Last week, I took you through my hair-pulling, shirt-rending experience of dealing with car sharing service Uber.
This week I want to turn that anger into a cautionary tale about investing in “disruptive startups.” While many investors are always looking for the next big thing when it comes to IPOs, there are a few things you should know before doing so…
Many investors rush in on IPO day, just to watch the stock tumble for the first few months. This happened with Twitter, AliBaba, and Facebook. While those companies have climbed back up and over their IPO prices, you’d have been much better off with the lower entry price after holding tight for a couple of months (you can read more about that phenomenon in my article, How Not to Buy an IPO).
Now, Uber is perhaps one of the most hyped companies in the world and the thought of an IPO is an enticing one for many investors. It has a current valuation of over $60 billion — which is more than Kraft Foods, Netflix, and Yahoo.
Here’s why Uber has an uphill battle if it is ever going to IPO…
Uber-Trustworthy
One serious threat to Uber is the safety of its passengers.
When I was taking an Uber in California last week, I asked one very talkative driver what he thought about the safety concerns associated with unvetted strangers driving people around in their car.
“Oh man, you wouldn’t imagine all of the things people tell me about their lives: where they live, when they’re traveling, how long they’ll be away. If I were a maniac I could easily rob them all blind, or worse…” he confessed after assuring me that he wasn’t, in fact, a maniac.
But some Uber drivers have been proven to be certifiable maniacs.
Most recently, Jason Dalton, an Uber driver from Kalamazoo, Michigan murdered six people in between his passenger pickups. Uber drivers have been exposed as convicted sex offenders, identity thieves, burglars, and even kidnappers.
There have also been several cases where Uber drivers have been charged with assaulting their passengers.
Now, while I certainly don’t completely blame Uber for the psychotic actions of a couple of deranged people, it does beg the question: What kinds of background checks is Uber doing for its drivers?
Some would argue not nearly enough…
While taxi and limo companies require their drivers to submit to fingerprint background checks that are then submitted to law enforcement, Uber does its background checks through a third-party company, based only on the driver’s name and social security number.
You’d think that Uber would expand background checks, if not for a moral obligation, then for self preservation alone. Why would it want the hassle of the bad press?
But when California tried to pass legislation that would require companies like Uber and Lyft to submit their drivers to a basic fingerprint background check, the company fought it tooth and nail, and the bill was killed.
“At the same time Uber was stating that it is ‘working diligently to ensure we’re doing everything we can to make Uber the safest experience on the road,’ it was instead working diligently to ensure it was doing everything it could to successfully defeat a bill pending in the California legislature that would have actually made Uber safer for its customers and the public,” one lawsuit stated.
Another issue with Uber safety is that because the drivers are using their own cars, many of the safety rules that apply to licensed cabbies don’t apply to Uber drivers. Taxi drivers are subject to frequent monitoring well after they have been hired. They also are quickly penalized if they are convicted of a misdemeanor.
It appears that Uber drivers simply have the one-time check and they are off to the races…
Uber maintains that its rides are as safe as taxis, but a court of law disagreed and Uber was forced to settle a class-action lawsuit that it misled its customers as to how safe its company actually was. Uber maintains that its background checks are plenty safe, and had even advertised the safety of its service as an added perk. That got it sued…
It had to pay out $28.5 million to settle two huge class-action lawsuits that alleged that Uber used phrases like “safest ride on the road,” and touted its “industry-leading background checks”, which amounted to false advertising. In the settlement, attorneys claimed that Uber did not check drivers against the national sex offender registry or use fingerprint identification.
Now, while that sounds like a huge settlement, it really only amounted to a minuscule $0.82 check for all Uber riders who decided to claim it. (You gotta love class-action lawsuits, the injured parties get less than a buck while the lawyers make millions. That’s a topic for another time….)
But the safety issue is but one of a flurry of lawsuits that has hit the company in the past couple of years. And the sheer amount of litigation against it is enough to be concerned about as an investor.
Uber-Litigious
Aside from the safety claims, Uber has been slammed with lawsuits since its inception, for reasons including deceptive pricing, illegal robocalling, trademark infringement, and disability discrimination. All told, it has faced over 50 lawsuits in the last year alone.
Just take a look at Uber lawsuits versus similar “sharing economy” businesses…
And it looks just as bad versus “unicorn” companies across the board.
That’s why even if Uber IPOs, I’m not biting right away… there are simply too many risk factors that need to be addressed.
