Among venture capitalists a “down round” is defined as funding in a private company that carries a lower valuation than the previous investment.
It means a company’s investors are taking a loss. That’s what is likely to happen when Uber goes public.
Right now, Uber is said to be worth $69 billion after taking losses of $2.2 billion during the first nine months of 2016. Its 2016 revenues were estimated at $5.5 billion, and it is not unusual for fast-growing companies to sustain losses as they invest to keep the growth going.
Valuing a company at 12.5 times revenue when it seems to be at the peak of its performance may seem to make sense for wealthy Silicon Valley investors, but here in the real world, we have a word for that kind of offer, and the word is no.
Trouble Ahead, Trouble Behind for Uber
Uber drivers are not employees. They are, in theory, business partners who pay Uber a commission to bring them work driving people around. They are unlicensed taxi drivers who don’t pay for medallions and are thus subject to harassment by the government.
But the Uber drivers I have met are incredibly professional, and their cars are clean, thanks in part to a “Vehicle Solutions” program that lets them rent, lease or buy new or nearly new cars. This is how the company has grown.
But relying on contractors carries risks. Uber is said to have a “toxic” work culture, one rife with sexual abuse, leading to a Twitter Inc (NYSE:TWTR) campaign advocating that customers delete the app.
Pando Daily founder Sarah Lacy has been an especially harsh critic, and political polarization now seems to be having an effect, as rival Lyft has reportedly grown 7% in just the last two months, although both companies have seen less traffic lately.
For investors, Uber’s biggest risk may lie in its efforts to get into the self-driving car business.
Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), the parent of Google and Waymo, a self-driving car pioneer, has filed a legal complaint charging that Uber stole Waymo’s trade secrets by having an employee walk out with them, founding a company called Otto, then buying Otto for $700 million. If Alphabet wins the case, it could take Uber completely out of that business.
Uber is also challenging Google Maps, pushing its own system on drivers, one that will make their driving fit corporate needs. It also gives the company a direct online connection to drivers.
Uber’s fraught relations with competitors, drivers and government is now a global phenomenon. Competition from new entrants is also increasing, even in Africa.
The Bottom Line
Buying Uber stock is based on a belief that the company will grow, but it’s more likely that Uber is now at the replacement end of the curve, where growth slows down.
Buying Uber in hopes of getting into the self-driving “cars as a service” craze is also risky, because Uber’s ownership of the necessary intellectual property is under question.
The risk of venture capitalists holding companies through their period of maximum growth is always that they will hold on too long, that they will be unable to exit the investment on their own timetable — that they will, in the end, get too greedy.
That’s what has happened here. When Uber goes public, wait for all lock-up periods to expire before considering an investment. See what its full value is before you buy. Don’t bet on the hype of the IPO. Treat Uber as the mature company it is.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in GOOGL.