Uber's Flawed Business Model is 'Broken Unicorn Syndrome' of 2019 IPOs

Uber’s Path to Profitability

The future of Uber is not very clear in 2019. Or perhaps, it's crystal clear. Read on.

Uber has had a lot of hype behind it. The on-demand economy was supposed to disrupted society. Fast forward to mid-2019, and Uber and Lyft look like under-performing IPOs. Both stocks are down more than 25% since their IPO date.

Uber and Lyft both have a crisis of a lack of a path to profitability. Uber lost over $5 billion in one quarter, and the way they do business as a business model means they will likely keep losing a lot of money fighting in tight margin businesses like food delivery with more agile startups.

What we know is this: The ride-sharing companies are subsidizing rides and overspending on technology, and soon their very business model may be upended in California.

Flawed Business Model Coming to Light

Without a doubt, these are the riskiest Unicorn startups we’ve likley ever seen. The era of Uber, WeWork, Airbnb and this generation of last startups born in the throws of 2008 seem totally dreamy and a bit overemphasized on scale, rather than the actual value they provide. You can blame Softbank’s Vision Fund or the founders, but these don’t appear to be normal companies, at least in the case of Uber and WeWork.

Uber and Lyft keep losing money while driving up the number of cars on our overcrowded streets. All for worse than minimum wage workers who don’t have adequate worker protections, rights or benefits. This isn’t a good sign, the so-called “Gig-economy” needs to be socially good, not exploitation evil.

When Uber went public in its IPO, it said it had 91 million users, but growth is slowing and it may never make a profit, according to Reuters. As Waymo One, Google’s autonomous driving startup surges ahead with beta tests in Phoenix and San Francisco, it appears Uber is not among the leaders in that trend either.

The S-1 filing underscores Uber’s rapid growth in the last three years but also how a string of public scandals and increased competition from rivals have weighed on its plans to attract and retain riders. Uber ruined itself, likely before it even went IPO, and Wall Street doesn't trust companies who have poor paths to profitability. Those companies usually fail.

It’s hard to chart all that went wrong at Uber. Poor leadership, a toxic culture, being overly aggressive in a global market, being hostile to the industry it sought to replace. Most of all, however, is that the business model is just flawed. It’s not grounded in reality.

Treating people poorly is just one of the impacts of a company like Uber on the world. Where are the Unicorns who do social good?

DK (Dara Khosrowshahi) is a fantastic salesperson, but what do you do when you take such a flawed company into your charge? How do you even reach those crazy benefits you have been promised?

Uber is a “Broken Unicorn”

Uber is like inheriting a “black Unicorn”, with three legs and a chipped horn. The magic is gone, and the competition is real. Uber has had to drastically retreat from global markets, and it’s just a startup — not a dominant first-mover in its domain.

Lyft appears to be taking marketshare from Uber in North America, and Uber is not well-liked abroad. Your reputation actually matters if consumers are your end-users.

The lack of profitability for the new wave of IPOs should be a serious concern for American innovation. Think about it. Just 24% of companies going public in 2019 will report positive net income this year — the lowest level since the tech boom and bust two decades ago, Goldman’s chief U.S. equity strategist David Kostin told clients in a note this week. This includes biotech companies and others in addition to giants like Uber and Lyft.

These companies are gambling with the future, especially if their core business model isn’t sound. A lack of a path to profitability can destroy even the best-funded companies.

Khosrowshahi often likes to talk about abstract concepts, like a $12 trillion “total addressable market” (TAM) that Uber has only just begun to penetrate. That includes things like food delivery, personal mobility, and freight shipping. Pure moonshine and Wall Street manipulation and we’re not drinking the kool-aid any longer.

Uber, which went public in May this year, faces an uphill battle to win over Wall Street investors concerned about its history of steep losses and slowing revenue growth. It’s not just a dark horse, it’s an operator in slim margin territory and transactions where profits might be in the area of cents, not dollars.

Bill AB 5 Could Doom Uber and Lyft

New legislation nearly kills the dream entirely of EVER being profitable. Assembly Bill 5 is an important step for the rights of Gig-economy workers and it could be the nail in the coffin for Uber, I’ll be the first to admit. For California, this is just huge. It could require companies that use independent contractors to reclassify their workers as employees. Such companies include ride-hailing services, like Uber and Lyft, and delivery startups, such as DoorDash and Postmates.

The hollowing out of our middle-class has been 40 years in the making and the Gig-economy is not helping. The idea that people would have fun at work as a driver even for less than minimum wage is a kind of technological slavery. Companies like Uber are built on this kind of exploitation. The new bill hopefully can help create more social justice in the domain.

Under AB 5, all companies using independent contractors in the state will be put to a three-part test that looks at how much control the company has over its workers. If the companies don’t pass the test, they may be required to classify their workers as employees.

Uber and Lyft have both said their business models hinge on drivers staying independent contractors. Uber’s entire business model thus needs the Gig-economy slavery to stay as it is. But what kind of a world would that be?

The tactics these companies used to fight the proposed bill also showed their lack of ethics. Before AB 5 passed, both Uber and Lyft sent messages to all California drivers saying that if they’re classified as employees, they could lose their flexible work schedules. They also sent petitions to riders warning of less dependable rides. The two companies additionally tried to strike a deal with lawmakers on the bill, but to no avail.

Uber’s path to profitability is possibly ruined permanently by this Bill. California’s Division of Labor estimates that the misclassification of workers adds up to a loss of $7 billion per year in estimated annual payroll tax revenue. Not only is Uber bad for its drivers, but it’s bad for society. Desperate workers are footing the bill.

Advocates for AB 5 say many companies that rely on independent contractors are unfairly shifting business costs onto their workers. Anyone with a shred of decency and compassion for the rights of workers knows this to be true. The Gig-economy is a kind of fraud, in some regards.

These companies could also be bad for traffic and congestion.

The ride-hailing firm is hanging its hopes on self-driving cars, spending aggressively to develop the software and tech needed to bring autonomous cars to market. But that’s unlikely to work out, with Waymo One, the automobile industry and others, like Didi, ahead in the game.

Uber is an example of how companies need to be ethical, treat people fairly and respect the intelligence of shareholders. If you don’t have a path to profitability that’s valid and aren’t a good citizen in terms of corporate responsibility, why should we support you as investors or users?

Nobody wants to support a loser or a bad actor on the global stage. There is a traffic crisis in many cities in the US, and Uber and Lyft bear some responsibility. Uber’s costs don’t show an upside that warrants our money or our rides. Its behavior in the public domain has been atrocious. A new CEO does not change history or Uber’s future.

Uber Must Face Reality or be Disrupted

Uber lost $3.03 billion in 2018 from operations.

Without a valid path to profitability, Saudi money is going down the drain just to make a few executives rich. If Uber went out of business would we miss it really? There’s Lyft and a long line of Uber clones that are doing wonderfully well in their respective global regions.

We might witness the day when Uber goes out of business. Other states are also looking at gig worker classification. Washington and Oregon have considered legislation similar to AB 5.

Reality is slowly coming to dawn on Uber and its flawed business model.

The disruptive company needs itself to be disrupted, to rebuild our middle class and reshape the future of workers as we know it for the greater good. The gig economy must die or be transformed into something better, otherwise, we all lose.

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