The U.S. economy has proven remarkably resilient amid the Federal Reserve’s largely successful attempts to pull off a soft landing from sky-high inflation. But not everyone has enjoyed the benefits. The Fed’s monetary tightening, raising interest rates the most in more than 40 years, has led to a minor blood bath across the tech sector.
Sure, a few firms have exploded to record highs — an artificial intelligence-related one and the “Magnificent Seven,” composed of Google parent Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. But much of the rest of the tech sector is struggling. While larger companies such as Cisco, Intel, and Spotify have stayed afloat with layoffs, billion-dollar startups once branded as unicorns have collapsed.
Yet there is one happy exception amid hundreds of cautionary tales of companies that could not survive the inevitable transition from the zero interest rate policy environment to higher interest rates: Uber. The ride-sharing platform stands out as the unicorn that has achieved profitability, and how it did so provides a lesson for fellow entrepreneurs and investors.
Uber’s original premise was simple: connect drivers with cars and riders to create a ride-sharing market that runs parallel to the tightly regulated taxicab industry. Critics warned from its inception that Uber never had a viable pathway to profitability. Its original gamble, that it would benefit from the widespread proliferation of self-driving cars, did not materialize fast enough. That led Uber to sell its autonomous car business to a startup in 2020 with the promise that those cars would eventually be reincorporated into Uber’s fleet.
Moreover, Uber founder and CEO Travis Kalanick’s aggressive and at times reckless attempts to defy government regulators only succeeded in part, leading indirectly to both his ouster from the company and a wave of blue state legislation attempting to re-regulate independent contractors such as drivers as employees instead. And Uber has not reported a single annual profit from its founding in 2009. That is, until now.
Much of Uber’s pivot to profitability resulted from Kalanick’s departure. While much has been made of successor CEO Dara Khosrowshahi cleaning house with regard to Uber’s corporate culture and public rehabilitation campaign, his real accomplishment was trimming Uber’s losses — not just by delegating its self-driving vehicle research to an outside startup but also by offloading its losing scooter and bicycle businesses. It used the coronavirus pandemic to downsize its workforce by 20%. And despite the overwhelmingly negative press received by its initial public offering on May 9, 2019, some reporters correctly noted at the time, including yours truly, that it ranked as one of the top 10 IPOs of all time.
After freeing up resources, Uber decided to double down on its less sexy but more in-demand services, such as food and grocery delivery. Through discounts and its generous loyalty program, Uber managed to expand its consumer base. All in all, Uber netted a $1.8 trillion profit last year, with fourth quarter profits up 140% from the year prior. Adjusting earnings before interest, taxes, depreciation, and amortization, Uber generated a $4 billion profit last year.
Comparing Uber’s market success to fellow onetime unicorns puts its unique prestige into even starker relief. From their IPOs until January of this year, DoorDash lost 45% of its market capitalization, Robinhood 69%, and Bird and WeWork both nearly 100%. By contrast, Uber is up more than 80%, rendering it the world’s 77th largest company.
One massive lesson to glean here is that corporate culture and operational discipline are inextricably linked. Khosrowshahi replaced Kalanick’s substance-free slogan that Uber employees “always be hustlin'” with the demand that the brand value “customer obsession.” As a result, Uber’s personal help support, loyalty programs, and one-stop shop of an app have consistently expanded its customer base.
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Furthermore, once-vaunted unicorns cannot rely on free cash and must be willing to kill their darlings in pursuit of cost-cutting. Self-driving cars may still very well be the future, but Uber’s willingness to cut its losses in 2020 set the stage for its success today. Even when it comes just to the food delivery sector, Uber’s “customer obsession,” reflected in a streamlined user experience and generous membership deals, explains exactly why DoorDash, a volume-focused enterprise that does little to incentivize a better customer experience, is lagging sorely behind.
While 10 years of the Fed’s zero interest rate policy made for a wild ride among startups, any honest investor knows the free money party will always come to an inevitable end, eventually. Uber’s pivot away from big tech and towards food and package delivery may have made it less interesting than its competitors, but as evidenced by its success, it was no less innovative.
