower than $70bn doesn't mean that the lower valuation is fair.
Having a business that changes the world doesn't mean that the business is good. Airlines changed the way we travel and made the world much more interconnected than before, no doubt. But for 40+ years, competition eroded all profits such that even the biggest airline by EV is less than Uber's valuation now - with many airlines having some stints in bankruptcy no less.
All in, the Saudi investment was far from "risk free"; no investment is truly risk free, as history has proven time and time again.
I stopped reading when OP described the investment as being "risk-free"
Come on guys this is a PE forum not a forum on treasury notes, it's obvious that there's always some risk involved...
If you are at all representative of the mindset in Silicon Valley, then this thread is all I need to know there is in fact a giant VC bubble.
"Risk-free"..."guaranteed"..."impossible to raise less than $10B in an IPO"...
I hope you don't kiss your firm's Partners with that mouth.
Nevermind your fundamental misunderstanding of the capital structure and valuation. You point to Uber having raised mostly equity by now yet they are burning $3B-$4B of cash a year. If anything, they are going to start waving this $70B valuation at lenders and those prefs are going to get the shit primed out of them.
Here's another way of telling the story: They've raised a ton of equity capital and burn a lot of cash. Where is the next round of funding coming from? At what price? And what if they can't get it?
Actually, the mindset among a surprisingly large percentage of VC's that I interact with is similar to yours. Investments are meaningless without an exit, and at the rate that Uber has stepped up its valuation, burned through cash, and drawn capital from every available source willing to give it to them, there's a very real question of how they can exit. Before an IPO, they're going to need to narrow those losses even just a bit. You're right, there's very few sources of funding that can drop the multi-billion dollar rounds like the Saudi government just did.
Softbank just announced a new $100B fund so that might be one source of capital. The availability of capital for late-stage private tech deals and the seemingly brazen disregard for valuations has become concerning. Partners at my firm are always saying it feels very bubbly.
At the end of the day, the public markets are going to be buying this, and the sellers are going to have to leave some money on the table if they want fund managers to buy the stock once you IPO. Given the valuation, I'm not so sure there's any upside left.