According to a , publicly-traded ride-hailing company is working to invest in building an ads business inside of , its food-delivery service. The move, TechCrunch notes, comes after Uber Eats allowed restaurants to offer discounts in exchange for better placement inside of the application itself.

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While an advertising business inside of Eats makes good sense for Uber, in our view, it is better understood from a profit perspective than from a growth orientation one. What’s more, the move underscores the fact that while Uber has scaled Eats quickly, the service’s losses have grown as well (more from Uber’s Q3 earnings here). If the ads experiment goes well for Uber, expect to see yet-private, on-demand companies also pursue similar monetization methods.

From the consumer perspective, don’t expect on-demand services to become cheaper; expect them instead to look for new sources of topline to staunch losses. Let’s explore the Uber example.

Uber Eats

Uber Eats is a quickly-growing portion of the larger Uber business. In the last quarter, Uber Eats pulled in $3.7 billion in gross bookings, representing a 73 percent increase year-over-year. Its revenue grew 64 percent year-over-year to $645 million and its adjusted net revenue also grew 105 percent to $392 million. Across most metrics, Uber Eats was the second-fastest-growing segment of the company in percentage terms, coming in only behind Freight. That makes sense, as Freight is a less mature division at Uber and therefore one growing from a smaller revenue base.

In the quarter, Uber Eats accounted for 22 percent of Uber’s total gross bookings, compared to the year-ago quarter when it made up 16.6 percent. In the third quarter, Uber Eats made up 11 percent of the company’s adjusted net revenue, compared to last year when it made up 7.2 percent of the adjusted net revenue.

It’s clear that Uber Eats is important to Uber’s growth story, as it’s one of the fastest-growing segments in the company while competing in the hot market of food delivery. It makes sense that Uber would double-down on the service by helping make it more commercially viable.

That being said, Uber Eats is deeply unprofitable. It lost $316 million in adjusted EBITDA in the third quarter. For reference, Rides brought in $631 million in positive adjusted EBITDA during the same period.

Uber Eats is a key driver of growth for the company while also a source of more red ink than Uber can stomach. The good is therefore also bad for Uber, a firm that very much wants to be valued on growth and not, say, GAAP profits. It’s stuck, therefore, pursuing Eats for the sake of growth while also trying to reach for profitability.

Enter ads, a business that can layer revenue into the Eats mix, lessening pressure on Uber to raise fees or dig deeper into the coffers of restaurants to help its must-work food delivery service become a viable long-term business.

Uber has a lot of cash, yes, but it also needs to start generating more of the stuff in time. If it doesn’t, it was never a real company to begin with.

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Switzerland-based seems to have, and the company’s innovative storage method made see enough potential profit to . (The company has raised other capital , including led by , subsidiary of . That deal will make sense shortly.)

For the Vision Fund, the deal size isn’t shocking; but what caught our eye is the technology selected. This is the fund’s first-ever investment into an energy company, according to a by Energy Vault.

Energy Vault is a change from Masayoshi Son and Company putting capital to work in on-demand companies, chips, or dog-walking, and we’re here for it.

Towering Possibilities

Here’s how the company’s Super Jenga (our name, not theirs) system works:

That is very smart? And simple? And pretty cool? And we suspect that it would look pretty neat in action. (TechCrunch of the system.)

Energy storage is an active sector, one that has as our needs to capture, and later access, power have risen; as the world moves towards renewable energy sources, some of which are more cyclical in nature than traditional power generation methods, being able to save generated power is a key piece of work.

To demonstrate the scale of the need for Energy Vault’s product, or one like it, read discussing how Utah may store air power in salt:

One hundred miles south of Salt Lake City, a giant mound of salt reaches thousands of feet down into the Earth. It’s thick, relatively pure and buried deep, making it one of the best resources of its kind in the American West.

Two companies want to tap the salt dome for compressed air energy storage, an old but rarely used technology that can store large amounts of power.

Compared to that, Energy Vault’s methods look downright simple. Let’s move on now to the Vision Fund and its recent deal flow and performance (both the good and bad), leaving you with the point that Energy Vault is incorrectly named. It should be called “Energy Tower.”

Vision Fund 2

Aside from investing in every late-stage company you can name, is looking to raise more money of its own. The SoftBank Vision Fund II plans to land somewhere around $108 billion, several billion dollars larger than its older sibling.

The pace and size of investments from ł§´Ç´ÚłŮµţ˛ą˛Ô°ě’s first fund was hard to wrap our heads around — and, apparently, investors struggled as well. Reports in June detailed that the second Vision Fund was having a hard time raising cash to fuel its investing machine. However, a month later, SoftBank said it had landed and on its list of LPs for the second Vision Fund.

It was a welcome boost for SoftBank, as it raises new billions, that its first fund had a good recent quarter. The firm saw liquidity, as well as “unrealized valuation gains” that looked strong. The results weren’t too surprising, considering some of its portfolio companies’ recent successes (think direct listing, fundraising rush, and recent investing news), but they were notable all the same. And while we poke at ł§´Ç´ÚłŮµţ˛ą˛Ô°ě’s invest-in-everything strategy, keep in mind its numbers showed specific strengths in its enterprise and consumer deals.

When SoftBank does launch its second, gigantic fund, we’ll see a second wave of investments by the behemoth. Despite its string epic check size and deal stamina, the company does have a few investments that could serve as learning lessons for the second fund

Market Wobbles

First up, Uber, a huge Vision Fund investment that had a disappointing start to its life as a public company and still is struggling.

The most recent news from the ride-hailing giant comes from its recent second quarter earnings report. The global transportation company – which SoftBank put billions into, making it – had less revenue than expected and larger losses than anticipated.

Uber must be feeling deflated, to say the least.

SoftBank, in its earnings report, explained that it had an “unrealized loss totaling ¥195,326 million was recorded for the decrease in the fair values of investments in Uber and others.” That means Uber isn’t the only Vision Fund deal that appears weak.

Looking to the future, WeWork, which filed its S-1 publicly yesterday, appears dangerously unprofitable as well (more here). And SoftBank has invested at least $6 billion into the co-working space business over time, and at one point .

But while its Uber bet hasn’t performed well thus far, and the company’s WeWork stake is looking risky, the Vision Fund’s huge (paper) win from its DoorDash bet could allow the investing giant to keep making big bets on unprofitable companies. And, perhaps, cut checks into different sorts of corporate growth risk, deals like this week’s Energy Vault deal.

Energy Jenga!

Illustration: .

Yesterday filed to go public, releasing an document and forcing every business publication in the world to scramble to figure out how its books work. Good luck.

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Now that the initial wave of posts are out (here my first, second, a third by Jason, and a with , in case you want more on the matter), I wanted to ask two questions of the company’s current situation. Here they are:

• Are WeWork’s gross margins high, or low, for its business category?
• What do public competitors say regarding WeWork’s implied value at IPO, given what we learned about its gross margins?

The latter question is something that we’ve written about together in the past, so we don’t have to explain it much. We’ll get to it shortly.

The first question might seem a bit odd, so let me explain what I’m aiming for. WeWork as a business likes to emphasize the parts of its business that aren’t the business parts. WeWork’s S-1 is peppered with stuff like “our mission is to elevate the world’s consciousness,” and “philosophically, we believe in bringing comfort and happiness to the workplace.”

Nice sentiments, certainly, but not the sort of thing that you can tot up in an accounting book. Or can you? WeWork also says in its S-1 that it is “committed to providing our members around the world with a better day at work for less.” That’s notable.

On the same theme, the company detailed on page 3 of its IPO filing how much cheaper it is to rent space at once of its facilities compared to building out office space yourself. I agree! But my curiosity then asked if WeWork is charging enough for space. The company certainly offers attractive offices. Does it price the square footage high enough to generate enough gross profit to pay for its business?

Not yet, certainly, but let’s explore the question through the lens of a competitor.

Gross Margins

WeWork has a public competitor, , formerly known as Regus. Happily, as IWG is a public shop we have access to its financial performance.

In its most recent half-year, IWG revenue of ÂŁ1.302 billion and gross profit of ÂŁ196.3 million. That works out to a gross margin of just over 15 percent. The company also generated operating profit (ÂŁ50.6 million) in the period and strong net results thanks to a divestiture.

The 15 percent result is useful. Yesterday, during our second look at the WeWork filing, we found that using a line item similar to cost of revenue, we were able to gist out that WeWork’s gross margins a little under 20 percent:

Now that we have a way to calculate gross profit from the company’s buildings, what do the results show us? Observe the following pairings of WeWork revenue, and same-period Location Operating Expenses:

• WeWork H1 2018 results: Revenue of $763.8 million, Location Operating Expenses of $636.0 million (83.3 percent of revenue consumed by location operating costs)
• WeWork H1 2019 results: Revenue of $1.54 billion, Location Operating Expenses of $1.23 billion (80.3 percent of revenue consumed by location operating costs)

As you can quickly sum, WeWork’s kinda gross margins work out to 16.7 percent and 19.7 percent for the two half-year periods that started 2018 and 2019. Bear in mind that these are directional numbers, not absolutes. What matters is that WeWork’s nigh-gross margins are close-ish to what IWG itself reports.

We know that our WeWork gross margin estimate is generous. Therefore, WeWork isn’t much more profitable on a gross margin basis than IWG. And since IWG is net profitable, I’d hazard that it will be difficult for WeWork to argue that its revenue is worth more than that of its rival due to fundamentals.

This tells us that when WeWork prices its IPO, it will have to lean on revenue growth, and not revenue quality, as its key valuation lever; the firm won’t be able to say yes we are growing more quickly than IWG, and we generate lots more margin per dollar of revenue.

And that makes the IWG-WeWork comp all the more pertinent. Now let’s pursue our second question.

Multiple This!

IWG reported ÂŁ1.3 billion in H1 2019 revenue. WeWork reported $1.54 billion in the same time period. Convert IWG’s pounds to American dollars and you wind up with very similar sums. That’s useful for us.

Yahoo Finance IWG’s market cap at $3.67 billion, giving the company about a 2.3x revenue multiple on its H1 2019 top line. Yahoo Finance itself notes that the company’s trailing price/sales multiple is a conservative 1.37x.

But let’s use our somewhat-neat H1 2019 IWG revenue multiple result as it uses the most recent financial grounding for each company. WeWork, at the same 2.3x multiple, is worth a hair over $3.5 billion. That’s about 7.4 percent of its .

Now, WeWork will not go public at that valuation. The firm’s growth rates of over 100 percent will afford it a higher price. However, IWG has profits to report while WeWork is incredibly unprofitable. How far WeWork will be able to extend its revenue multiple thanks to its growth (with scant help from its gross margins) is the big question in front of it.

We’ll know soon enough!

Illustration: .

The flotation is interesting given where Boku is based, how much it had previously raised and from whom, and how much it is worth post-IPO.

The IPO conversation here in the Bay Area spirals around unicorns and their ability (or not) to meet their last private valuations. But that situation doesn’t apply to every company that will go public.

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Let’s peek into the Boku offering to see what happened and what we might learn from it.

The Flotation

Boku sold 76.2 million shares of its equity in its debut at 59 pence apiece, bringing in just under £45 million. The income was split roughly by one-third for the company, and around two-thirds for “existing shareholders.”

Shares of Boku , up 24.6 percent. That’s a very healthy first-day pop. The company’s  (post-money) is now worth, including a currency conversion, $206 million, give or take.

And now you can see why this is all quite interesting. What sort of company goes public when it is worth just a few hundred million? Well, as it turns out, the AIM is a place built for smaller companies to float on—not everything has to be the Big Board.

Last year, I with , who works for the London Stock Exchange, to better understand why smaller companies might want to list on the AIM. Here’s what he said:

AIM, London Stock Exchange’s market for smaller, high growth companies was created to provide the optimum conditions for small and mid cap growth companies—i.e. valuations in the tens to hundreds of millions of pounds.

Because of the scale of the US exchanges, companies at this sort of valuation can struggle to cut through the noise. When they can even get onto market, we have found they can struggle to attract top tier investors, may have to offer deep discounts on their issue price, and run the very real risk of becoming so-called “orphan stocks” lacking adequate coverage from analysts.

Smaller, high-growth companies going public? Let’s look at Boku’s book to figure out how it fits the mold.

Boku By The Numbers

What initially snagged our attention in all of this was the combination of San Francisco headquarters, Silicon Valley money, and London IPO.

What would bring a company into that particular milieu? As it turns out, a company that is nearing a decade of life that has raised quite a lot of capital and just found new wind.

Boku, founded in 2008, , has raised nearly $90 million across rounds stretching back to 2008. Benchmark, Index, and Khosla hopped in back in 2009, a16z in 2010, and New Enterprise Associates led the company’s $35 million Series D in 2012. The firm tacked on $13.75 million in .

From its filings, here what you need to know about . Foregoing its TPV (payment equivalent of GMV), here’s its revenue for the last three full years for context:

• 2014 full-year revenue: $14.2 million.
• 2015 full-year revenue: $15.2 million.
• 2016 full-year revenue: $14.4 million.

Here are the firm’s last two half-year results:

• 2016 H1 revenue: $8.4 million.
• 2017 H1 revenue: $10.2 million.

And, the “Underlying EBIDTA” results from the same two periods:

• Underlying EBIDTA H1 2016: -$7.2 million.
• Underlying EBIDTA H1 2017: -$2.8 million.

What does all that mean? That after a few years of uneven results, the firm has a solid growth number in place for the first half of 2017 along with improving profitability.

Not a bad time to go public, really.

(And if you are worried that the firm could return to the negative growth that it saw before, bear in mind that this is a smaller IPO. The stakes here are smaller than when a unicorn goes public while keeping its horn.)

Smaller IPOs: So What?

Before we got underway, we stated that Boku was interesting for a few reasons, including “where Boku is based, how much it has raised and from whom, and how much it is worth post-IPO.”

We can deal with that mix head-on now, and in the process, answer our just-stated, final question.

What is interesting about Boku’s headquarters is that it’s a full ocean away from its trading market. Seeing an American tech company go public on a British exchange isn’t unheard of. But I can’t recall another venture-backed, U.S.-based company going public in a similar fashion (biotech aside).

Which brings us to Boku’s fundraising. Its list of backers is a power list of Silicon Valley’s venture class, and London’s AIM helped provided liquidity to some of America’s well-known money kids.

Finally, the firm’s value at just over $200 million represents smallish exit for a company that has raised around $90 million. But, notably, it is an exit of sorts, and one that doesn’t involve crushing the firm into a purported open niche inside a corporate giant.

Crunchbase News reached out to the London Stock Exchange’s  (Head of Primary Markets, Americas) concerning the Boku IPO in particular, to which the group responded:

This IPO again highlights that LSE, particularly via our growth exchange AIM, has a track record of offering small and micro cap tech companies access to high quality capital at lower cost and reduced regulatory burden relative to US public markets. It also shows VC shareholders can diversify funding for portfolio companies and often achieve partial exit through a London IPO.

Fair enough, really, given what Boku pulled off today.

We don’t hear about many small or mid-cap tech IPOs here in the States, at least not at the moment. Perhaps, however, we’ll see a few more like Boku?

In that vein, we also asked about the pacing of U.S.-based companies listing across the pond. To which the LSE responded with data that implies that we’re a bit behind on the trend:

Crucially, history shows that London blue chip institutional investor are comfortable with companies with much smaller annual revenue (sub $10m in some cases) and market caps (most AIM IPOs have market caps in the $50m-$300m range) than typically seen in US IPOs.

We have had about 20 North American companies from various sectors list in London this year with market caps ranging from c.$10m up to $3bn and have seen a significant increase in interest in the tech sector that we now have a number of US tech deals in our IPO.

We’ll be on the lookout for the next Boku. More when it lists.

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In unison Friday, the reporting firms, Microsoft, Alphabet, and Amazon rallied to fresh highs. Their competitors that round out our collection of the biggest technology firms from the United States, a collective we loosely call the Big 5, also performed strongly on the day. That news broke on Friday that the US economy in the third quarter likely didn’t hurt.

That the biggest tech companies are doing just fine doesn’t shock. The tech industry’s stock market rally has gone on so long by this point that it can be difficult to recall a time when things were different. Indeed, the combined value of the Big 5 — our three recently-reporting firms, plus Apple and Facebook — has since early 2014, when the group was worth a more pedestrian $1.5 trillion.

Now comfortably north of $3 trillion in collective weight, it’s fair to ask why these firms have done so well in recent quarters. There is no correct single answer to a question with that much complexity, but we can take a lesson from each company’s quarterly results as a good starting point for comprehension.

So, in order, we’ll examine Microsoft, Alphabet, and Amazon’s most recent quarterly results, working to understand why they resonated as much as they did with Wall Street, and what we can learn from it.

Microsoft

The pride of Redmond beat analyst expectations in the most recent quarter, posting $24.5 billion in revenue, ahead of an expected $23.56 tally, and earnings per share of $0.84 (adjusted), ahead of expectations of $0.72.

Those figures are impressive on their own, , underscoring that, on an earnings-per-share basis, Microsoft put up its two best quarters since at least the start of its fiscal 2015. Not bad.

But the company managed to do something more than merely beating top- and bottom-line financial expectations in the quarter. In addition, Microsoft quickly met its promised cloud revenue goal several quarters ahead of its self-imposed timeline.

The firm promised to grow its commercial cloud revenue run rate to a $20 billion annual pace by the (which ends with the conclusion of the second calendar quarter of 2018). Instead, Microsoft crossed the mark in its most recent quarter, the first of its fiscal 2018. So three quarters early.

And that implies that by the end of its fiscal 2018, Microsoft’s commercial cloud revenue collective will be far above the $20 billion run rate mark. It could even be large enough for Microsoft to break out revenue from Azure, its cloud computing platform that competes with AWS, as its own line item. After all, if Surface has to report its own numbers, why not Azure?

Regardless, Microsoft’s market cloud-future continues to come into focus. The firm’s various fuckups — the recent, final days of Windows Phone have been testament to the fact that not all bets bear out, even when they are purchased for billions — aside, its cloud wagers are paying out. Office 365 traditional office, Azure is growing quickly, and the collected enterprise-facing cloud services that Redmond sells are doing $5 billion a quarter at current tip.

If you were a market observer concerned that Microsoft might miss cloud as it missed mobile a few times, the company now has material counterarguments at the ready.

All that and a short-term revenue and profit beat means that Microsoft shareholders are enjoying a nice price jump today.

The big get bigger. And cloudier.

Amazon

Amazon’s quarter , managing to grow its revenue 34 percent year-over-year to $43.7 billion. Analysts had expected a far-slimmer $42.14 billion in top line. The firm’s profit also beat expectations, with the firm managing $0.52 per share when the markets had expected $0.03.

Confused about how the street could have been so far off? That’s Amazon for you.

Shares in the company didn’t merely rally, however, after the beat. They soared, closing the week’s trading today . That’s a staggering result for a company worth hundreds of billions of dollars — each percent they gain is billions of dollars in value created, after all.

So what could have driven the company’s massive gain in value? It seems possible that the firm’s re-acceleration of revenue growth while beating on profits could be the secret sauce that investors fancy. Indeed, looking back to Amazon’s year-ago third quarter, the firm :

Net sales increased 29% to $32.7 billion in the third quarter, compared with $25.4 billion in third quarter 2015.

This year, the firm grew at a faster pace, namely 34 percent, which is a dramatic improvement as the firm increased its ±č±đ°ůł¦±đ˛ÔłŮ˛ą˛µ±đĚýgains from a larger base this year, making the result doubly impressive.

So, yes, Amazon managed to beat expectations in the most-recent quarter, but its ability to run faster at this age seems to have impressed Wall Street.

The big get bigger. And faster.

Alphabet

Alphabet, the entity that takes credit for Google’s profit and debits its side-project tab against the same accounts, had a great quarter. The firm posted revenue of $27.8 billion, ahead of an expected $27.2 billion tally, and earnings per share of $9.57, far ahead of an anticipated $8.33 per-share figure.

Shares of Alphabet rallied today, following the news, pushing the value of Alphabet shares over the $1,000 mark. What caused that 5 percent bump? Was it merely a beat on top and bottom lines?

No, it doesn’t look like it. To explain what is going on at Alphabet, Matthew Lynley, my co-host on Equity, from the Alphabet earnings:

Google’s cost-per-click — a metric that helps define how valuable its ads are — grew 1% quarter-over-quarter this year. While still down 18% year-over-year, that tiny nudge forward is likely going to be a big positive signal for Google as it looks to show that its advertising business won’t be challenged by other platforms and it is still going to remain a critical ad buy even as user behavior shifts to mobile.

Google has done well in the global shift to mobile, but the impact on its cost per click, or CPC, was chronic. Each quarter, Google would sell more ads, and see the revenue per ad it could earn fall, on average. And on the company grew. But this time, Google sold more ads, and they were worth more on an average, per-ad basis.

A change in the winds, perhaps, and one that could tell investors that the era when each quarter Google had to make up more ground selling ads than it lost in seeing their average value fall could be over. And if it is, the firm could be in good shape to keep growing at a healthy clip.

And since Alphabet remains more than majority-Google from a revenue perspective, what is good for the Google is good for the gander named Alphabet.

And the big get bigger. And more profitable on a per-click basis.

—

That is a bit of what went down yesterday. We skipped so very much. Things like Surface at Microsoft, AWS and Whole Foods at Amazon, and Other Bets at Google. But sometimes you have to excise to march, and we’ve come full circle.

What will be fun to watch will be if Facebook and Apple can mange strong results as well. If all of the Big 5 pull that off then the tech cycle must have at least another turn left in it.