Benchmark Capital was one of the first investors in Uber, participating in the Series-A financing in 2011 and acquiring a 13% stake in the company for a $20 million investment. Now, after watching Uber suffer through 24 consecutive quarters of cash burn, managerial controversy, a power vacuum in the C-suite, and multiple lawsuits filed against Uber by the powerhouse venture capital fund, Benchmark Capital is considering exiting from Uber at more than 200 times its initial investment.
It is no surprise that Benchmark Capital put the option of exiting Uber on the table.
Managerially, Uber stands at the center of controversies surrounding labor regulation for its drivers, sexual harassment of app users, privacy concerns of riders, and dirty business tricks against its main competitor, Lyft. More recently, the company faced a PR crisis and a lawsuit from Alphabet claiming the ride-sharing app stole technology related to self-driving vehicles. All of this prompted ex-Uber CEO Travis Kalanick to resign in June 2017. Even though Uber replaced the CEO with ex-Expedia CEO Dara Khosrowshahi in late August 2017, most of its C-suite executive positions are still vacant. More concerning, Uber may be caught in the middle of a power struggle between Kalanick, Khosrowshahi, and outside investors. Travis Kalanick has the say on at least three of six new incoming directors coming on board, which brings his total influence on the board to at least six including himself. This means that while Khosrowshahi is commander-in-chief, the new CEO could face insubordination from his board. In response, Khosrowshahi has proposed slashing the number of board seats controlled by Kalanick and stripping super-voting rights - smells like a power struggle brewing.
Financially, the company is bleeding cash, losing more than $700 million in its first quarter this year despite booking over $20 billion last year and owning around a fifth of the global taxi and limousine industry. Additionally, the company has recently raised capital from investors ranging from Saudi Arabia to Baidu to Softbank at valuations as high as $70 billion. This has led some investors to fear that Uber’s valuation is an over-inflating bubble and has stirred some doubt in the venture capital community. Even worse, the mismatch between investing and exit valuation caused by Softbank’s special investment valuation at $45 billion has put current Uber positions in difficult positions, as few investors are willing to invest at a $70 billion valuation and exit at a $45 billion valuation.
Evaluating Benchmark’s position from these two angles, it would seem like the venture capital fund is stuck between a rock and a hard place and would explain why Benchmark has been hesitant on staying on board or exiting. In my opinion, however, Benchmark should immediately liquidate its investment in Uber to protect itself from the potential downside of a significant drop in valuations. Currently, Benchmark stands to make at least $5.8 billion from its exit (almost 200 times its initial investment) at the $45 billion valuation bid from Softbank. Sure, venture capitalists could claim that Uber will be worth more than $100 billion in a few years, but the potential upside does not justify the illiquidity and potential managerial and financial downsides and heated competition that Uber faces in the coming years.