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Goldman Is Helping Uber Raise Money From Rich People

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Last week Bloomberg News reported that Uber was raising "at least $1 billion" from investors like T. Rowe Price and Fidelity at a $35 to $40 billion valuation. Yesterday Dan Primack at Fortune reported that Uber is also seeking to raise several hundred million dollars from Goldman Sachs private wealth management clients.

In 2011, Goldman tried to do a very similar deal for Facebook -- raising money from private wealth clients prior to the initial public offering -- and it became a horrible nightmare. It got wide news media coverage, and people worried that that might constitute "general solicitation" in violation of the securities laws, so Goldman ultimately had to pull the deal from its U.S. clients, leaving them furious and less wealthy than they otherwise would have been, though still quite wealthy.

This time around, that problem has been solved by legislation: The JOBS Act required the Securities and Exchange Commission "to lift the ban on general solicitation or general advertising for certain private securities offerings." So now Goldman can advertise as widely as it wants -- which, as it happens, is not especially widely, pretty much just e-mailing its private wealth clients. More relevant, perhaps, is that media attention shouldn't prevent the private placement from going forward. I could do something like write in big letters

Hey everyone now you can invest in Uber

with no risk of blowing up the deal.

So now Uber can talk freely about its fundraising plans. And, while Uber is a private company, it is not raising money (just) from venture capitalists or private equity firms or other traditional investors in illiquid private companies. The two investors named in that Bloomberg article were T. Rowe Price and Fidelity, two giant mutual fund complexes that are top-10 owners of Facebook and Alibaba and various other publicly listed tech and tech-ish companies. If Uber was doing an IPO, it would be targeting, you know, T. Rowe and Fidelity.

It would also be targeting retail investors, and, again: It is. Goldman private wealth management is pretty ritzy retail -- its clients' "average account size is $40m, making them comfortably among the richest 0.1 per cent of the US population" -- but if you're an individual investor getting allocated shares in a hot IPO, you're probably a pretty ritzy retail investor yourself. Just like it would be in an IPO, Uber is selling to rich individuals.

So this round of private fundraising lets Uber access most of the investor classes that it could have accessed in a public offering. It's not constrained in the types of investor it can sell to, with the statistically large but economically insignificant exception that it can't sell to "non-accredited" individual investors. Nor is it particularly constrained in its number of investors. And it doesn't seem to have much trouble with the amount of money it can raise: This round of fundraising involves "at least $1 billion" in institutional money and "several hundred million" from individuals, and "Uber still has some $1bn on hand from previous investment rounds." A deal of, say, $1.5 billion would rank as the seventh-biggest U.S.-listed IPO of 2014, and that's not even counting the $1.2 billion or more from Uber's June fundraising round.

So ... why do an IPO at all? Uber can raise all the money it needs, from all the investors it wants, as often as it wants. And it doesn't have to file audited financials with the Securities and Exchange Commission, or subject itself to stock exchange governance guidelines or flash crashes, or deal with short sellers or activist investors or nuns or really any investors it doesn't want. Companies that go public give up a lot, and don't really get anything. So why do it?

The answer, of course, is pretty simple. The people investing now -- like the ones who invested in June, or last year, or earlier -- will want to be able to cash out. They could in theory cash out by selling to each other; certainly there are private companies that allow trading among their private shareholders, though Uber apparently does not. But even leaving aside the administrative headaches, selling to each other has a certain zero-sum feeling: For everyone in the limited universe of pre-IPO investors who makes money by selling at a higher valuation, another is out-of-pocket paying that higher valuation.

No, the way to cash out is in an IPO. An IPO brings in new money, which can take shares off pre-IPO investors' hands at a higher valuation, making all of those pre-IPO shareholders richer. The current private-wealth deal explicitly recognizes this: It is not for common stock, but for convertible debt that will convert into common stock at the IPO, presumably at a discount, so that everyone gets richer as soon as the IPO happens.

Crucially, an IPO provides a way to increase the demand for Uber stock -- it goes from a limited universe of institutional and accredited pre-IPO investors to a broader universe of public investors -- without really increasing the supply. I mean, sure, the supply increases; most companies that do IPOs actually issue more stock. But these days they ... kind of don't need to? This year, I was tickled by King Digital, which had a pronounced lack of need for the money it raised in its IPO, but it's not like Facebook or Twitter or lots of other hot tech IPOs were about desperately needed fundraising. Even Alibaba, which sold over $10 billion in new shares in its IPO, had no better ideas for the money than "general corporate purposes." Companies issue stock in IPOs because it looks weird not to, but the goal is never to flood the market with as much new stock as it will absorb. The goal is to bring in new money to buy existing shares, so that the people who own those existing shares get rich.

There are reasons to do an IPO other than to cash out existing shareholders -- to retain employees, say, or to turn your shares into an acquisition currency -- but cashing out really does seem to be the main one. The point of an Uber IPO will not be to raise money for Uber. The point of an Uber IPO will be to retroactively justify the private fundraising that Uber is doing now. Without an IPO in a year or two, the people who are investing in Uber now will regret it. And those are the people who are allocating capital to new businesses, so you can't have them regretting their decisions.

This is all sort of obvious. But it's important to calibrate your model. A thing that I sometimes say is:

If your model of the stock market is that companies that are building businesses come to the stock market to finance those businesses, your model is wrong. The stock market is where companies that have built businesses go to cash out their shareholders. The S&P 500 spends 95 percent of its earnings on buybacks and dividends.

People sometimes criticize dividends and buybacks: Companies should be investing in their businesses! They shouldn't just be giving money back to shareholders! But that largely misunderstands what the U.S. public equity market (now) is. The public equity market is not a mechanism for companies to raise money. It's a mechanism for companies to reward the people who previously gave them money. And that's what Uber's investors are looking forward to.

  1. The usual disclosure: I worked at Goldman, and still have a little restricted stock. Slightly less usual disclosure: I sat by the people who did the Facebook private placement, though I had no direct involvement in it. I also used to be a private wealth management client, though not the sort who'd get a look at Uber, but then they kicked all the schlubs like me out of PWM.

  2. At least, not for securities-law reasons. And given Uber's general imperviousness to negative media attention, probably not at all.

  3. Also it's not true; you can only invest in Uber (in the U.S.) if (1) you're an "accredited investor" entitled to invest in private placements, (2) you're a Goldman PWM client and (3) Goldman/Uber decide to give you an allocation.

  4. I mean, not really economically insignificant. Lots of people are not accredited investors. (Basically you need to make $200,000 a year, or $300,000 with a spouse, or have more than $1 million of net worth excluding your primary residence.) And lots of them invest, and in aggregate their investments are significant. But when you're a company looking to raise money, whether in a private placement or a public stock offering or a bond offering or anything else, you are not thinking about getting $1,000 at a time from a bunch of retirees investing their small nest eggs. You're thinking about getting $10 million at a time from institutions and maybe a few very rich individuals.

  5. In addition to the general solicitation rules, the JOBS Act eased the rules about Exchange Act registration for companies with more than a certain number of shareholders of record. It's now 2,000 shareholders, or 500 who are not accredited investors, and there are some extra exceptions. But "shareholders of record" is a pretty nebulous term anyway so it doesn't seem like a huge constraint.

  6. Using Bloomberg's IPO function to list 2014 year-to-date initial public offerings listed on U.S. exchanges. (No. 1 is of course Alibaba, at $25 billion raised, though the majority of that was sales by selling shareholders. After that you get Citizens Financial at $3.5 billion and then 15 deals of $1 to $3 billion. If Uber raised $2.7 billion this year, that would put it in fourth place, behind Alibaba, Citizens and Synchrony Financial.)

  7. I'm being tendentious here, since I have no idea how much money Uber needs. Unlike a lot of more truly tech companies, Uber is not infinitely effortlessly scalable; it has to actually go get itself into new markets one at a time, and that requires effort to sign up drivers and passengers and regulators. (Here is Felix Salmon on the benefits that Uber's scale gives it.) Some super dumb math based on the Financial Times articles though: Uber "has some $1bn on hand from previous investment rounds," and the most recent round "raised $1.2bn in capital" by early June, and it had raised $258 million in 2013. (Dan Primack: "To date, Uber has raised around $1.5 billion.") So figure a six-month burn of, I don't know, between $200 and $400 million? Probably toward the lower end of that range? During a pretty aggressive phase of expansion? So after this round Uber should be good for at least, like, five years? Assuming no operating cash flow? But in fact Uber makes quite a bit of money? I am told that the use of proceeds for this round is "general corporate purposes," meaning that there's no pressing need for it. So, yeah, "Uber can raise all the money it needs."

  8. In fact Nasdaq has a thing to support that trading -- "NASDAQ Private Market" -- though I confess I haven't heard much about it since I wrote about it in early 2013. I am generally a fan of letting companies customize the trading markets for their stocks, though you could see why investors and even companies might not be.

  9. Actually I have heard that the conversion price is not a fixed dollar amount, but rather set at a discount to the IPO price, as is not uncommon for pre-IPO convertibles. This guarantees the investor some (double-digit) upside, assuming that there is a successful IPO, but it also caps that upside. If you bought in at a $1 billion valuation and the IPO is at a $100 billion valuation, and you had a fixed conversion price, you are very very rich. If the IPO is at a $100 million valuation, you are not. But if you bought in at a fixed discount to the IPO, you basically make out just as well either way -- well, but not 10-times-your-money well.

    By the way Dan Primack says:

    This offering is completely separate from a previously-reported fundraise targeted at institutional investors, which could raise more than $1 billion at around a $40 billion valuation. Given that Goldman clients would have fewer information rights than would the institutional backers, this deal likely comes with a lower valuation.

    [Update: Hearing the lower valuation part may not be accurate. Trying to get additional details]

    I would have thought, as a pure guess, that a private-wealth deal would have the same terms as the institutional deal, with fewer information rights just being the price of being an individual investor. But I have no idea if that's true, and it sounds like it's not: If the convertible does have a floating conversion price then that suggests that, unlike the institutional deal, it's not really "at a $40 billion valuation."

  10. See also Joe Weisenthal's Ello on King Digital:

    My old colleague @jyarow asked on Twitter, why bother even being public then? The answer is that being public is a nice way to lock in ("monetize") a massive (but uncertain) stream of future cash flows.

    I think of King Digital as kind of like being a small oil sands company in Canada. If you're sitting on a huge future stream of oil, it's a smart move to sell off the future cash flows it spins off, rather than a) Wait for all the cash to come in and collect it or b) hope to strike (black) gold again via speculative drilling.

  11. Again, it's a $25 billion IPO, with the greenshoe, but most of that was selling shareholders (so not truly new supply). Alibaba itself sold 123.1 million shares, plus 26.1 million more in the greenshoe, at $68 a share.

  12. I mean, mehhhhhhhhhhh. You want to own pre-IPO stock, not post-IPO stock. Once your employer has IPOed, you can't fantasize about a future IPO valuation; you are at the whims of the market. On the other hand if your employer never IPOs, you can't make a lot of money selling your pre-IPO stock. But this is a "cash out existing investors" story.

  13. Though Facebook, at least, had no problem using its stock as overvalued acquisition currency before its IPO.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net