What was Uber like when Benchmark Invested?
Why did Benchmark Invest in Uber?
- “Having come out of OpenTable being successful, I was trying to think of other industries where, if you put a network on top of [it, that] would absorb waste and make it more efficient and more usable. And the thesis of cars had come up, and we had met with several taxi [startups] — there were actually taxi startups before Uber. And we had quickly come to the conclusion that doing it on top of taxi wasn't the right way to do it because prices were fixed, they’re oligopolies, there's regulation, and if anyone did it on town cars, we would pay attention. So that was a thesis we had internally when they popped up.” (Bill Gurley - Kara Swisher)
- …”so we immediately cold-called them, and I remember meeting with Ryan and Travis at a restaurant and then I brought them [in]. This was before their seed round, and this is the part you're talking about about going back and forth. And they presented the company to us for the seed round and we chose not to do it at that point in time. And then for the next three or four months Matt became, I think, the No. 1 rider on Uber. And as he's done many times in our partnership — he came into the room screaming, "We have to do it! We have to do it! We have to do it!" And so we got aggressively in front of the series A.” (Bill Gurley - Kara Swisher)
- Between the time we looked at the seed and when we did the A, Travis had moved into the CEO position. At the beginning we were just studying him as an angel investor in the thing, and probably by the time the A came around he was the CEO. It was hard. Like I said, we had a theory that it could be like OpenTable. So you know, OpenTable was sold for like $3 billion or something. So I'd be inaccurate if I suggested we had a vision that it could one day cause people to question car ownership. I never had considered that.
- So Matt had known him (Travis) for a while. I actually called Mark Cuban, because Cuban had been an investor in Red Swoosh, and they had ended up in a disagreement, yet Mark had walked away thinking Travis was remarkably professional even though they had different points of opinion, which I took as a positive. I like to think I knew how passionate he was. But I didn't. We were taking a chance. I'm remarkably thrilled, now that we're involved, to see a guy who's just so committed to what he does. (Bill Gurley - Recode Decode with Kara Swisher)
- Yeah, but two things. One, I do think that it is one of the best product market fits that has ever come along. And as I've come to realize what's possible here, there is a real opportunity to literally change the face of America.
You talked about that early on, I remember.
Like car ownership has gotten way too far in our country. 2.3 per household.
I agree.
And parking lots. Houston has like 4.5 parking spots per car. And there's an opportunity to change it. You can actually lower housing pricing if you remove parking requirements. So we're doing deals now with developers and getting cities to approve them to have parking-free housing.
https://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/#:~:text=For the market size%2C he,TAM estimate is %24100 billion. - not sure how much of this is in hindsight vs. at the time of investment, but really interesting nonetheless.
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In his 2014 article about Uber’s market share - I’d suspect he had similar feelings at the time of investing - “Let’s first dive into the TAM assumption. In choosing to use the historical size of the taxi and limousine market, Damodaran is making an implicit assumption that the future will look quite like the past. In other words, the arrival of a product or service like Uber will have zero impact on the overall market size of the car-for-hire transportation market. There are multiple reasons why this is a flawed assumption. When you materially improve an offering, and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process. The past can be a poor guide for the future if the future offering is materially different than the past. Consider the following example from 34 years ago that included the exact same type of prediction error: (AT&T McKinsket report)”
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He mentions 1. faster pick up times - usually around 5 minutes and you have a live tracker. 2. Coverage density - Uber drivers are based anywhere and everywhere, so it’s easier to get an Uber in a suburban area than a taxi. 3. Payment - you never think about payment in an Uber because your card is saved and payment is automatic. 4. Civility - the dual ride rating system ensures higher quality drivers/riders are rewarded with faster pickup times 5. Trust and Safety because there is a record of every ride ensuring porr drivers are removed. Sort of like an overwatch.
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Dramatically lower prices because as Uber scales, it can pay its drivers less because they’re getting more rides so their per-hour rate remains the same even though prices are getting cheaper which has no effect on the drivers and a massive positive effect for riders.
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The biggest factor that many outsiders did not consider early in the Benchmark investment in Uber is the potential trend to Uber’s as an alternative to car-ownership. This is obvious now, but not clear back then. It’s incredible to see how true this has become as cars along with the insurance is so expensive that it is far cheaper to just take Ubers, especially if many companies pay for their employees to take Ubers to the office, almost certainly something they did not consider but if they did then bravo. Maybe look at Car ownership stats. Here are some at the time and maybe look at some now.
- The Times notes that less than half of potential drivers age 19 or younger had a license in 2008, down from nearly two-thirds in 1998. The fraction of 20-to-24-year-olds with a license has also dropped. And according to CNW research, adults between the ages of 21 and 34 buy just 27 percent of all new vehicles sold in America, a far cry from the peak of 38 percent in 1985. https://www.theatlantic.com/business/archive/2012/03/why-dont-young-americans-buy-cars/255001/
- There is also a trend of young Americans preferring Urban settings than Suburban settings where cars are more needed: Great graphic: https://en.wikipedia.org/wiki/Urbanization_in_the_United_States#/media/File:Urban_and_rural_populations_in_the_United_States_(US_Census_Bureau_(1790_to_2010)),_OWID.svg
- There are two other points worth considering with respect to Uber as a car ownership alternative. First, the consumer is most likely to replace their “extra” car first. You may see an urban family going from two cars to one. Or perhaps a suburban family will reduce its fleet from four to three or three to two. The fixed costs of this marginal car are very high (DMV registration, insurance, depreciation), yet the usage of that car is much lower. The second point worth nothing is that for certain people the benefits of not driving are so high that they will switch to Uber before the economic case is specifically advantageous, choosing to pay a premium for the convenience. This would include people that consume alcohol after work and do not want to risk driving, people that are frequent users of smartphones when they commute (now considered a bigger risk than DUI), and people that loathe spending time parking their vehicle.
- The number of cars in circulation in the world is just over 1 billion, with 25% of those in the United States. AAA estimates that the average annual cost of owning a car is $9,000. While this number may seem high, if you read the report you will see that the key drivers: the rising costs of gasoline and raw materials and insurance alone averages $1000/year. It is hard to imagine a scenario where these costs fall (most are rising), and many of these costs are now consistent on a global basis. But we will conservatively cut that number by 33% to $6,000.
- One billion global cars multiplied by a $6,000 annual cost of ownership results in a $6 trillion market for annual car ownership costs. How much of that market Uber can take is an interesting question to ponder (which we will), but the fact that 25% of that market is in the U.S. is a huge advantage for the company.
- There are clues to be found, if you know where to look. In this video recorded in October of 2012 (about 20 months ago), Uber’s CEO, Travis Kalanick, notes that when Uber launched its services in 2010 there were about 600 total black cars in San Francisco. At the time of this video, Travis notes that more than 600 black cars were active on Uber and the company was still growing at 20% month over month (at the time, UberX had just launched, so Uber’s fleet was all black cars). So 20 months ago in San Francisco, Uber was already at 100% of Damodaran’s historic market, and growth was still tilting up and to the right. The only way this is possible is if the market is expanding at rapid pace, beyond the historical limit.
Sources: https://www.youtube.com/watch?v=rQ6GoY2_Ujw