Joan Magretta once argued that all business models must pass two tests: the narrative and the numbers. Does the story make sense? Do the numbers stack up? I start with the narrative: if the narrative isn’t compelling, you don’t have the foundation of a strong business model. Having done plenty of spreadsheets in my time, it is too easy to ‘shape’ the numbers.
Valuation expert Professor Damodaran[1] argues:
“a good valuation is more about the story than the numbers … if the valuation proves to be wrong, the problem will be in the underlying narrative, not the numbers”
A strong narrative has both an emotional and a logical dimension. At the emotional level, the narrative needs to connect with multiple audiences, particularly for start-up investors and employees. Guy Kawasaki – serial entrepreneur, venture capitalist and former Chief Evangelist for Apple – laments the number of entrepreneurs who pitch to him saying: we want to make money. His response:
“It’s so depressing … successful companies are those companies who set out to change the world”
I think about some of the companies that are regular features in MBA case studies: Southwest Airlines; IKEA; Apple; Starbucks … there are literally hundreds of them. These are extraordinary companies built off the back of a story that set out to change the world.
We can see this ‘narrative and numbers’ playing out as we follow the Uber story. In 2014 Damodaran valued Uber at $6B. At the time, VC’s were valuing it at $17-18B. Bill Gurley, a venture capitalist and early investor/Director responded: Damodaran missed the valuation by a mile.
Gurley attacked two fundamental assumptions: the total addressable market and the potential market share. He argued the total addressable market (TAM) was much greater than the $100B global market Damodaran assumed driven by:
§ The numerous improvements with respect to the traditional model – better pick up times, cashless transactions and more pleasant rides – will expand the market;
§ The radically different economics – UberX is typically around 50% of the standard taxi fare – will dramatically expand the market volume (price elasticity);
§ ‘New users’ will be induced into the market
According to Gurley Uber’s experience in San Francisco is that the market is 3-6x the base taxi market, suggesting a global TAM ca. $300-600B.
Who was closer? Damodaran assumed $100B with a growth rate of ca. 3% per annum, which would put the TAM today at about $135B. A quick search suggests the global market for taxis, limousines and ride hailing is about $150B today. Given the vagaries of these models, we’d give him that.
Gurley’s argument underpinning the market share is one of network economics captured neatly in a napkin sketch (literally) by David Sacks (former Pay Pal COO and founder of Yammer): viz.
Uber business model on a napkin
Under this logic, Gurley argued that a market share of 50% was ‘not unreasonable’. Damodaran had assumed 10% market share driven by inertia, regulatory barriers and competition (from other ride hailers). You can split the difference: ten years on it looks like Uber’s global market share is ca. 25%.
As Damodaran himself said: the problem in valuation will be the narrative. His narrative was too conservative. Equally, Gurley’s too optimistic. Uber has faced significant challenges in their battle for global domination, being effectively pushed out of China, and battling for share in India.
Both narratives missed the migration of Uber into food delivery. In 2023 Uber’s revenue was US$37B, of which $19B was rides; another $12B in delivery.
The ‘narrative and numbers’ approach exposes the critical issues for scrutiny. The Uber story still has a long way to play out albeit the uncertainty boundaries are more narrow today.
So, what is the current state for Uber?
Uber’s market cap in early September 2024 was ca. $150B, up ca. 230% in the last two years. A far cry from anyone’s valuation a decade ago. It is useful to compare the shift in valuation of some other ‘signature’ firms across this same period:
The tech leaders have experienced 5-10x growth in market cap over the last decade
With the benefit of hindsight, we can see these tech firms have seen their market cap increase by ca. 5-10x.
What are the broader lessons for strategists?
§ Gurley’s key insight was to recognise that it’s hard to predict how innovation will change consumer behaviour. What innovations are threatening in your sector? How might these change consumer behaviour?
§ What might be missing from your narrative? What is your sectors ‘uber eats’?
§ When it comes to valuing firms where the future is so uncertain adopt the McKinsey mindset: what would I have to believe for this to be true?
Good luck. The unfashionable strategist
[1] Professor Damodaran is a professor of finance at NYU where he teaches equity valuation and corporate finance, and has written several books including Narrative and Numbers: the value of stories in business
