• Uber recently completed a series F funding round, valuing the company at $51B.
• That round made Uber the second private company after Facebook to cross the $50B valuation.
• Uber will likely cross far higher than the $50B line due to the JOBS Act changes since Facebook’s IPO.
• However, while Facebook’s valuation survived though the global financial crisis of 2008-2009, Uber's valuation grew during six years of a bull market.

123RF Stock Photo

In an article published earlier last week, I covered Uber’s valuation and financials as they appeared in public media. Uber has an astonishing valuation of $51B and an incredible demand for Uber stocks, which is reflected by the ease of raising new funds even with skyrocketing stock prices. That reminded me of another famous $50B private company that everyone wanted a piece of before it went public – Facebook (NASDAQ:FB)

It was only three years ago that Facebook, the biggest venture-backed startup in the world, was forced to go public when it exceeded the maximum number of shareholders a private company could have in the pre-JOBS Act era. At the beginning of 2011, Facebook raised $1.5B from DST Global and Goldman Sachs, valuing the company at $50B, and structured the deal in such a way that it dodged the SEC limitation of 500-max shareholders for a private company. By many, that last funding round and Goldman Sachs’s efforts not to cross the 500 shareholders limitation signaled that Facebook was about to go public. Facebook halted its IPO plans as it lobbied in the Senate in favor of upping the restrictions from 500 shareholders to 2,000 as part of the JOBS Act. However, the JOBS Act was finalized late, and Facebook had to go public in the meantime.

As shown in Chart 1 below, seven years after Facebook was founded, it reached a $50B valuation in the private markets, but  it took Uber only six years to achieve the same milestone. Could this mean that Uber will also be forced to go public soon?

Of course not. The primary difference between the two cases is that the JOBS Act legislation increased the maximum number of shareholders allowed for a private company from 500 to 2,000 (including accredited investors). The higher maximum number of shareholders allows Uber to continue raising funds from private markets as long as it stays below the 2,000 shareholder line, which means that Uber will not only reach a $50B valuation faster than Facebook but will probably reach a higher valuation before IPO.

Another difference between Facebook and Uber is related to the financial sentiment regarding their growth. Facebook’s main growth took place during the financial crisis of 2008–2009, while Uber’s growth occurred during the six-year-long bull market when investors poured money into private equity markets as a diversification alternative to the surging public markets. Fundamentally, these two markets are connected valuations of private companies compared to their peers in the public market and the other way around, so the surge in public markets pulls up the valuation in the private market.

This process makes it very easy for a company like Uber to raise considerable funds every few months even as its valuation and stock price rise, as presented in Chart 2 below. Facebook, on the other hand, suffered a 33% decline in valuation in 2009 as a result of the financial crisis, but it survived it and grew to its pre-IPO valuation of $50B.

As the financial and economic sentiment in the markets supported Uber’s valuation growth, the company raised money more easily than Facebook did. Even though Uber’s management probably prefers this scenario over Facebook’s, in case the current sell-off continues or even intensifies, Uber will face a difficult time raising more funds, which will be a new situation for the company, and I’m not sure how it will handle it.

Conclusion

The bull market in public equities of the last six years impacted private equity prices, driving up companies’ valuations. As the price of publicly traded securities went up, investors looked for alternatives and poured large amounts of money into the private equity market. During this time, Uber was able to raise money relatively easily and often; however, unlike Facebook, which reached a $50B valuation after surviving  the financial crisis of '08-'09, Uber hasn't experienced any significant financial crisis and doesn’t know how to raise funds in that environment.

Uber will likely cross the $50B valuation line as the 500-shareholder limitation has been increased to 2,000. However, Uber has became so reliant on easy cash that it might get into trouble if it fails to raise funds in the case of the current bear market continuing.