Investors see potential in Uber, which is causing black-taxi drivers to protest

Analysis: Why investors are paying top dollar for Uber

More than 12,000 black-taxi drivers descended on London this month to protest the rise of taxi app Uber, with Mayor of London Boris Johnson expressing his sympathy for their cause. The company was recently valued at around $17bn in advance of its IPO, so why are investors willing to pay so much?

Uber was recently valued at around $17bn in advance of its IPO, a move that shocked many. Aswath Damodaran, a finance professor at New York University’s Stern School of Business, found the valuation vastly inflated.

So, why are investors willing to pay so much? In its pitch to venture capitalists for its latest funding round, Uber focused purely on its taxi business, but they may have their eye on a bigger prize. Uber is a poster child for the sharing economy, which is gaining significant traction.

The sharing economy shares existing resources, rather than encouraging the ownership of new ones. There are many examples. Car2Go and Zipcar in North America allow people to book vehicles using their mobile apps, often for mere minutes at a time.

AirBnB, which was itself recently valued by investors at $10bn, has done to hotel accommodation what these services have done to the taxi and car rental industries. And others are doing the same with everything from parking spaces to personal loans.

AirBnB has been attacked by apartment owners worried about their own liability for building safety, and by advocates of the hotel industry. One of the most common complaints: shared economy businesses make profits (along with their users) while dodging the business costs incurred by entrenched businesses.

Entrenched businesses have only just glimpsed the surface of what the shared economy would become, but venture capitalists are well aware of the possibilities. There will come a time when Uber – or someone else – moves into other areas such as logistics. If you can hire someone to give you a ride in a cab, then why couldn’t a local business hire them to deliver a package across town? In some places, this is already happening.

The sharing economy isn’t new. Timeshares have been around for decades. But whereas timeshare companies had to force sceptical occupants into an airless room for a hard sell, all Uber has to do is get them to download an app and sign up. Technology – especially technology that’s in your pocket when you need it – is frictionless.

And the protests aren’t new, either. Entrenched businesses have always hated disruption. It took Steve Jobs years to persuade the music industry to adopt digital downloads. Telecommunication companies are eager to eradicate net neutrality so that they can charge money to online content providers who they say are using their infrastructure to line their pockets. And in the world of bitcoin, banking organisations are loudly talking up the disruptive technology’s dangers (while quietly fretting about the effect on transfer fees, no doubt).

So these grumbles from established industries will get louder, just as the signups, listings and profits for the sharing economy companies grow in number.

And at the nexus will be the regulators. The cabbies were not protesting against Uber. Rather, they were angry at Transport for London for not regulating the firm as a taxi company. These regulatory battles are being fought in most of these sharing economy companies’ new markets. Every time they open up in a city, bureaucrats and lawmakers play a big part in their fortunes.

Those heavy venture capital investments will be a powerful tool for companies having to navigate this regulatory landscape – red tape is expensive to cut. In the meantime, companies capitalising on the sharing economy could do with a few more angry placard-wielders. If Uber is to be believed, it saw its sign-ups in London increase 850 per cent in a week following the London protests.

For the city’s angry taxi drivers, exhausts aren’t the only things to backfire.

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