This article was written by Benjamin Bosis, Brown ’20. It is one of two Intercollegiate Finance Journal (IFJ) articles co-published this fall under a new partnership between the DBJ and the IFJ. To find out more about the IFJ and the partnership, please click on the author profile below.

The Transport Revolution is Coming

When Russia successfully launched the first satellite, Sputnik, into space, the whole world suddenly became invested in the progress of completely new technologies – and Americans had some serious ground to regain. John F. Kennedy knew that setting a goal would be half the battle, so he urged congress that “This nation should commit itself to achieving the goal, before the decade is out, of landing a man on the moon.” It was only with the drive to achieve that aim that America did just that.

Technology has long been a means to power, but in today’s world we often see such battles between corporate entities rather than political ones. According to Elon Musk and other business leaders, the future lies in self-driving cars, and, like JFK dictating the mission to the moon, Musk is now conveying his vision of automated driving to the American people. Already, many of the biggest companies in the U.S. have broken into a full-on sprint to be on the right side of the coming transportation revolution.

A Battle Between Giants

Google, General Motors, Uber, Mercedes-Benz, Tesla, and Lyft have made huge strides in automated vehicle (AV) development. Even Apple, who leads America’s technology sales by a whopping $200 billion a year, is reportedly planning to get in on the corporate rush. These important players come from one of two completely different perspectives and corporate incentives. The tech giants who started the movement towards unmanned vehicles are secure in other products, but see autonomous vehicles as a new and potentially huge source of income. The auto giants, on the other hand, have an almost existential dependence on cars, and face much higher stakes in keeping their brands relevant.

Despite their decidedly distinct backgrounds, members of each side have begun to choose partners across the aisle, sharing their knowledge in an attempt to get ahead. GM recently invested $500 million in ride-sharing service Lyft, and announced plans to equip an autonomous Lyft fleet with GM cars. The same partnership exists between Volvo and Uber, which use each other’s technology exclusively in their pursuits; whereas Google and Daimler, focusing on more limited aspects of the AV market, remain independent. Though most thoughts on Apple’s efforts are largely speculative, they would most likely also avoid any significant partnerships in order to control their long time vision, which at this point remains unclear.

Your Mission, Should You Choose to Accept it

All of the competitors agree that automation will shape the next era of transport, but opinions differ on how driverless cars should be implemented in the new age. Uber and Lyft envision the disappearance of car ownership entirely. In particular, Lyft plans to market each of its products as part of a larger network of vehicles that, instead of belonging to any one individual, operate 24/7 to carry customer after customer from point A to B. Transportation would become an exclusively service phenomenon, eliminating the need for anyone to actually own a car. Perfectly suited to urban environments, the plan for driverless cities could lead to larger sidewalks and an often-fantasized-about end to traffic jams. The interconnected fleet would vastly decrease the overall number of cars, which would in turn decrease pollution and make almost all parking lots obsolete.

Despite all the excitement for AVs in the tech world, Tesla founder Elon Musk is betting that Americans won’t give up the freedom of car ownership so easily. As the first company to actually place semi-driverless technologies in the hands of individual consumers, Tesla has demonstrated a commitment to autonomy not only for the car-driving-software, but for the car owner as well. Ultimately, the vision that will triumph is the one most adaptable to American life. Individually owned cars could be more suited to America’s huge expanses; as cell providers have shown, ‘nationwide coverage’ often leaves out many people in rural communities. And for most, having a car means not only being able to go wherever you want, whenever you want, but more importantly, knowing that no one can stop you. That quintessential ‘American’ quality may give Tesla’s plan for the future a bit of an edge.

Anxiety and Fear — Obstacles to Adoption

Legislators across the country have reacted very differently to the prospect of self-driving cars their public roads. California, usually the center for this kind of tech development, has driven some companies’ efforts elsewhere by considering significant regulations. Their potential laws would require all autonomous vehicles to have brakes, accelerators, and a steering wheel as cautionary measures inside the car, which would also necessitate a human operator in all test vehicles. The federal government, clearly hopeful for what the industry could do for the American manufacturing economy, has remained extremely lenient and supportive, necessitating only minimal safety precautions and reserving the right to require reports of all tech failures from any company.

Consumer enthusiasm, on the other hand, is another animal entirely. Many Americans have safety concerns about vehicle automation. Robots may not make mistakes, but programmers can, and the idea of having no recourse whatsoever in the case of a tech malfunction is not something to be taken lightly. Investors are particularly wary, as seen when Tesla’s stock dropped 3.2 percent only hours after their first fatal crash was reported. The reputations of companies hoping to put fully driverless cars on the road are proving paramount to their ability to do so.

Pittsburgh: A Case Study for Acceptance

In the face of growing hesitance, Elon Musk has insisted that it would be “morally reprehensible to delay release simply for fear of bad press or some mercantile calculation of legal liability.” While some seem to agree with his logic, that may not have been a good thing for Tesla. Across the country in Pittsburgh, Uber in particular has taken advantage of commercial testing allowances. Pennsylvania lawmakers, who clearly have more to gain than those in a state already home to some of the biggest companies in the world, have made no signals toward any major regulation so far. This leniency is largely a continuation of America’s laissez-faire industrial tradition. Not only is the ability to test in Pittsburgh catapulting Uber’s project forward, but the jobs and attention that came with Uber are helping to rejuvenate the long industrial legacy of the city.

Through steel, Pittsburgh became of the biggest economic powerhouses in the United States, and helped to lift the U.S. to the wealthiest nation in the world; but since leaving the industrial frontier it has fallen into relative obscurity. Now Uber’s entrance, catalyzed by the harsher regulating in California, is giving many of the students at Carnegie Mellon University a reason to stay. Their high volume of robotics talent will prove to be key to both Uber and Pittsburgh as they blaze a trail in the automation industry; for Uber, it has already meant taking the lead in the development race. That lead may continue to grow if other companies cannot find testing grounds of their own.

They’ll Get Here When They Get Here

Nevertheless, in all the excitement of the current flurry of AV activity, companies have declared decidedly optimistic timelines – typically ranging from 3 to 6 years – for their progress toward commercial production. Tech analysts at McKinsey, however, have taken stock of expert opinions and constructed a more realistic one.

The initial process leading up to product release may finish as early as 2019, as companies predict. Most experts believe, however, that there will be a much slower adoption of the cars lasting until 2030, while safety data accumulates and customers uncertainty decreases. Any state of 100 percent implementation – such as an eventual outlawing of human drivers – would not likely come before 2050. So for those of you hoping to own a completely autonomous car, that hands-free commute might not be so far off; Lyft CEO John Zimmer’s vision of the intelligent, interconnected, super-efficient fleet is a far less likely eventuality. But whether they’re Teslas, Volvos, or anything else, self-driving cars are coming; and a brighter, cleaner future is coming along with them.

Art Valuation

In the world of venture capital, there exists a special class of startups that attracts the attention of investors from nearly all backgrounds: Unicorns. These firms consist of private startups that are worth at least one billion dollars. The taxonomy goes further in order to identify the truly massive startups called “decacorns,” referring to their valuations in excess of $10 billion. Companies like Uber, Snapchat, AirBnb and SpaceX are among the best-known unicorns.
Conversations about the size of the valuations seem just as ubiquitous as the companies themselves. Headlines read of Uber’s $62 billion valuation, which easily surpasses Ford’s $50 billion market capitalization, and of AirBnb’s $25 billion valuation, which similarly trumps Hilton Group’s $22 billion market capitalization, despite having only eight percent of its revenue. In response to these astonishing sums, skeptics reverse engineered the growth expectations via traditional valuation techniques and found that, with astonishing frequency, unicorn valuation depends purely on optimism. Optimism, however, is not a new element in Silicon Valley’s expectations or in inflated valuations. The cause for this trend in inflating valuations is best explained by the changing nature of venture capital as it pertains to unicorns, and as a consequence, it is clear that valuations do not attempt to represent concrete value.

New considerations have been included into the valuation calculus. Average funding round size has increased dramatically in recent years, with some suggesting that “Series A round is the new Series B round,” referring to the notion that funding typically increases in each successive round. Over the course of 2014, average Series A funding rose 6 percent, Series B rose 20 percent, Series C rose 31 percent and Series D rose an astounding 100 percent. The increase in Series D funding picks up on a new strategy used by technology companies like Uber, in which mature companies stay private for longer and sustain operations with large, late-stage funding. Indeed, part of the inflation trend is due to the prestige of unicorn status itself, which is evidenced by the fact that Fortune Magazine lists just fewer than 100 companies that have valuations of one billion dollars, out of a total of 229 unicorns. CEOs and investors may see a startup’s unicorn valuation as a way to legitimize the company, attract new talent and over time, justify the overly ambitious valuation. Another part of the valuation inflation is due to the popularity of “downside protection provisions” as elements in funding agreements that shield investors from risk. For example, senior liquidation preferences are one common downside provision, and specify that an investor has its investment returned before other preferred stock or common investors should the company be liquidated. Another common downside protection is a provision that guarantees an investor additional shares if the company raises funds based on a lower valuation, thereby preserving the value of the investor’s stake in the company. Such stipulations have been increasingly popular as a method to shield against risk from investors, which consequently frees investors to make larger investments. As a result, it is clear that the inflation seen in valuations of unicorns represents the fact that the valuations are not pricing risk accurately.

Notable individuals from the worlds of technology and business have voiced concerns over some outlandish calculations. Jim Breyer, prominent investor and partner at Accel, a venture capital firm in California, commented early this year that he expects only 10 percent of current unicorns to survive and the remaining 90 percent either to fail or be revalued. Assuming his estimation is correct, only about 23 companies have accurate, or at least sustainable, valuations. In fact, skepticism is not uncommon. Bill Gates is wary of the future of unicorns as well, and warned of “overenthusiasm” in startups during a February interview with the Financial Times.

Regardless, some investors remain bullishly optimistic on unicorns. Scott Kupor, chief operating officer at venture capital firm Andreessen Horowitz, attempted to disabuse skeptics of the notion of a second tech bubble in a presentation this past year. He highlighted several key differences between 1999 and today, most notably the dramatic increase of Internet users (900 percent), the amount of funding (only 32 percent of the 1999 level) and the much lower median time to IPO (four years today versus 11 then), among other metrics. Evidently, he failed to convince many of his colleagues. A survey of 500 startups conducted by First Round Capital found that 73 percent of responders affirmed the existence of a technology bubble. The proportions of this bubble do not approach the frenzy of the late nineties, but there still remains an implicit understanding between startup owners and venture capital firms that valuations do not exactly equal value.

These mismatched valuations explain in part the scarcity of technology sector IPOs in 2015. Once public, markets will decide the true value of companies, so startups need to delay public offerings until fundamentals can support IPOs that reflect private valuations in order to protect investor value. Both Box, a cloud storage company, and Square, a payment service company, went public with offerings priced below their private valuations, providing a cautionary tale for executives and investors at other unicorns who have their eyes on the public market.

Like the valuations themselves, the disagreement over the existence of a second technology bubble can only be decided by the market itself in the years to come. Many of these unicorns have indeed reached incredible sizes with incredible speed. In seven years, Uber became the world’s largest taxi provider; it took AirBnB eight years to become the world’s largest hotel-provider. Perhaps it seems likely that the upper-echelon of the “decacorns” has substantial overlap with the ten percent mentioned by Jim Breyer. Yet, considering the 100 or so startups that may have wrangled for a billion-dollar valuation only for the title, many unicorns are simply overvalued, despite the “enthusiasm” attached to their future prospects. Silicon Valley and its bankrollers ought to remember that while enthusiasm is a critical asset for any startup, it is only as valuable as it is monetizable.

In the mid 1900’s, an individual was solely employed by a company and classified as an employee with a corresponding salary and appropriate benefits. People worked for a single company their entire life and retire with a pension plan and medical benefits. That scenario, however, has changed drastically since the arrival of the technological revolution, rapid growth of globalization and the introduction of the Internet. Highly skilled professionals and self-starters are now part of a freelance society since the landscape of work has changed over time. New innovative tech start-ups such as UBER implement this independent contractor model into their way of doing business in the marketplace.

Also significant toward this shift away from lifetime employment was the terrible financial crisis of 2008. During the crisis, profits were hard to come by and executives began to think of cost-cutting measures to improve profitability. Unfortunately, the employees bore the burden of such measures. There were massive layoffs during this crisis, and numerous companies began to see the advantages of converting future workers into an independent contractor status. It was a win-win for the company. Employees would no longer receive fixed salaries and benefits, and instead, be treated as independent contractors, possibly paid at an hourly rate with no benefits and under the condition that any expenses incurred may or may not be paid by the corporation.

The Internet and cellphone have transformed the way business is done in the world. For example, UBER is a ride-sharing “taxi” company. UBER hires independent contractors to drive for them in the ride-sharing process. Uber drivers are free to work when they want, are responsible for their expenses and are paid a percentage of the fare by UBER.

The company would obtain a tremendous savings because benefits and perks for employees are substantial expenses and these savings, in turn, would make the company more profitable. Workers would be free, though, to choose the hours they worked and could also find additional work, if needed. This possibility may hinder the company employing an independent contractor model because it has given up some type of control over their employees.

It remains to be seen whether the financial savings from using independent contractors outweighs the lack of control and direction of the contractors as such a lack of control could hamper the company’s customer service record. An employee in a traditional work contract can be told what to do directly but independent contractors may lack discipline.

Recently, a worker in California challenged UBER with the Labor Commission stating that she was owed expenses for gas and tolls. UBER disagreed and stated that she was not an employee but the California Labor Commission disagreed and awarded her the judgment, highlighting the blurry distinction between employee and contractor. The Labor Board had a multifactor test of determining an employee from a contractor, a decision will have huge ramifications throughout the business world because companies will think twice about hiring workers as independent contractors versus employees.

There has recently been a focus on strong customer service by companies along with the various states throughout the country raising the minimum wage. These two factors have changed the battleground regarding employees versus independent contractors. Enjoy, a tech start-up by Ron Johnson in the Silicon Valley in California, sends employees to companies to help with tech set-up to provide a more personal service.

According to Diane Burton, professor of human resources at Cornell University, “When people are your source of competitive advantage, it is clear that a long-term employment relationship and what we would call a ‘good job’ is good for the workers and good for the companies.” This shift into looking at the corporation as one entity and not two halves – the corporate headquarters and   independent contractors – is taking place before our eyes. As a result, solid positive feedback from the company’s customer base should improve dramatically.

Through centuries, there have always been shifts in sentiment regarding employees and how they should be treated in the workplace. It remains to be seen if the cost of hiring a company employee with salary and benefits outweighs the lesser cost of an independent contractor from a customer service benefit. As we have seen from the above example with UBER and the California ruling, there is uncertainty whether or not one is an employee or independent contractor. A corporation is in business to make a profit and the key component of making a profit is satisfying the customer.

The recent court ruling and state-by-state shift to a higher minimum wage all point toward examining whether the independent contractor model will be sustainable for corporate profits and excellent customer service or whether a company should hire future employees with benefits and have total control over the entire operational system known as the corporation. The future of this model remains unclear. Whether employees want full-time work or the freedom of working on their own time must be considered. The independent employee might just be the vision of the future as companies try to best figure out how to improve their brand recognition throughout the world with their workforce.