The Problem With Investors And Scaling – Uber Examples

Note: I started the post a few months ago, so there may be some slightly outdated facts.

I’m a great proponent of bootstrapped companies, and I’ve always admired successful businesses that managed to grow without taking on seed funding or various types of investment. We’re in our fifth year as a team at DevriX and while we’re always hesitant to get a hold of more resources and speed up our growth or launch some of our products, we’re still relying on a self-growth model instead.

Uber

Photo by diginomica.com
Photo by diginomica.com

Uber is a great service – an alternative to a regular taxi/cab. You can open the app on your smartphone, connect a credit card and ask for a car from your destination to another place. They are currently operating in more than 200 cities and 60 countries (and counting), and there are several other companies that follow the same model, such as Lyft.

Over the years I’ve had various problems with cab drivers, their attitude or their unwillingness to work. Once I had to ask four taxi drivers to drive me from home to a meeting – over 6 km distance (4 miles) and all of them turned me down. The fifth one was a winner, but apparently I was not a good fit for them and they were looking for a trip that’s at least twice as long or so, which I find insulting, since I’m not into walking for an hour and a half across the city in the evening. Uber has a minimum fee, but does not limit you to your distance, so it’s a win-win model.

The best thing with Uber is that you can become a driver yourself. People can drive for an hour or two every now and then, after work, and meet some great folks riding with them. Payments are transferred via credit card, so no cash involved, and you can easily travel around the city even if you’ve forgotten your wallet at home (been there).

Investment and Costs

Investor's Bubble
Investor’s Bubble

Uber was founded in 2009 and the company received a total of $7 billion in 12 rounds according to CrunchBase. This year alone they raised over $3.5B and Uber’s valuation now is over $50B as we speak.

According to some leaked financials from late 2013, Uber was generating $20 million a week in revenue, or around $1B a year. Their business model is based on taking 20% of all transactions and paying 80% back to the drivers, so they likely generated around $200M in 2013.

Uber’s gross revenue is expected to hit about $10 billion by 2015. That’s about $2 billion annually for Uber itself as an organization, after paying the drivers.

In Jan 2014 Inc shared an article on how Uber hires, where Travis Kalanick, their CEO, mentioned that they have 550 employees and were looking to grow to 1500-2000 by the end of 2014. We’re talking about employees working on the platform, business development, regional management and more, while drivers are not included in the number. Check out their job board for more details.

The number of employees is probably in the 2500-3000 range by now, and that’s a solid number of salaries on an annual basis. Even with $2 billion of annual revenue, the actual net profit (after taxes, salaries and such) isn’t all that impressive.

I’m guesstimating big time here, but if an average salary is $40,000 a year – given the fact that they also have support roles and other lower-cost administrative positions and offices outside of the US – it’s about $1.2 billion a year. Take out some taxes here and there and the actual net profit will probably be way under $500 million a year by the end of this calendar year. I’m not even counting office rentals, marketing expenses, or investments when opening new offices.

I’m definitely not an expert in investing – not even close – but with about $7 billion of funding so far, the actual financial ROI for most investors is not high at all. Admittedly, it’s a 5-year old startup so it’s currently an astonishing accomplishment, but being able to pay back those would be quite challenging. In addition to that Uber has been attacked (and banned) in several countries since it doesn’t operate as a taxi service due to its business model, which violates various laws in many countries around the globe. That slows down their growth and adds some pressure to their drivers and riders as well.

Kevin O’Leary also said that he loves the service, but wouldn’t invest in it:

pandodaily published an article explaining their unrealistic valuation and the problems with private investors (also covered by Mark Cuban himself about the tech bubble in 2015).

Private market valuations are as much an expression of power and how badly investors want to get into a deal as they are fundamental reflections of a company’s value based on some financial metric like discounted free cashflow.

As a conclusion, Uber seems to be doing great given their expansion on every level, and their growing valuation (and number of investors). However, while they are cashflow positive, their funding was the main reason why they got so popular and distributed in the first place.

Just imagine starting to offer similar services yourself. You need a reliable platform that deals with the technical management, map with the cars nearby, web platform and mobile applications for Android and iOS. There is a lot of legal and tax stuff involved as well, business development, recruiting a number of drivers (and paying some base salaries until your service gets traction), a lot of marketing and international work in order to expand in different countries.

There’s probably no way to start something like that without funding and making it successful. Even with some solid bank loans there is a natural limit for the growth, and it takes years to grow and establish a new market that could eventually become successful.

Grow a Product or SaaS

In case you’re wondering what Uber has in common with WordPress – it’s simply a business. A pretty well backed one, but it’s a successful startup that keeps growing further, which may serve as a lesson to other entrepreneurs. I spend some time monitoring large businesses and successful growing businesses since DevriX is growing and we work with some successful international brands (some bringing billions in revenue).

We can bring the same analogy to building a product or a SaaS and growing it to a successful and profitable business. While the numbers will not be that impressive, there are a few successful WordPress-based businesses that serve as an example to other business owners eager to start their own venture.

Investing in WordPress businesses is not uncommon; as a matter of fact I’ve connected business owners with investors several times, and we’re currently working with another WordPress-driven business on its valuation and the non-appreciative assets in terms of brand awareness, potential, market positioning etc. since EBITDA alone doesn’t tell enough about the business success factor.

Startup Financing CycleBut there is indeed potential for entrepreneurs to get funding for their startups or build a business with some financial backing. It starts with crowdfunding campaign sites like Kickstarter, other forms of seed funding or angel investor contacts, and VCs willing to skyrocket a good business. Various startup accelerators, platforms selling websites or seeking investors and more exist online already.

Additionally, WordPress now powers over 24% of the Internet, and there are lots of entrepreneurs who haven’t penetrated the market yet. Many successful investors monitor the WordPress market closely, looking for the right opportunity to join the game with some head start.

Venture Capitalists have portfolios of their companies, and naturally try to build a network with self-complimentary services. For example, a VC investing in a project management system and a CRM may be interested in penetrating the WordPress market by investing in a WordPress-driven Software as a Service that allows for connecting the other tools within the platform which would result in higher value for the customers.

If you are interested in that financial/investment field, I’d suggest you to read more about valuation, business planning, taxes, inflation, interests and debt and all of the other relevant specialties. The Economics and Finance courses by Khan Academy may be a good start for you.

Seeking investments and pitching VCs is an art, and could be quite painful in reality. If you’ve seen Shark Tank before, you know how conservative investors are, and that’s normal. You need to have a rock solid business plan, know your numbers in details, and have a clear vision on growing aggressively. Getting an investment can be a huge burden since investors are looking to recoup their cash and generate more. And getting a crazy valuation as Uber’s is close to impossible, and attainable by an incredibly small percentage of startups and small businesses.

How To Deal With Bootstrapping

Most WordPress-based businesses have started without external investments. One of the reasons is that most investors are interested in the WordPress space due to its volume, but they’re fully aware that the business opportunities are quite limited since WordPress users are looking for free stuff far too often.

This is one of the reasons why .NET development is so popular, being based on a proprietary platform in a business environment where people are used to paying often and a lot. It’s also the reason why the Apple ecosystem is so rewarding – because Apple devices are massively overpriced worldwide and Apple aims for exclusivity; which means that their user ecosystem is comfortable paying for everything, unlike the Android user base.

If you’re determined to grow a business with WordPress, there are different paths forward. The most important part for each of your ventures is being aware of the financial model. One of the things that WordPress folks often forget is that 100% free stuff is only possible if you have other ways to get a return on your investment. Otherwise the end result is poor quality and abandoned product, which is of no use to anyone.

Therefore you should either build software that directly benefits you through a clear monetization strategy, or serves as a marketing funnel that lets you upsell other services of yours.

Funding Through Client Work

One of my favorite models for building software is through client work. We have several internal plugins of ours for building service calculations in the frontend, a CRM platform, invoicing tool, a custom visual builder, slider, mega menu component and a few more that have been partially built for different clients.

Extracting a project for free or for sale while working for a client requires their consent and approval. Make sure that you’re not exposing intellectual property that is not yours or could harm a customer. I often share my Contributing Manifesto with our clients and let them know the benefits of extracting a feature into a separate product that would be improved over time.

If you are allowed to reuse part of the codebase or share it with the public, make sure that it’s maintainable and not context-specific. Take the time to build the infrastructure of the separate component and add all of the required hooks that allow for other services to connect and interact with it.

Additionally, you can bundle different libraries, components or even separate functions and classes into a large module. Learning to follow the principles of strong cohesion and loose coupling would let you integrate smaller components into a large one that could be a plugin or a separate platform – think of a computer mainboard with all of the separate components living on it.

Freemium Model

The freemium model is one of the best business models in my opinion. Premium tools often lack the proper demo suite that would convince the users that it is a good investment. Moreover, when other alternatives exist, it’s not trivial to ensure that a software solution would play well with the rest of a technical stack.

Many successful products and online services offer a freemium plan, whenever it’s possible to provide a limited (but usable version) to the users. The ones that are comfortable with the feature set are often tempted to invest more and purchase higher plans, or Pro versions of a plugin/theme accordingly.

This also benefits the industry as a whole. Some people can use a great service for free, but there are other customers paying for extra features, support, better resources or something else, which allows for reinvesting back.

Reinvesting and Allocating Buffers

Speaking of reinvesting, growing a business requires constant reinvesting in its technical stack, marketing strategy, advertising, sales, brand awareness, networking and more. If your product or business requires a lot of time to get live, consider the different options on the table.

You can allocate a percentage of your salary or current business revenue to the new business venture, and reinvest its profit back into the business. Use the rest of your network to boost up the sales and continuously improve the product. Consider the freemium model as an option or find a way to provide services to customers that let you improve your own product as well – for example, integrating 3rd party services for another project will let you build a proxy that could be integrated in your product, or a reusable landing page structure for its sales page.

MVP

Graphic by: vincentjordan.com
Chart by: vincentjordan.com

I am a great proponent of MVPs. We have started several products over the years and tried to polish them over and over again, until they became useless. Time is of the essence, and validating the idea before investing too much is also crucial.

Focus on the key selling propositions and figure out a way to bootstrap with a minimum set of features, invite some beta users and get the initial customer feedback. There are plenty of early adopters eager to try new products out and send feedback – which is why we built Beta Testers Hub. Getting feedback early can save you a ton of money, and direct your product towards success. Also, satisfying customers is a great way to combine building features that people really need and growing satisfied clients that will recommend your product and be your ambassadors.

Marketplaces

I’m not a fan of ThemeForest mainly due to their quality standards and the amount of bloated code among the majority of the WordPress premium themes. I’m not particularly excited about CodeCanyon either (due to the underpricing), but it’s a good place to start a product, get some feedback, generate some revenue and grow the customer base. They also allow 100% GPL submissions now which is great.

There aren’t many marketplaces with solid user base where you can sell. My guess would be that CodeCanyon, being part of Envato’s network, has a pretty solid user base, and there are plenty of plugins selling thousands (if not more) of copies, which is a good revenue boost and a user audience amplifier.

Affiliate/JV Networks

Building partnerships is great. Over 80% of our WordPress development projects at DevriX come from referrals or our partners across the world. And many of our customers generate a solid amount of their income thanks to affiliate or partnership deals.

The product space can take advantage of that by offering affiliate and partnership programs for its users. Finding more affiliates helps you accomplish two things:

  • Reduce your sales efforts and grow your user base, and
  • Increase your exposure through media websites, blogs, and other services.

Have you seen Zaxaa before? Zaxaa is a way to launch a product and find affiliates willing to promote it. Some of our customers have successful launches with over $100,000 in revenue in the first month by building a partners network in JVzoo or Zaxaa.

Those Joint Venture networks will amplify your product launch and connect you with influencers in the industry, successful bloggers, marketers and ambassadors who are motivated enough to resell your product to hundreds or thousands of users over a webinar, email campaign or a cross-promotion.

Media Exposure

Putting the word out is obviously super important. If you’re launching a great service that has unique benefits and would be worth to plenty of users out there, you can reach out to bloggers and media websites for exposure.

Neil Patel has a great PR chapter in his online marketing book and Sean Ellis (the guy who coined the “Growth Hacker” term) published a great story on Deconstructing PR.

Upselling Services

Even if your model isn’t focus on direct monetization through selling licenses or copies of your product, there are other ways to move forward, such as by upselling your services.

The majority of the plugin developers and people releasing free software generate income through consulting, or selling services related to their free products. Paid Memberships Pro used to follow that strategy by offering everything for free – 100% – available on GitHub for use, and they used to sell configuration, installment and development services as an upsell. After all, that’s a pretty good deal if you get a powerful framework for free, the lead developers should be the best choice for making it work as expected. However, they switched to a different model by selling a Pro version of their plugin instead.


What is your vision of building a business – should you focus on outstanding code quality from day one, or invest in marketing and PR early on in order to attract investors? Would you look for funding, or try to bootstrap first? Share your thoughts in the comments below.

 

Your thoughts?