Uber the 'paper unicorn?' A cautionary tale

Published 19.04.2016 01:06

The founder of the People's Republic of China, Mao Zedong, referred to the United States as the "Paper Tiger," implying it was all show and no real strength. I have had the opportunity to return to China this week and do some traveling throughout the country and the "special administrative region" of Hong Kong. I've found what may be signs of "Paper Unicorns." I use the term "Paper Unicorn" to refer to start-ups valued at over $1 billion - called "unicorns" in VC circles - that are dropping the ball on monetizing their presence in China. While the term generally refers to "unicorns" that are valuable on paper only, I believe the meaning I've assigned is a better fit for companies with a Chinese presence.

Before I get to Uber and, by proxy, whether or not some "unicorns" in China are just "paper unicorns," I want to step back for a second. China has been home to one of the most volatile of stock markets in recent memory. From its peak last June, the Shanghai composite index is down over 40 percent. After a slight recovery in the fall, the benchmark Chinese index is down over 20 percent since the new year. While 20 percent may not seem like much, that amount is roughly $1 trillion or three times the value of all of the companies listed on the Borsa Istanbul stock exchange. This is precisely why the Shanghai Stock Market in particular and Chinese financial markets in general are of such importance. Slight moves in Chinese equity markets are like shallow earthquakes, while they may not register much on the Richter scale, their waves cause tsunamis.

As China is on track to surpass the US economy this year in terms of size - by some accounts it already has - it continues to play a greater role in global commerce. At a dinner a few nights ago, I was seated next to several gentlemen from Detroit who are in charge of producing Jeeps for Chrysler. Similarly tens of thousands of other foreign executives live and work in China producing for their companies what had previously been produced in their home countries. This story, the "world's factory" narrative, is by now an old story. The newer narrative is that China is also the "world's breadbasket," and not in the literal sense. If you want to launch a multinational brand, you must have a China strategy. Often times, venture capitalists question start-ups on how they plan on monetizing their presence in China, and start-ups must have convincing answers on how to market their services to the fastest-growing class of consumers in the world.

Perhaps the most famous of these examples nowadays is Uber. If you follow my column, you will note that nine months ago I lauded the success of Uber and its presence in China. Fast-forward to today and my song has changed. As an Uber user, I have found several important changes in Uber's execution. The first and most problematic issue was something that I had only read about. Other articles detail how Uber is being used by "drivers" to game the system. Nonexistent drivers pickup nonexistent passengers and they go on nonexistent rides. With some careful software manipulation, criminals trick the Uber system and pocket the promotional fees Uber pays their drivers and the free credit it gives its passengers.

One of the clearest evidence of such fraud, or at least signs of fraud, is that Uber no longer knows who its drivers are. I was often picked up by Uber drivers that look nothing like the pictures on their Uber profile in cars whose license plate do not match those Uber communicates to its users. Drivers tried to negotiate cash fees in lieu of using Uber as an intermediary. Complaints to Uber customer service were, after the prerequisite form response, completely ignored. The inability of Uber to control its product and the rapid deterioration of the services it provides its customers is not welcome news for its users and it is especially not welcome news for its investors.

Uber was last valued at over $62 billion dollars a few months ago. This makes Uber worth roughly one-fifth of Amazon.com. Amazon, by comparison, had over $100 billion in sales last year. So, does Uber deserve the multi-billion valuation it currently holds? Perhaps, as long as the ride-sharing behemoth is able to successfully go public at a valuation greater than the multi-billion dollar valuation in which investors last invested in December, then all is well; however, should Uber continue to execute the way it has been in China in recent months, I am afraid Uber investors will be in for a bumpy ride.

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