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Decoding Uber's Proposed $50B Valuation (And What It Means For You)

This article is more than 8 years old.

Of all the so-called Unicorns (companies with valuations of at least $1 billion), Uber stands out above the rest. It currently holds the distinction of being the world’s most highly capitalized startup and its growth appears to be accelerating at breakneck speed. Still, when I saw the news that Uber plans to raise another $1.5 to $2.0 billion at a staggering $50 billion valuation, I was shocked. I couldn’t help but wonder what that really meant for the company. In order to better understand what was going, my team and I dug into the numbers.

At BodeTree, our mission is to make understanding finance simple and easy for small business owners, but every so often we like to analyze much larger companies like Uber. We relied on what publicly available information we could find to develop a reasonable estimate of Uber’s revenue. The goal was to figure out what a $50 billion valuation meant for the company in terms of implied revenue growth and margins. Here’s what we found:

If you assume a normalized long-term free cash flow margin of about 35% (yes, this is quite high, but Uber’s business model is very efficient), Uber’s $50 billion valuation means that they will need to generate about $35.7 billion dollars of gross revenue and about $7.1 billion dollars of net revenue to justify the recent valuation. Perhaps more interestingly, the company will have to have an annual growth rate of about 286% each year over the next five years to hit these numbers. To put those numbers into perspective for a moment, it means that Uber is currently valued at 125x trailing annual net revenue.

Uber’s massive market value surpasses 80%+ of all S&P 500 companies, many of which have been around for 20, 30, 50 or more years (Uber was started in 2009). At first glance, the $50 billion valuation seems absurd. However, if the company manages to continue its current growth trajectory (seemingly doubling revenue every 12 months or less), it is not as crazy as one might presume. Still, this sky-high valuation isn’t without risk.

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First and foremost, Uber’s only real exit strategy at this point is to go public. That won’t pose problems for them in the near-term, but it may cause problems in the future. After all, Wall Street is notoriously short on both patience and understanding. It’s likely that when Uber goes public, it will be at a valuation of $70 billion or more. At that point, unless their revenue has increased dramatically, they’re going to have to deliver on even more accelerated growth annually over the next five years. With increasing pressure from both the incumbent players and local governments, achieving this growth could be a tall order.

While very few companies will ever find themselves in Uber’s enviable position, each and every entrepreneur eventually has to grapple with establishing a value for their business. When that time comes, they have to decide whether to push forward with a high value and its implied growth, or take a more conservative route.

The market is strewn with the corpses of companies that have reached for high values and failed in execution. Consider the stories of Zynga, Webvan, or Groupon . All of these businesses saw incredible growth and high valuations, only to be brought down by the harsh realities of not meeting the public market’s expectations. That’s why my co-founder and I opted for a conservative valuation during our last fundraising round at BodeTree. It was a difficult decision, but ultimately we chose to settle on a value that captured the immense opportunity that was ahead of us, yet was still tempered by conservative assumptions. In the end, we settled for a value that we thought was more reasonable than what the market might have supported.

Our rationale was simple. If we had raised the round at the highest valuation possible like Uber, we would have committed ourselves to delivering even more growth in the near-term in order to justify the value. It’s likely that we would not have been able to remain focused on our long-term vision. We felt strongly that giving ourselves the room to do what was right for the company – and avoid the pressure to grow at all costs – was the best path. And today, we have no regrets.

My advice to other founders: Think long and hard about what accepting a high valuation might mean for your startup. While a big number may be a flattering indicator of your success so far, it could also put your company in a perilous position going forward.

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