DARA KHOSROWSHAHI, CEO of UBER, in conversation with John Thornhill at todays FT125 event at Clothworkers Hall, London on 22nd October 2018
Dara Khosrowshahi wants Uber to be the middleman for everything from shared rides to buses and subways © Jim Winslet/FT

Only a handful of global technology companies can claim a billion people use their products. But Uber wants to join the club.

Chief executive Dara Khosrowshahi said this week that the San Francisco company is aiming to reach 1bn active passengers, drivers and food delivery customers, compared to about 100m today. Two years ago, the company had just 40m passengers using its rides business.

But now, as Uber prepares for a blockbuster initial public offering next year, Mr Khosrowshahi is laying out an ambitious pitch for the future where the company becomes the middleman for everything from shared rides and electric bikes to public buses and subways.

“We want to invest very, very significantly in pool technology and mass transit, and we want to take that 100m to a billion,” he said at a Financial Times event in London on Monday.

Reaching 1bn people would put Uber in the realm of Google, Facebook and Tencent. Unlike those companies, Uber’s business model revolves around charging its users — but the company still loses billions of dollars every year.

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More than an unprofitable ride-hailing app

What effect increasing its reach by an order of magnitude will have on its ability to turn a profit is a question potential investors must weigh as they consider how much Uber is really worth. Bankers believe its IPO valuation could top $100bn — well above the $76bn the company was valued at in its last private funding round.

Uber’s much-anticipated listing could be the biggest of a generation of technology companies whose private valuations have swelled into the tens of billions of dollars thanks to a seemingly unending flow of capital from wealthy investors. Ride-hailing rivals Lyft and Didi Chuxing, as well as fellow US “decacorns” Airbnb, Pinterest and Palantir, are also reported to be considering going public in the next year or two.

Uber fundraising chart

For Uber and Mr Khosrowshahi, the key task ahead of the IPO is to show the company can be more than an unprofitable ride-hailing provider.

In its near decade of existence, Uber has burnt through billions of dollars in venture capital to build a car-booking business in more than 600 cities around the world. It has done so by heavily subsidising rides in markets where it competes with well-funded rivals, such as Lyft in the US and Ola in India.

The company reported a $4.5bn net loss in 2017, and its core rides business is still “a couple of years” away from profitability, Mr Khosrowshahi said at the FT event.

‘The Amazon of transportation’

But Uber’s aspirations — which will form a critical part of its pitch to public investors — extend well beyond car rides.

Mr Khosrowshahi describes this strategy as becoming “the Amazon of transportation”, emphasising the potential reach of Uber’s platform.

“If there’s one big goal for Uber it’s to replace car ownership,” he said.

Uber is already in the business of electric bike and scooter rentals, food delivery and freight booking. It will soon offer public transit tickets and rental cars through its app. It has longer-term bets on self-driving vehicles, short-range electric aircraft and delivery drones.

Mr Khosrowshahi says that rather than limiting Uber’s ambitions to matching passengers with drivers, it should aim for the entire $6tn global transportation market and beyond, into other sectors in need of on-demand labour. The company is testing a variety of projects that could one day lead to new businesses, including a short-term staffing pilot in Chicago.

The goal is to develop four or five multibillion-dollar revenue streams to keep Uber growing beyond the next three to five years.

The company points to its Uber Eats food delivery business as the model. The three-year-old unit is on track to exceed $6bn in annual gross sales — more than a tenth of Uber’s total gross bookings — and is growing at an annual rate of 200 per cent.

“Where is the next Eats?” Mr Khosrowshahi asked.

Finding a path to profitability

While the investments could have longer-term pay-offs, in the short term they will further delay Uber’s path to profitability. The company’s IPO filings will be another reminder to investors that it records no profits or free cash flow, and fuel the fundamental debate over whether its business model can ever work.

Mr Khosrowshahi is betting that by showing investors Uber is moving in the right direction, they will tolerate losses a while longer. To demonstrate this, he points to a metric that may be less familiar to some investors: contribution margin, or the proportion of revenue available to cover fixed costs.

In some mature markets, including parts of Europe and the US, the contribution margins of Uber’s rides and food delivery businesses are “getting more positive or getting less negative”, he said.

“We can show our investor base that it’s not a theory whether the model works. It’s working today,” he added. “If you plot the business three to five years forward, the contribution margins will be in a place where they can pay for overhead and then some.”

The strategy could help differentiate Uber from other lossmaking companies such as Spotify and Snap, which have stumbled since going public as investors wonder whether user growth can translate into profits.

Soon it will be up to investors to judge for themselves whether Uber should be valued as the cash-intensive car-booking business it is today, or the expansive on-demand platform it says it will become.

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