Tech

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

The most valuable unicorn in the world, Uber Technologies Inc., is hammering out investment terms with the biggest technology investor, SoftBank Group Corp.'s Saudi-backed Vision fund. These are two rare beasts that need each other, but only one can really walk away.

This deal is a microcosm of the complex economics of privately-held Silicon Valley startups. After agreeing to invest $1 billion at a valuation of almost $70 billion, Masayoshi Son's SoftBank and its partners are offering to purchase a $6 billion stake in Uber for a valuation of $48 billion, according to Bloomberg News. That's a 30-percent gap between two deals involving the same actors.

Unicorn Park
Uber and its rival Didi Chuxing are the two most highly valued ride-sharing startups
Source: CBInsights

There are some big differences that explain the gap. The second leg of the deal is bigger in absolute terms, and it involves buying out existing Uber shareholders who might want to cash out now rather than wait for a promised IPO in 2019. Even with a 30-percent discount, this would be a big windfall for the early birds, one that looks worth grabbing now rather than in years. SoftBank may need to lift its bid a bit to win over holdouts, but probably not by much.

On top of the structural reasons that would merit a discount, there's the opportunity for SoftBank to bake Uber's epic run of bad news into the bid. This is a company that's had a string of scandals worthy of a financial institution: Allegations of sexual harassment, the use of special software to sneak under the nose of regulators, and an attempted cover-up of a major hack of customer and driver information.

Baking In More Than Just Bad News
SoftBank is eyeing a 30-percent discount for the price of Uber's planned secondary share sale
Source: Bloomberg News

But this is also a discount to secure a deep-pocketed buyer, often described as the tech investor of last resort. Both legs of the deal have to happen for SoftBank to sign off, and it loves to remind Uber of this. SoftBank also owns stakes in China's Didi Chuxing, India's Ola and Southeast Asia's Grab, according to Bloomberg News, and a glance at CB Insights' data on startups shows that unicorns of the ride-sharing variety aren't very rare. Didi Chuxing is valued at $50 billion, Lyft at $9.6 billion, and Ola at $3.7 billion. But there's only one SoftBank.

Many rational bystanders might wonder whether even a 30-percent discount is steep enough for an unprofitable company that has burned billions of dollars and whose racy, aggressive growth model has been humbled by scandals both inside and out.

But risk-taking tech types will tell you it's not about what could go wrong. It's about what could go right. A discounted stake in Uber offers an attractive opening to fix Uber's governance problems, restructure the industry through mergers and dabble in self-driving cars. And if there's an unreasonable premium, SoftBank is working to cut it: $48 billion isn't far off a $45 billion lower-range estimate published in an academic paper earlier this year.

Whether everything goes to plan in time for a 2019 IPO is an open question, though. SoftBank no doubt hopes that by the time Uber goes public, there'll be fewer ride-sharing rivals out there and that myriad regulatory bombshells can be defused. Regardless, progress will have to be pretty perfect for Son to eventually extract a higher price from the public market hordes.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net