September 27, 2019 / 2:34 PM / 21 days ago

Breakingviews - Review: Uber rite-of-passage tale will have sequel

NEW YORK (Reuters Breakingviews) - Uber Technologies is emblematic of many Silicon Valley claims to fame. It’s the result of the disruptive triumph of a piece of software – a smartphone car-hailing app – over established taxi firms the world over. It’s the creation largely of one founder, Travis Kalanick, and his relentless drive. Its rise to a $54 billion public-market valuation, though lower than some hoped, represents the vindication of early-stage investors.

Uber CEO Travis Kalanick speaks to students during an interaction at the Indian Institute of Technology (IIT) campus in Mumbai, India, January 19, 2016.

Yet Uber also showcases the worst of the San Francisco Bay Area tradition. Kalanick’s win-at-all-costs, “tech bro” culture proved toxic. Not only to some of the women who worked at the company, but also to drivers unable to make ends meet, and to passengers who were assaulted and offered little help by Uber.

Mike Isaac’s “Super Pumped: The Battle for Uber” catalogs Kalanick’s rise and ultimate departure. An investor coup in 2017 ultimately laid bare the conflict between a growth mentality and running a big, valuable company.

The New York Times journalist documents Kalanick’s earlier relative failures, including an experience at the hands of former Walt Disney executive Michael Ovitz that left the entrepreneur determined to keep a tight grip on his next startup.

The tale then unspools in detail, and at pace, from Uber’s establishment as UberCab in 2009 until the company’s initial public offering 10 years later under new Chief Executive Dara Khosrowshahi. Isaac does a fine job exploring what makes Kalanick tick and even inspires some sympathy – and not just in recounting the tragic death of his mother and injury to his father in a boating accident just as the boardroom struggles at the car-hailing behemoth came a head.

As Kalanick built Uber he rode roughshod over local laws governing taxis and car hire, dismissing them as impossible to change because of entrenched interests. Uber spied on competitors and used secret software to identify and trick regulators who were trying to catch the company’s drivers breaking the law. For a time, the company tracked all its users using software known as “Heaven” and interfered with the business of U.S. rival Lyft using a tool called “Hell.”

The experience was almost as bad for employees. Kalanick hired aggressive, mostly male acolytes, often in his own image. Governance, safety, data security and human resources were afterthoughts at best. According to Isaac, a legal firm’s report detailing Uber’s many failings read like “a racist, sexist Silicon Valley bachelor party.”

The urge to compete with direct rivals like Lyft at home and Didi Chuxing Technology in China led Uber to hand out millions of dollars in subsidies to drivers and riders to encourage them to switch to, and stick with, Uber.

This required buckets of cash. Even before Japan’s SoftBank started writing massive checks to tech startups, Kalanick had raised plenty from the likes of Google Ventures and Saudi Arabia’s Public Investment Fund. That gave him huge clout, including over earlier investors like Benchmark. The venture-capital group’s Bill Gurley was an early supporter and mentor, but later helped orchestrate Kalanick’s exit.

That part of the story is a study in Silicon Valley’s cult of founders. The entrepreneur is everything: His (or occasionally her) charisma, persuasiveness and work ethic can make the difference between getting funding for a good idea and failing to attract backing for a better one. Isaac shows how Gurley grappled with getting rid of Kalanick even as the venture capitalist lost faith in him. Benchmark, after all, was supposed to be loyal to its founders.

That’s understandable when a founder has overcome obstacles and created a business as boldly as Kalanick did at Uber. But it’s also easy to grasp how an investor’s willingness to turn a blind eye to increasingly obvious problems might diminish once it has billions of dollars of value to protect.

Kalanick half knew it would happen. Isaac reports him suggesting to a group of entrepreneurs that although venture capitalists always start out exalting founders, “It is in the VC’s nature to kill a founding CEO. It just is.”

There are similarities with this week’s exit of Adam Neumann as CEO of WeWork parent The We Company. The heavily money-losing office-sharing giant, brandishing a private valuation of $47 billion, planned to go public this month. But stock-market investors balked not only at the price tag but at governance and the co-founder’s behavior in both the business and personal realms.

Benchmark was also an early investor in WeWork. As the valuation for an initial public offering tumbled toward $20 billion or even less, shareholders faced something like the same dilemma as at Uber. As with Kalanick, they closed ranks convincingly enough to persuade Neumann to step down as chief executive.

The timing of the investor coup at The We Company was awful. At least at Uber, it didn’t torpedo the company’s IPO. Khosrowshahi cleaned up a lot of the mess left by Kalanick, and the company went public in May this year. Though people involved whispered about a market capitalization of up to $120 billion, the final price was considerably lower. Since then, the shares have fallen some 30%.

That’s far from a stellar performance. Yet Uber is nonetheless valued at five times last year’s revenue of $11 billion, not bad for a company that lost $3 billion at the operating level. It suggests even a laundry list of problems can be overcome.

The question remains, though, whether a business whose model is, basically, to charge less than taxis – not a sector renowned globally as a money-spinner – can ever make a profit, at least until autonomous cars dispense with paid drivers. How that plays out could be the sequel.

Breakingviews

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