Acknowledged king of the unicorns, Uber has raised over $8.8 billion of private funding since its founding in 2009, most recently at an equity value reported to be on the order of $70 billion. In the wake of an highly-publicized internal investigation of the culture at the ride-sharing firm and a recent personal tragedy, founder Travis Kalanick is reportedly contemplating a three-month leave of absence from the company.
What effect does the loss of a key leader have on the value of an enterprise? Valuation specialists often consider whether a business is subject to a key-person dependency when measuring fair value. For early-stage enterprises, key-person dependencies tend to be obvious and significant as many start-ups simply would not survive the loss of the founder. For a company of the scale and complexity of Uber, the analysis becomes a matter of degree. To what extent would the loss of Mr. Kalanick’s services affect the expected cash flows (including growth) and risk perceived by investors?
The most widely-discussed case of key-person dependency in the tech sector has been that of Apple. During the five years preceding founder Steve Jobs death in October 2011, the company’s shares had generated an annualized return in excess of 38% for shareholders. In the almost six years since his death, annualized shareholder return has been a still-enviable 22.5%. While Apple was undoubtedly a product of Mr. Jobs’ vision and personal leadership, those characteristics had been sufficiently woven into the broader culture of Apple so that the company has been able to thrive without Mr. Jobs’ ongoing involvement. Of course, whether Apple’s performance over the subsequent period would have been better (or worse) under Mr. Jobs’ continued leadership is unknowable.
As a public company, investor perceptions regarding Apple and its key-person dependency issues were expressed in the daily trading of shares both during Mr. Jobs’ illness and after his death. Aside from occasional trades in the generally illiquid and opaque secondary market, market checks on the value of Uber occur only sporadically at the time of external financings. With Uber reportedly not likely to need additional external funds for some time, observers will have to wait and see how investors judge the dependence of Uber on the continued presence of Mr. Kalanick.
For smaller early- and development-stage entities, fair value measurements should take into account the degree to which expectations regarding future cash flows are tied to a particular founder or executive. In order to build sustainable value, founders need to be focused on both executing their vision for growth and fostering a culture that can endure (and ultimately evolve) in his or her absence.
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