Uber hits a staggering $17 billion in valuation

SAN FRANCISCO -- Forget the billion-dollar club.

Now it's the $17 billion club.

Uber's announcement on Friday that it had raised $1.2 billion in additional funding at a staggering $17 billion valuation has put the on-demand car service in a class of its own.

In less than one year, Uber more than quadrupled its paper worth, officially launching Silicon Valley valuations into nose-bleed territory.

The billion-dollar valuation club used to more exclusive, said University of Florida finance professor Jay Ritter. Now more start-ups are gaining access.

"It's still a club not that many are admitted to, but it's certainly not as exclusive as it once was," Ritter said.

Uber is just one of several young companies in Silicon Valley with untested business models that are commanding valuations that rival those of long-established publicly traded companies.

Airbnb and Dropbox are two up-and-comers that earned $10 billion valuations in the past year. Pinterest, the popular online scrap-booking service, recently raised $200 million at a $5 billion valuation. That was up from $3.8 billion just seven months earlier.

The only privately held Silicon Valley company to land a bigger valuation was Facebook in 2011. At the time, it was valued at $50 billion.

And that's what is driving all the interest in this new wave of Internet companies: Investors on the hunt for big gains are willing to risk a loss to get in on the next Facebook.

"These valuations do reflect optimistic assumptions," Ritter said.

Paper valuations can be worth about as much as the paper they are written on. They are just early bets from investors on what a company might someday be worth.

But the optimism may be justified in the case of Uber, which lets people order private town cars and other vehicles through a smartphone app. In just four years, the company has quickly grown market share and name recognition around the world.

"This is a real company with real cash flow and real customer demand," said David Wessels, a finance professor at the University of Pennsylvania's Wharton School. "This is very different from many transactions we have seen over the last year."

Even with competition pressing in from all sides, Uber which already operates in 128 cities in 37 countries, "is the kind of business that could stand on its own," Wessels said.

Investors are banking that Uber which has 900 employees and takes a 20% commission from drivers is positioned not just to dominate the mobile ride-sharing business but that it has the potential to substantially grow that market.

"Imagine a world in which people actually made the decision not to drive," Wessels said. "Instead they say, rather renting that car or purchasing that car, I am just going to Uber everywhere."

Uber also has plans down the road to expand its ride service to delivering other goods and services through its growing network of drivers.

The biggest risk for investors with Uber: It's still entangled in a morass of regulatory red tape over its ride-sharing business, from safety concerns to widespread protests by taxi driver lobbies in the United States and overseas.

"Uber's uber-valuation is a stretch given Uber's numerous legal and regulatory challenges," said Sam Hamadeh, founder and CEO of research firm PrivCo. "Much of Uber's business is in fact contrary to a matrix of laws... Venture capitalists investing in the 'sharing economy' will soon encounter the 'regulated economy.'"