Silicon Valley Uber Alles

The car-service startup is worth nearly as much as Hertz and Avis combined. How is that possible?

Peter Faris stands in front of one of his vehicles while holding a smartphone with the Uber app that orders up his sedan service in 2013 in Washington.

Photo by Paul J. Richards/AFP/Getty Images

Uber just shook Silicon Valley again. According to Businessweek, the on-demand ride service has raised a $1.2 billion venture capital round that values it at $17 billion. Investors in the San Francisco–based startup that bills itself as “everyone’s private driver” include Fidelity, BlackRock, Kleiner Perkins Caulfield & Byers, and Google Ventures, among others.

Why is that a big deal? Because $17 billion is a staggering number, even by recent Silicon Valley boom standards. In fact, Bloomberg’s Serena Saitto calculates that it’s a new record for tech startups in a direct-investment round. (That doesn’t include WhatsApp, the messaging app that Facebook bought for $19 billion in cash and stock earlier this year.) In a tech startup world that follows valuations like baseball fans follow home-run stats, it thrusts Uber to the top of a leaderboard that includes Airbnb, Dropbox, SpaceX, Spotify, and Pinterest.

Astonishingly, Uber’s valuation is also more than the market capitalization of rental-car giants Hertz Global Holdings ($12.5 billion) or Avis Budget Group ($6.32 billion). It’s closer to the market cap of those two companies combined.

How could Uber, which just celebrated its fifth birthday, be worth more than industry leader Hertz, which was founded in 1918 and took in more than $10 billion in gross revenue last year? There are a few different ways to answer that.

1. The skeptical answer

The first answer is that the word worth should probably be in scare quotes. No one has actually paid $17 billion for Uber, and even if investors did, plenty of skeptics would make a case that they weren’t getting fair value for their money.

Inc.’s Ilan Mochari complained last week that all the attention paid to startup valuations is just so much effervescence. The daily deals startup Groupon, he notes, was also “worth” some $17 billion on the day it went public in 2011. Now it’s less than $4 billion. The grocery service Webvan was valued at $6 billion in 1999 and electric-car startup Fisker $1.8 billion in 2009. Both are now bankrupt.

There’s no guarantee Uber won’t suffer the same fate, especially given that many U.S. cities and states consider its operations dangerous and illegal. Even if it somehow manages to win its myriad legal battles while fighting on countless different fronts, it might still turn out to be little more than a yuppie techie fad. Besides, what’s to stop all the other car services out there from building their own slick smartphone apps and doing the same thing? And then, if customers demand it, adding a mustache?

2. The optimistic answer

The second answer is that, while Uber is much smaller than Hertz or Avis today, it’s growing much faster—and its ceiling may be far higher. At this point, we have a good idea of what to expect from the established rental-car companies.

Uber is taking on a quite different market, and it might be a much bigger one.

At its most basic level, Uber represents a challenge to the taxi industry, which brings in an estimated $11 billion a year in the U.S. alone. Historically that industry has been fragmented, with a handful of relatively small companies dominating each local market. It has also been heavily regulated in a way that has made the incumbents complacent and ripe for competition.

In San Francisco, its home city, Uber has already become a wildly popular alternative to local taxi services, and it’s quickly making inroads in other big markets—not only in the United States, but around the world. CEO Travis Kalanick told Businessweek that Uber is now in 128 cities and “probably closing in on 40 countries if we are not there already.” You know you’re growing fast when your CEO can’t even keep count of how many countries you’ve entered.  

And unlike a lot of other fast-growing startups of Silicon Valley past, Uber actually makes money—you know, by selling something that consumers willingly pay for. Where startups like Snapchat and Pinterest achieve ridiculous growth rates by offering a service for free, Uber takes a healthy 20 percent cut of every ride.

Uber itself is not immune to competition, of course. But it has a healthy head start on its closest startup rival, Lyft. And Kalanick insists that it hasn’t had to cut its margins in markets where Lyft has begun competing with it head-to-head.

3. The starry-eyed answer

All of the above help to explain how Uber could someday justify a $17 billion valuation. But it leaves out the real upside—the third answer!—which is the possibility that taxis are just the beginning for Uber.

Already Kalanick is not judging Uber’s progress against the market size for taxis, but against the size of the whole ground transportation sector, which he pegs at $22 billion in San Francisco alone. His thinking: If people find it convenient and affordable enough to hail a private car via smartphone anytime they want, they might just ditch their cars altogether. Already Uber has expanded beyond professional drivers with its UberX ride-share service.

Next imagine a long-term future in which Uber is the exclusive provider for Google’s massive fleet of self-driving cars, which whisk us all from place to place at the touch of a button and then move on to pick up the next customer. Now you’re thinking like the Uber investors who are convinced that $17 billion is a bargain.

4. The real answer

The real answer is that no one has the foggiest idea how much Uber will be worth once it matures. Anyone who tells you that he does is not to be trusted. Investors are looking at a company whose possible outcomes range from “the Amazon of the transportation industry” to “the Webvan of the 2010s.” (Amazon, in case you were wondering, has a market cap of about $150 billion.) They’re taking semieducated guesses that attempt to capture both the sky-high upside and the steep downside of its prospects. Less than a year ago, the guess was around $3.5 billion. Today it’s $17 billion. Welcome to Silicon Valley circa 2014.