Blog Ipsa Loquitur

Steven Solomon in the NY Times, on why investors in Uber (and tech startups as a whole) might be just a teensy-weensy bit… crazy:

Take Uber, for instance. The company is a rocket, no doubt. In less than five years, it has reached a $41 billion valuation. About six months ago, investors put its value at $18 billion. This valuation exists even though all the revenue from the taxi industry in the United States is only about $11 billion a year.

Sure, maybe Uber is about to scale with perfect efficiency, down to the last taxi in the last rural county in the last corner of America, and eat every single lunch of every single taxi company. All this while not incurring any of the costs, regulatory or otherwise, that legacy taxi companies have. (E.g. background checks for drivers.) A valuation of $41 billion still doesn’t make sense. Solomon observes:

The only way that the Uber valuation works is as a bet that Uber will be able to induce more people to take taxis, expand to ride-sharing and even replace cars. Still, this bet supposes that Uber is a category killer and that only the biggest, fastest-growing company will survive.

Bill Gurley, a partner at Benchmark Capital, which is an Uber investor, used this argument to justify the fat valuation. In other words, Uber will change the way we get taxis as well as how people and things get from here to there.

Yes, that’s right. Investors are just that certain that Uber will completely disrupt (1) all taxies, (2) ride-sharing generally, (3) private car ownership, and (4) public transportation; the last three would be massive enough that what was once known as the taxi industry would double or triple in size.

That’s a mighty efficient market hypothesis you got there. It’d be a shame if something happened to it and rich people just started throwing money into implausible ventures.