The issuance of convertible debt became a popular means of fundraising among private tech companies in 2014 as interest rates fell and valuations for the fastest-growing companies soared. Investors who purchased such securities can later convert them into ordinary equity a price that’s established from the outset.
In early December last year, investment bank Goldman Sachs offered millions of dollars of such debt in ride-sharing service Uber to its highest net-worth personal clients. In a similar vein to Facebook, the private placement raises the possibility of an initial public offering at some point, which would transform Uber into one of the leading global internet brands. As an institutional investor in Uber, Goldman would of course hope for a prominent role on any subsequent offering. But while this may explain the bank’s motivation for the arrangement, the fundraising is also noteworthy since it comes at a time of controversy regarding Uber’s aggressive business tactics.
For those that do not know much about Uber, it is an application that allows people to book a private car service in a growing number of cities around the world. Through an online phone app, you can see where cars are located in your area and request a car. Almost immediately, one of the nearby drivers accepts your request and heads straight to you. When you reach your destination, the fare is automatically deducted from your credit card, so no money changes hands between you and the driver. The service is fast and extremely convenient – so much so that in late 2013 Goldman rival Morgan Stanley advertised that it would start to permit its employees to use the service for business travel.
The reaction to Uber has not been totally positive, though. At a New York dinner in November 2014, Uber’s senior vice president of business Emil Michael suggested that the company would be justified in hiring a team of researchers to dig up dirt on its critics in the media – more specifically, to circulate personal details of the female editor of a particularly-critical Silicon Valley-based website – in order to ‘give the media a taste of its own medicine’.
Ironically, Michael’s remarks came at a time when the company was seeking to improve its relationship with the media after criticism of aggressive business tactics against competitors as well as treatment of its drivers. And that’s before one mentions the incredibly-ill-conceived promotional campaign, led by the company’s Lyon office, to provide an ‘Avions de Chasse’ (a colloquial French term meaning ‘hot chick’) driver service.
In his opinion piece for CNN on 21 November 2014, well-known public speaker Bruce Weinstein (aka ‘The Ethics Guy’) articulated several additional areas of concern, namely:
- multitasking drivers – Uber drivers are only able to learn of a nearby passenger by checking a mobile device, possibly while driving, thereby potentially placing passengers and pedestrians at risk
- passenger safety – The New York Times reported that a number of Uber drivers have been accused of sexually assaulting passengers, raising questions about the company’s vetting processes
- privacy – many Uber customers appear unaware that the company utilises the so-called ‘God View’ internal application to track customers’ locations, raising questions about consumers’ privacy
- leadership – Weinstein was particularly scathing of Uber CEO Travis Kalanick’s response to Michael’s indiscretion, likening it to the ‘non-apology apology’ by President Richard Nixon’s spokesman about Watergate.
How much merit should be given to these concerns remains debatable. What has achieved consensus, however, is that Uber has filled a gap in the convenience market and is already diversifying to the extent that it is starting to provide a store delivery service in the United States. As such, it has secured the support of the entrepreneurial faculty.
As with any successful entrepreneurial venture, Uber is seeking to address some of its perceived areas of concern by improving its supply chain and extending working hours to also cover weekends. Furthermore, while Uber’s supply chain may not be perfect, the rise of Uber is having a positive impact on supply-chain corruption.
For all of its reported faults, online initiatives such as Uber appear to be having the same impact on corrupt payments to suppliers for car-sharing services as e-customs initiatives have had in the government space.
One entrepreneur’s Uber view
While recently using the Uber service in New York to ride out to the airport, I was confronted with the reality of how a successful new application could aid in reducing petty corruption.
On my journey to the airport that day, my driver and I shared our very positive experiences about Uber, both from a customer’s perspective and from a driver’s perspective. The driver was talking about how it is much easier using Uber and how he makes about 25 percent more money than working for a private car-hire company.
Being a little inquisitive, I asked why the margins were better using Uber rather than working as a contractor at one of the main car-hire places in New York (where, up until recently, my Uber driver had worked).
‘The difference is down to bribery,’ he said. ‘I used to have to pay off the hotel doorman to get a ride –give them five to ten dollars every time they called me or allowed me to enter their hotel zone. Those guys simply run the cars out front of the hotel and they control every guest and every potential passenger. Little does the hotel guest know just how they are getting tricked every time, and how their money is going straight into the hotel doorman’s pocket,’ said my driver.
I dug a little bit deeper into how the deal actually works.
‘In large cities such as New York, as a private driver for one of the large car companies you are basically at the mercy of the hotel doorman. You will have to be friends with them, give them free rides, pay them bribes and run errands all of the time just to work that patch. Even if you get a call from dispatch, and it is a good pickup and one with an airport run or a run into New Jersey, you will have to bribe the dispatcher the next time that you are in the office. I used to pay the dispatchers around 25 percent of my longer fares in order to build the relationship with them. With Uber, all of that goes away. I just answer the app on my phone and head straight to you. I don’t need to talk to the doorman, I don’t need to speak to a dispatcher, and I certainly don’t need to pay a bribe to pick up a fare,’ the driver said.
Little did he know that, as an anti-corruption and compliance practitioner, I found this whole situation quite interesting.
On reflection, it certainly does make sense. When things go online and the natural human interaction and demands for quid pro quo are removed, things seem to work better. We have seen this in the government space where the payment and tracking of customs for goods has gone online and e-customs initiatives have reduced corrupt payments to customs officials at border gates. And apps such as Uber seem to be having the same effect on the commercial side by giving the consumer a fairer and more transparent way of choosing their service provider.
Uber not only got me to the airport on time, but also gave me an interesting story. Uber can be cool for compliance.