By Michelle Quinn. This article originally appeared on The Mercury News, August 31, 2016.
The tech industry is pedaling along just fine.
Nothing on the horizon seems likely to knock off Google, Facebook, Apple or the many smaller companies that are keeping up with the pack.
Except, what if, Uber, the most valuable startup in the world, stumbles on its road to an IPO?
That’s what I thought after reports last week said that the ride-hailing company lost $1.2 billion in the first half of 2016 after losing more than $2 billion in 2015.
Sure, startups lose money all the time as they carve out new markets and grow as big as they can. And Uber, valued at more than $62 billion, isn’t hurting for cash even with its losses. The seven-year old firm manages to raise another few billion every few months, and has many billions in the bank.
But the moment of reckoning, when private investors who have been financing Uber will need to cash out, may come soon. The company is aware of how important it will be to show that it is on the road to profitability. Earlier this year, it touted its profitability in the U.S. (but is reportedly back in the red even here).
The danger is that Uber, the most valuable startup ever, may be too expensive for public investors. They won’t tolerate a few bad quarters at the billion dollar loss level.
That prospect could be ugly, not just for Uber or competitors such as Lyft. It would be a blow to the 170-plus so called “unicorns,” the startups that are valued at more than $1 billion.
A rough Uber IPO could be a where-were-you-when moment for tech, much like the day Webvan closed its doors in the dot-com boom. We know that irrational exuberance fuels the run up and irrational depression fuels the down cycle. Investors get spooked, and companies stop hiring and spending until they can get better visibility. If it happens, this period of tech growth will come to a screeching halt.
That’s the risk of this boom. Investors have created unicorns that are blown up like balloons in the Macy’s Thanksgiving Day Parade. Big, big investments and big, big losses equal big, big valuations — if the company executes well.
A recent study found that one-third of today’s unicorns won’t be worth that much when they have an exit — whether that means being bought by another company or having an IPO. The thinning of the herd has already begun with companies having to accept lower “down rounds” of funding.
Robert Siegel, a venture capitalist with XSeed Capital and a Stanford University lecturer, doesn’t buy my Uber doomsday scenario.
“I don’t believe there will be a cataclysm,” he said. “Facebook’s IPO was considered a catastrophe. Great companies can recover.”
Should Uber stumble, what will matter are the underlying causes, said Enrico Moretti, a professor of economics at UC Berkeley. “The only scenario that Uber stumbling would affect the larger tech sector is if it was about something broader about the sector.”
That makes sense. And I hope that Uber doesn’t stumble. But if the past is any guide, Uber’s success has a symbolic value far beyond the company’s performance. It’s about whether this tech boom is built on something real or the stuff of dreams.