
Uber Turns to Saudi Arabia for $3.5B Cash Infusion - taylorbuley
http://www.nytimes.com/2016/06/02/technology/uber-investment-saudi-arabia.html
======
methehack
I've always been a little confused about uber's capital needs. When I first
heard about uber, the part I thought was super-clever was that you wouldn't
_need_ lots of capital because all the drivers would have their own cars.
Leveraging the latent capital of one side of the two-sided market was the
genius of it. (Airbnb too)

Same for the staffing -- hook up both sides of the market. No need to pay
anyone out of your pocket -- in fact, probably there'd be some float for you
there. Sure, maybe you have to subsidize one side at first, but not forever.

So where's all this cash going? Is the driver side being subsidized to a
ridiculous degree still (this is, actually, my guess)? Is there a moonlander
(driverless car) in the works? Are the G&A costs off the charts? How could
that be, give that the software does the connecting? Is the software _that_
hard to write? I mean, it's good, but it ain't rocket science. (I'm not sure
rocket science is even rocket science anymore.)

If I'm right that all the cash is still going to make the fares cheap to
encourage up-take, it seems to me like Lyft (or another/any fast follower) is
in a fantastic position. Let uber burn the capital to sell the idea to
consumers, and then step in when it stumbles and walk away with the glory and
gold. Place your bets.

~~~
discardorama
> So where's all this cash going? Is the driver side being subsidized to a
> ridiculous degree still (this is, actually, my guess)?

I was in India recently. The driver said that when Uber started out, they'd
give each driver Rs. 60K/mo (about $1000/mo) just to sign in for 10 hours/day,
even if they did not give a single ride. Now, Uber pays by the _number of
rides_ and not a portion of the actual fares. So, for example, he said that
Uber pays them Rs. 3500 for 17 rides. Most of my rides were about Rs 100 each;
so Uber was taking a loss on each ride. But their system of paying by the
_ride_ is a genius idea: it removes the incentive for the driver to dick
around and do a TSP around the city to drive up the fare. Now its in their
interest to get the ride over with as quickly as possible, so they take the
most direct route.

Edit: Sorry, "Rs" is the Indian currency, Rupee. There's about 65 Rupees to
the USD.

~~~
zatkin
What does "Rs." mean?

~~~
riyadparvez
Rupees, Indian currency. BTW, that is a lot of money.

------
CPLX
Sincere question, can someone explain to me a plausible scenario at this point
by which early investors actually receive a payout even slightly commensurate
with their supposedly incredible investment?

For example, how can someone in the seed round genuinely be able to cash out
given the unbelievable amount of dilution that has taken place. What are the
plausible scenarios where this occurs?

EDIT: Specifically asking in the context of a valuation that seems to way
outstrip any plausible IPO (or complete takeover) valuation, and almost
certain liquidation preferences that accompanied these later institutional
rounds.

~~~
birken
As long as the valuation of the company is going up more than the dilution,
the value of existing shares goes up.

In an early stage company that might mean raising a Series A where the
valuation of the company goes up 100% and shares are diluted by 35%. Value
still going up.

For an ultra late stage company like Uber that means ~5% dilution in this
round and the total value of the company might go up 10-20%. The value of your
shares is still going up.

For simple back of the envelope math, assume you invested 10k into Uber's seed
round valued at 3.5 MM. Then we'll simulate some excessive amounts of
dilution, so let's say our 0.28% stake is diluted by 30% 10 times (which is a
ton of dilution and way more than would have reasonably happened).

You are now down to 0.007% of Uber. 0.007% of 65 billion is $5.1 MM. Not bad
for a 10k investment.

Based on more reasonable dilution estimates my guess is a 10k investment in
Uber's seed round is worth somewhere between 25-50 million.

~~~
hkmurakami
You aren't taking into account multiple liquidation preferences, ratchets, and
profit guarantees on a downround IPO that are in the term sheets for this
round.

Warning of such "dirty term sheets" is Benchmark's Bill Gurley.
[http://abovethecrowd.com/2016/04/21/on-the-road-to-
recap/](http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/)

[http://abovethecrowd.com/2016/04/21/on-the-road-to-
recap/](http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/)

~~~
perbu
Did Uber accept any such preferences when taking investments? I thought only
clueless entrepreneurs fell for such trickery.

~~~
hkmurakami
It is widespread suspicion that Gurley's post was directed at Uber's latest
fundraising round (as an early investor, they take a hit from these dirty
terms)

------
slg
Putting aside whatever you think about Saudi Arabia or its government, it is
inarguable that this move will be highly controversial. It makes me wonder why
Uber pulled the trigger on this knowing there will be a backlash. Wouldn't it
have to be because of pricing? I wonder if the leadership of Uber simply
didn't want to see any dip in the valuation and Saudi Arabia was the only one
out there willing to meet that price. It makes me think that $62.5 billion
value is completely unrealistic.

~~~
dharmon
First, public backlash has not stopped Uber from doing things before.

Second, all the smart money is either sitting it out and/or can't invest at
these levels, and Saudi money in a tech startup is definitely dumb money.

------
kafkaesq
"Excuse me driver, can you pull over for a minute? I need to beat my servant."

[http://www.cnn.com/2013/10/31/world/meast/saudi-arabia-
beati...](http://www.cnn.com/2013/10/31/world/meast/saudi-arabia-beating-
video/index.html)

~~~
cloakandswagger
Rumor has it they're working on an on-demand servant beating service called
Uber Beats.

------
Mendenhall
What I find particularly interesting is Uber now has someone on their board
who thinks women should not be allowed to drive? It will be interesting to
watch this play out and take note of their policy and public statements. I can
see many sources of conflict in such a decision.

~~~
dragonwriter
Women are not allowed to drive in Saudi Arabia, but that doesn't mean that the
particular official given a board seat believes that they shouldn't be allowed
to drive (or even that the monarch believes that that's the way things
_should_ be, generally; just because its not a democracy doesn't mean that
Saudi government policy isn't shaped by a desire to appeal to particular
constituencies.)

~~~
Mendenhall
I agree with your statement completely. The thing I notice is he works for the
government and I would think he would never be able to say that openly. A
competitor could instantly draw that into question and make them defend the
point and use it as a propaganda tool. If he says women should be able to
drive he goes against the kingdoms laws and those constituents, if he says
they shouldnt or stays mute the propaganda one could spin is legion. "Uber
board member thinks women shouldnt be able to drive for them"

~~~
morgante
I think you're overthinking the likelihood of that becoming a controversy.

Sovereign wealth funds routinely invest in companies which run contrary to
government official policies. Their foremost duty is as investment managers,
not politicians.

~~~
Mendenhall
I dont think it will turn into a controversy at all, but a smart competitor
versed in propaganda could easily hit that attack vector. "Ride with Uber and
help raise money to suppress women!" "How do you feel as a Uber driver knowing
board members dont think women should be able to drive and your actions help
support that?"

~~~
pknerd
SO if a woman does not drive she is suppressed? So far no woman was elected as
a President either in US. Guess women are oppressed there?

~~~
AnAfrican
not being allowed to do something is oppression.

------
fma
Uber has a higher valuation than actual car manufacturing companies (GM, Ford,
Honda, etc)

[http://www.forbes.com/sites/liyanchen/2015/12/04/at-68-billi...](http://www.forbes.com/sites/liyanchen/2015/12/04/at-68-billion-
valuation-uber-will-be-bigger-than-gm-ford-and-honda/#10b6c8855858)

------
mmayberry
Uber wants driverless cars and Saudi Arabia is already half way there...

------
bogomipz
“Of course we think women should be allowed to drive,” said Jill Hazelbaker,
an Uber spokeswoman. “In the absence of that, we have been able to provide
extraordinary mobility that didn’t exist before — and we’re incredibly proud
of that.”

Of course we think women should be able to drive but we have no problem doing
business in and with a backwards repressive society that doesn't believe that
women have the same rights as men as long as they give us money. Besides such
inequalities are a business opportunity since those repressed women need
rides. Hey Uber how about "disrupting" the farce that is the Saudi Royal
Kingdom.

------
Animats
Latest Uber worry: When the Tesla 3 comes out, Uber drivers clogging the fast-
charging stations. "Free power for life" is a great deal when you're a cab.

~~~
maxerickson
I was going to speculate that they will charge for access, but Googling to get
the Supercharger name right lead here:

[http://arstechnica.com/cars/2016/06/no-free-superchargers-
fo...](http://arstechnica.com/cars/2016/06/no-free-superchargers-for-teslas-
model-3-h2-stations-grow-in-ca/)

Announced today, they will charge for access.

~~~
semi-extrinsic
Wow, based on the access fee for the early lowest power Model S, along the
lines of $2500, if not more?

That's what, more than two years of fuel for an economic petrol car?

~~~
bryanlarsen
I certainly hope they don't charge a flat fee, that'll just make the problem
worse, not better. Once you pay the fee you'll be inclined to use it as much
as you can, "just to get your money's worth". Sort of like how most people
overeat at all-you-can-eat restaurants.

They need to make sure they charge more than the retail rate for electricity.
Make sure it's cheaper to charge at home. It'll still be almost an order of
magnitude cheaper than gas.

------
danielschonfeld
I know this isn't new, but if companies have the abilities to raise money from
international entities like this, at these kind of sums. All the while, people
are locked to their country of citizenship for working rights... is
globalization in its Capitalistic form not claiming as prisoners its own
citizens?

------
Retric
Uber needing 3.5B is a huge negative sign IMO. Clearly something is broken
with their business model.

~~~
koolba
> Uber needing 3.5B is a huge negative sign IMO. Clearly something is broken
> with their business model.

If someone is willing to give you $3.5 billion dollars I'd argue you've got a
solid business model. Either that you're just _really_ good at raising
capital.

~~~
rexreed
Let's revise "solid business model" to "solid ability to sell the company's
value". A solid business model doesn't require this sort of continuous cash
infusion.

~~~
jessedhillon
> _A solid business model doesn 't require this sort of continuous cash
> infusion._

Where is this assumption that this cash is _required_ coming from? A very
common use for investment is to accelerate plans which would otherwise unfold
over long/impractical timelines. Another common use is to get ahead of
competitors.

I know much of HN is very eager to see all billion dollar valuations deflate
so as to prove that extremely conservative risk profiles are the only
strategies worth considering, but there's nothing inherently troubling about a
highly-valued, late-stage company raising so much money.

~~~
macspoofing
>but there's nothing inherently troubling about a highly-valued, late-stage
company raising so much money.

Maybe not troubling, but interesting. There's definitely something interesting
there. For one thing, nobody wants a representative of the Saudi government to
sit on their board and yet they took their money. Clearly they didn't have a
lot of suitors willing to dump money on them and clearly they had some
(major?) need of capital.

~~~
koolba
> For one thing, nobody wants a representative of the Saudi government to sit
> on their board and yet they took their money.

Says who? If you want to expand in the Middle East then having high level
officials with skin in the game is a plus. I wouldn't put it past them to ban
the competition and pressure their allies accordingly.

------
mnglkhn2
This might have to do with uber's recent effort to become a capital provider
for when someone wants to lease/finance a car in order to drive for uber.
Those $3.5bn are most likely capital to fund this operation. Uber is getting
into financial services.

------
arzt
Where does Uber rank historically in terms of private capital raised by a pre-
ipo tech company? I would imagine very close to #1?

------
slackstation
I think this is a bridge until the driver-less car can be developed. Once they
hit the market, automation will take over but, that same automation will allow
for a company with hyper-thin margins or people to loan out their car to a
service that transports people.

Uber wants to be that company but, there's nothing really stopping the market
from having 50+ companies like Uber in it.

There will probably be marketplaces that aggregate these smaller services into
larger competitive exchanges with spot prices for a ride.

If that's the case, it seems like it might take an awful long to make back the
billions that Uber is pumping to make markets around the world.

On the bright side, everyone has cheaper transportation.

------
em3rgent0rdr
The Saudis may have lowly motivations for this: Uber will lessen the demand to
allow women to drive.
[http://www.forbes.com/sites/rebeccalindland/2016/06/01/why-u...](http://www.forbes.com/sites/rebeccalindland/2016/06/01/why-
ubers-3-5-billion-windfall-is-bad-news-for-some-women/#6a28218f1604)

------
rock57
according e.g. to the stories linked below and many previous reports, Uber
actively aims to reduce the number of cars on the road, and its efforts,
especially Uber Pool will reduce the oil consumption and, as a result, oil
prices... And now they get the largest investment yet from a party that is NOT
interested in falling oil prices... What am I missing here?
[https://newsroom.uber.com/us-new-york/taking-1-million-
cars-...](https://newsroom.uber.com/us-new-york/taking-1-million-cars-off-the-
road-in-new-york-city/) [http://www.theguardian.com/sustainable-
business/2016/may/31/...](http://www.theguardian.com/sustainable-
business/2016/may/31/uber-millennials-us-cities-cars-austin-lyft)

~~~
macspoofing
>What am I missing here?

Their impact on oil prices today, and in the foreseeable future, is
inconsequential.

And sure Uber says it 'actively aims to reduce the number of cars on the road'
but that's just lofty marketing speak. They just want to sell you a taxi
service. But Silicon Valley startups can't just sell you useful services and
products, they need to change the world.

------
sandworm101
If Uber really is so unprofitable that it need saudi cash to keep things
ticking over, then how is this not dumping? Few would doubt that Uber is
disrupting taxi markets all over the place. That's fine so long as they are
the better mousetrap. But if they require billions in cash at this point, long
after they are a household name, then they aren't the better mousetrap. They
are a cash-rich company trying to drive others out of the business by dumping
below-cost product on the market.

If their goal really is to survive long enough that they can do away with
drivers, this is exactly the sort of practice that trade rules are meant to
prevent. We cannot allow corporations to buy out entire markets because we
know what happens once they do.

------
elmar
This video explores the Unit Economics of the Uber business and doesn't look
good at least in the US market.

Why Uber Is A Scam - Math Explains

[https://www.youtube.com/watch?v=fgQPj90OrQE](https://www.youtube.com/watch?v=fgQPj90OrQE)

------
tomp
Saudi Arabia? A country that is itself seeking a cash infusion?!

[http://www.ft.com/cms/s/0/9dd8cbfe-2755-11e6-8ba3-cdd781d02d...](http://www.ft.com/cms/s/0/9dd8cbfe-2755-11e6-8ba3-cdd781d02d89.html)

------
khc
If they can get cash at a good deal, why not? 10 years later, if they do make
a truckload of money from overseas expansions, they can pay back their
investors with oversea cash without paying American taxes. Double win!

~~~
fiatmoney
It is typically not legal to pay out (via dividends or share buybacks) to
different investors of the same class in differing amounts.

I'm not enough of a tax lawyer to say if you can do a miniature version of
that by buying back stock of a US company listed on foreign exchanges without
repatriating capital, but after arbitrage you would expect the effect to
ripple back to the US-listed share price by the same amount.

~~~
khc
This isn't about saving money per share, but using overseas money that many
companies now avoid repatriating.

~~~
fiatmoney
Right, but you can't pay out specifically to overseas investors.

------
johansch
So Uber will not be moving to electric cars anytime soon then, I guess.

------
kriro
A "we drive you" company taking financing from the only country in the world
that prohibits women from driving. I guess that's somewhat noteworthy. Maybe
some of that money goes towards Wali notification if a female passenger wants
to take a Uber ride in Saudi Arabia. "Your protectee wants to take a ride from
A to B. Accept/decline." It'll need an auto accept for women over 45 as they
are allowed to travel alone.

------
estefan
Since I'm reading "Zero to One", let's try to answer Thiel's "7 questions":

1\. Engineering - Have they created a "breakthrough" technology (10x better
than current tech)? No.

2\. Timing - Is now the right time? Maybe they're gambling that self-driving
cars are only a few years away so they can subsidise human drivers until that
happens in order to build a brand and demand/market presence.

3\. Monopoly - Are they starting with a big share of a small market? Only by
subsidising prices which isn't sustainable.

4\. People - Do they have the right team? Not sure.

5\. Distribution - Their app has widespread distribution and some key
partnerships solidify that.

6\. Durability - Will the market position be defensible 10 and 20 years in the
future? I can't see why it would be. If they're betting the company on self
driving cars, then that removes any benefit of a network effect based on a
two-sided market. Fast forward 10 years and another well-funded company could
pump a city with autonomous cars which would face little barriers to entry
(barring regulation, but they'd probably ignore it like Uber have).

7\. Secret - Have they identified a unique opportunity that others don't see?
Not unless they can move into adjacent markets or have a major ace up their
sleeves, but there are so many competitors that it would seem they haven't.

They are obviously targetting economies of scale which would mean their plan
is to keep prices so low no one else can afford to enter the market barring
major technological innovation. This must be why they're burning so much cash.

Self driving cars would _remove_ one barrier to entry since once they exist
there will be no need to have a pool of human drivers. So in that case there
would be no network effect to act as a barrier, only any effects of economies
of scale. That means there's potentially no monopoly being fought over, and
therefore no monopoly rents to be gained. Economies of scale take funding to
break into, but probably won't inherently create a monopoly with a significant
defensible position a well-funded competitor couldn't break into.

Is their valuation the result of a bubble because investors have few other
places to put their money? Google invested, probably just hedging their bets
or buying access to a future market, and now their valuation keeps
spiralling...

------
gdltec
Whatever the output, the Uber story will surely be an interesting
startup/VC/capitalism case study in the near future.

------
davidiach
Can someone please explain to me why people are so much more bullish on Uber
than on Tesla?

------
hackney
Considering Saudi Arabia likes their slaves, I find it quite coincidental they
would invest in what is a perfect scheme to get uber to provide what for that
country will be a ton of slave drivers. Remind me never to use uber.

------
michaelbuddy
60 billion as compared to Microsoft, Lockheed Martin, AT&T, Google. I mean
basically we're talking about a high end phone app and supporting company
infrastructure around that. 60 Billion for Uber. I'm just not seeing it.

~~~
xufi
Same here. I do wonder what is up other companies are up to while Uber is
doing this. What about Lyft?

------
tehabe
Saudi Arabia wants to be more independent from its oil production and invest
in a oil dependent business. That is satire, right?

~~~
cjarrett
Agreed, most ludicrous thing I've read today

------
syngrog66
in short: lawyers, politicians (whether legal donations or illegal bribes),
and accountants. each of which will vary by jurisdiction (city, county, state,
nation, etc.) yes, the core server-side codebase design/code/operate will be
about the same. yes, each taxi operator will own/buy/provide their own
hardware. yes, the mobile platform app codebase is fairly unified/common.

but... it's all those jurisdictional and market differences. plus, the
advantage to subsidize and accelerate, that will likely cause the lion's share
of thirst for bootup investor cash. Uber's biggest problem, as a 2000-ish
YC/SF-style "software" startup is that there is no Amazon/AWS-like cloud
provider of vehicular rides. Because you need, well, vehicles. Which are
expensive and messy. Uber needs enough cash to ensure enough vehicles, plus
those messy human drivers, plus all those locale/jurisdiction-specific
requirements, are satisfied and ready. Human/political/legal costs don't scale
up/down anywhere near as well as totally automatable solutions like pure
software.

------
TrevorJ
Ironic that Uber would take cash from a country that won't even allow women to
drive...

------
ilaksh
Arcade City and/or similar decentralized peer-to-peer blockchain-based systems
will make Uber obsolete. Same thing will happen in most other areas.

------
rajacombinator
Raising this much from dumb money seems to be a bad sign ...

------
craigvn
Blood money while they continue to execute people in the street.

~~~
breitling
Get off your moral high-ground. We (USofA) still continue to execute people as
well.

~~~
seizethecheese
Get out of your moral valley, get a better vantage on the moral topology
around you. The USA executes people, true, but generally not political
opponents. Saudi is an order of magnitude worse than the US government.

~~~
gorkemyurt
guess who is Saudi's biggest trade partner?

[https://en.wikipedia.org/wiki/Economy_of_Saudi_Arabia#List_o...](https://en.wikipedia.org/wiki/Economy_of_Saudi_Arabia#List_of_trade_organizations)

or who actually sells them guns?

[https://en.wikipedia.org/wiki/Saudi_Arabian_Army](https://en.wikipedia.org/wiki/Saudi_Arabian_Army)

~~~
seizethecheese
Your point that the US is complicit and that our hands are not clean is well
taken. There is a moral topology, this isn't black and white.

------
godembodied
So what if they execute people for what they think are crimes? Who are you to
judge what people should or should not do? What you label as evil someone will
label as good. There is no absolute evil/good, as you're trying to portray it.
It only your opinion vs. their opinion.

~~~
nemedse
How can you seriously think that? Do you think that crucifying someone for
taking part in pro-democratic protests is not universally bad? Why not let our
government do it? If they label it as good, who are we to judge ...

~~~
godembodied
How can it be universally bad? Gravity is universal, but morals are relative
to individual and groups of individuals(societies).

You grew up in the environment where action X is labeled as bad and then you
take that so seriously and think it's an objective fact about the world(a
universal law), when it's just your point of view.

~~~
nemedse
I don't want to argue about what is accepted in Saudi Arabia and what is not.
But we are talking about a company from the US, which is not stuck in the
middle ages AFAIK. It is totally unacceptable that they accept money from, and
at the end of the day, provide more money to this dictatorship that goes
against the core values of western civilisation.

------
iask
Uber is a fad...and will soon be be moved to the back seat...unless it's too
late. One poster might be on to something "...they are trying to get enough
money to sustain the subsidies until they kill all existing
competition"...62bn for a ride-hailing company?

------
nikolay
And that's precisely why I will boycott it and switch to Lyft!

Edit: It looks like there's Saudi money in Lyft as well. :(

~~~
breitling
Good luck with that. Saudi Prince Al-Waleed bin Talal invested in Lyft [1]

[1][http://blogs.wsj.com/digits/2015/12/24/saudi-prince-
alwaleed...](http://blogs.wsj.com/digits/2015/12/24/saudi-prince-alwaleeds-
firm-leads-247-7-million-investment-in-lyft/)

~~~
nikolay
Thanks! Well, I rarely use either. :) Anyway, Buycott [0] needs to add a Saudi
filter!

[0]: [https://www.buycott.com/](https://www.buycott.com/)

