The three leading US based sharing economy companies are anticipated to launch their IPOs during 2019. Lyft in being the first to file its IPO registration statement last week will likely be the first to launch an IPO even though it was founded after UBER and Airbnb who were the founders of the sharing economy. However, what UBER should be famous for is originating the Wealth Sharing financing strategy for startups. The strategy enabled UBER to raise the just-in-time capital that it needed to support its exponential growth and at increasingly higher valuations.
After UBER successfully launched in its first city, San Francisco in June of 2010, it launched its seed round financing to raise $1.25 million in October 2010 at a post money valuation of $5 million. There were 32 lucky investors who each invested an average of $40,000. At December 31, 2018, a $40,000 investment in UBER had appreciated to $540 million.
The strategy that Travis Kalanick, the founder and CEO of UBER came up with was bold and brilliant. It’s because Mr. Kalanick had the wherewithal to fund the entire $1.25 million himself. In April 2007, Red Swoosh which he cofounded was sold to publicly traded Akamai Technologies for $17 million. Instead of funding UBER’s first round, Mr. Kalanick allocated the funding round to a group which included strategic investors who could increase the probability of the company being wildly successful. In the round there were four venture capital firms and 28 individual investors. Below are some of the individual investors and why I believe that they were invited to invest in UBER’s first round:
- Sean Fanning Kalanick and Fanning were kindred spirits. The 19 years old Fanning became a rising new star in the tech world when he co-founded Napster, the very first digital disruptor in 1999. After copy right infringement issues surfaced in 2000 Napster did not survive. Kalanick who is four years senior to Fanning founded the Scour Exchange in 1998, which had to file for bankruptcy in 2000 due to its having copyright infringement issues.
- Jeff Bezos – The Amazon founder and CEO being on the list enabled UBER to have instant access to Amazon’s visionary investors who were close to Bezos.
- Troy Carter – Was the manager of many of the top music stars including John Legend and Lady Gaga. Having celebrities tweeting about how easy it is to use an UBER car was a no brainer.
- Brian Chesky – Was the Co-founder and CEO of Airbnb which was founded before UBER. Chesky who is five years younger than Kalanick was also one of the upcoming leaders in the tech world and a co-founder of the sharing industry. Having Chesky as an investor enabled UBER to potentially leverage Airbnb’s investor base.
- Gary Vaynerchuk – Was a founder of company which provides social media and strategy services to Fortune 500 companies including General Electric, Anheuser-Busch, Mondelez and PepsiCo. To keep advertising costs down UBER had to utilize social media to penetrate the market.
- Naval Ravikant – Had founded AngelList, a website which introduces startups to angel investors.
- David Sacks – Member of the PayPal Mafia, a group of ex-PayPal employees who used their instant wealth from it being acquired by eBay to invest in startups including their own. The PayPal Mafia which includes Elon Musk, Reid Hoffman the founder of LinkedIn and Peter Thiel the first investor in Facebook is famous for creating a whole new wave of technology.
All of UBER’s first round investors were not strategic or connected. Cyan Banister, who was an UBER angel investor subsequently became a partner at Peter Thiel’s Founders Fund. She has spoken publicly about going from living on the streets as a teenager to making multi-million dollar technology investments.
Mr. Kalanick was able to create enormous goodwill with those who invested in its first round. The goodwill was leveraged by UBER to raise the just-in-time needed capital and to minimize its marketing and advertising expenses. The table below provides details about UBER’s funding rounds and valuations for the first five years that it raised capital. Four months after UBER went 100% digital with its successful launch in San Francisco it raised $1.25 million at a $5 million valuation. Another four months later UBER’s valuation had multiplied by 12 times. Thirteen months after the founders round investment was made it had multiplied by 66 times. In December 2014, which was four years and two months after the October 2010 founder’s round the valuation had increased by 8200 times. In less than five years an October 2010, $10,000 investment in UBER appreciated to $82 million. Everyone who invested in UBER from October 2010 through June 2014 made a minimum of 2.9 times their investment by the end of 2014.
UBER was a low risk and high reward investment opportunities for the 32 who invested. It’s because they invested into a digital disruptor at the optimum time which is after the model has been perfected. The video below entitled “Digital disruptor companies have the potential to get $10 billion valuations quickly” is about UBER perfecting its model.
Mr. Kalanick’s financing strategy for UBER was bold. Because of his experience with Red Swoosh, the tech company that he founded and sold he knew that the 25% dilution from UBER issuing shares at a post funding valuation of $5 million could reduce the long term value of his and the other founder’s stakes by billions. Yet, he purposely made the decision to raise capital for UBER at a discount to the much higher valuation that it could have received since it had successfully launched in San Francisco four months earlier. This is the first time throughout my 42-year career that I have witnessed a CEO valuing a startup at a discount for the purpose of increasing its value long term. Mr. Kalanick is a true visionary entrepreneur.
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