Uber’s scan­dals test in­vestor pa­tience

Los Angeles Times - - FRONT PAGE - By Paresh Dave, David Pier­son and Makeda Easter

When you’re the hottest start-up in the world, in­vestors will give you a pass for burn­ing through as much as $1 bil­lion a quar­ter. You’re growing your busi­ness, af­ter all.

But when your com­pany is con­sumed with com­plaints of per­va­sive ha­rass­ment, mis­man­age­ment, ex­ec­u­tive fir­ings and de­par­tures, a fed­eral in­ves­ti­ga­tion for ob­struc­tion of jus­tice and a law­suit from a pow­er­ful ri­val al­leg­ing the theft of technology, such spend­ing may face a bit more scru­tiny.

As Uber attempts to emerge from this litany of scan­dals — with the find­ings of an in­ter­nal in­ves­ti­ga­tion into its cor­po­rate cul­ture set to be re­leased Tues­day — the ride-hail­ing com­pany faces new con­cerns. Will its mis­con­duct harm its rep­u­ta­tion with pas­sen­gers? Could its tar­nished stature hin­der hir­ing? And will in­vestors re­tain their con­fi­dence —and their will­ing­ness to un­der­write Uber’s losses — un­der the cur­rent lead­er­ship?

If not, changes could be

com­ing — and fast.

“An event like this is also an op­por­tu­nity to do a re­set that might never have hap­pened,” said John Boudreau, a pro­fes­sor of busi­ness man­age­ment at USC. “It’s very easy to plug along when in­vestors and cus­tomers are pro­vid­ing money.”

The San Fran­cisco com­pany prob­a­bly wouldn’t over­haul the busi­ness model that en­gi­neered its rise. But new lead­ers soon could have an open­ing to re­shape spe­cific prac­tices as the com­pany seeks to fill nu­mer­ous ex­ec­u­tive po­si­tions and Uber’s vi­sion­ary founder and chief ex­ec­u­tive, Travis Kalanick, re­port­edly con­sid­ers an in­def­i­nite leave of ab­sence af­ter the sud­den death of his mother last month.

Uber in­vestors who have small stakes said Mon­day that though they re­mained ex­cited about the com­pany’s po­ten­tial, they were look­ing for­ward to hearing what shake-up, if any, the board of di­rec­tors might an­nounce Tues­day. The di­rec­tors, who in­clude four in­vestors and three em­ploy­ees ex­clud­ing Kalanick, will have con­sid­er­able sway over what strate­gies the com­pany pur­sues.

Based on the es­ti­mates of pri­vate stock bro­ker EquityZen, Kalanick could own as much as about 10% of Uber shares, al­though he and two sup­port­ive con­fi­dants re­port­edly hold vot­ing con­trol through su­per­vot­ing shares.

Kalanick has faced scru­tiny for fos­ter­ing an en­vi­ron­ment where rule-break­ing was con­doned and not do­ing more to in­ves­ti­gate re­ports of sex­ual ha­rass­ment in the of­fice. He’s com­bat­ive in pub­lic and in pri­vate — a trait that has won him en­e­mies and fans.

“They’ve got a lot of money and lot of good fun­da­men­tals,” Boudreau said. “If they can re­gain their image and the con­fi­dence of rid­ers and in­vestors, the po­ten­tial is there to right it­self. But this is def­i­nitely a new level of chal­lenge for them.”

Kalanick has traded Uber shares for bil­lions of dol­lars in cash dur­ing the last seven years, bring­ing the com­pany to a mar­ket value of near $70 bil­lion. Us­ing the money to pro­vide dis­counts to rid­ers and bonuses to driv­ers has helped the com­pany gain dom­i­nance over taxis and other com­pe­ti­tion.

The in­cen­tives have cut into the fees Uber col­lects as the match­maker be­tween driv­ers and cus­tomers. Ex­pen­sive re­search into de­vel­op­ing self-driv­ing cars has eaten away at in­come too.

The com­pany gen­er­ated $6.5 bil­lion in sales last year from the fees and posted a $2.8-bil­lion loss. It pared its quar­terly loss to $708 mil­lion to start 2017 from $991 mil­lion dur­ing last year’s fourth quar­ter. But the com­pany re­mains far from pro­duc­ing the pre­dictable fi­nan­cial re­sults in­vestors covet.

Though Uber has $7 bil­lion in the bank, it will need to fundraise again by the end of next year at its cur­rent pace. Be­cause of the re­cent scan­dals, rais­ing funds will be dif­fi­cult for the fore­see­able fu­ture, start-up fi­nance ex­perts say.

If it can’t find in­vestors, Uber could tap fur­ther into loans and credit lines. But shed­ding costs could be more pru­dent. Fi­nan­cial an­a­lysts have long ex­pected Uber to slowly raise prices for cus­tomers to demon­strate a clearer road to profits by next year, when it might hold an ini­tial pub­lic of­fer­ing of its stock.

Ac­cel­er­at­ing the time­line and go­ing leaner could be nec­es­sary not only to in­stall more strin­gent hu­man re­sources prac­tices, but also to win back skep­ti­cal in­vestors and driv­ers.

“One pos­si­ble strat­egy to im­prove its image would be to pay driv­ers more and scale back its losses,” said Kevin Wer­bach, as­so­ciate pro­fes­sor of le­gal stud­ies and busi­ness ethics at the Whar­ton School at the Univer­sity of Penn­syl­va­nia. “That would mean higher prices for rid­ers.”

That move may not prove pop­u­lar with pas­sen­gers if ri­vals, such as Lyft, keep sub­si­diz­ing pas­sen­ger fares.

Uber de­clined to com­ment for this story. But the com­pany has said its cor­po­rate is­sues haven’t had a sig­nif­i­cant ef­fect on rid­er­ship, though 200,000 users deleted the app dur­ing a so­cial me­dia protest in Fe­bu­rary. In­deed, Uber’s scan­dals haven’t led to sus­tained upticks in app down­loads of ri­vals such as Ola in In­dia or Lyft in the U.S., ac­cord­ing to anal­y­sis by re­search firm Sen­sor Tower.

But there is ev­i­dence of brand dam­age within the technology com­mu­nity.

Dis­cus­sions in women’s tech groups pointed to sex­ism and ha­rass­ment at the com­pany for years, says Allyson Kapin, founder of Women Who Tech.

“To re­build that cul­ture is go­ing to take a long time — it’s go­ing to take a com­plete lead­er­ship over­haul,” Kapin said.

Kse­nia Coul­ter of Wash­ing­ton, D.C., said she deleted the Uber app from her smart­phone af­ter read­ing a blog post by for­mer Uber em­ployee Su­san Fowler, whose writ­ing about the lack of in­ter­nal fol­low-up to sex­ual ha­rass­ment com­plaints trig­gered in­quiries by the com­pany and an in­de­pen­dent coun­sel, for­mer U.S. Atty. Gen. Eric H. Holder Jr.

“I never had a prob­lem with driv­ers or the ser­vice, and the app it­self is pretty good, but it all piles up,” said Coul­ter, 27, who de­vel­ops web­sites.

For driv­ers, rev­e­la­tions about Uber’s cul­ture haven’t been a sur­prise, said Harry Camp­bell, a driver for both Uber and Lyft who blogs about the in­dus­try.

“A lot of Uber’s poli­cies don’t value driv­ers who have been with the plat­form for years,” he said.

Driv­ers have voiced frus­tra­tions — most vo­cally about their clas­si­fi­ca­tion as in­de­pen­dent con­trac­tors rather than em­ploy­ees — though they have had less luck in find­ing a way to delete the app. Uber’s dom­i­nance makes it dif­fi­cult to leave for a ri­val ser­vice full­time. “I wish I could elim­i­nate Uber from my life,” said Naf­tali Kamych, 43, who has been driv­ing for Uber since 2011. He’s feud­ing with Uber man­age­ment to get ap­proval to use his 2017 Lin­coln Con­ti­nen­tal, a $55,000 car he re­cently pur­chased, in Uber’s more lu­cra­tive Black ser­vice.

“You can­not sur­vive with­out Uber to­day,” he said.

Pub­lic per­cep­tion will mat­ter when Uber tries to list shares on the stock mar­ket.

“If it did an IPO to­day, the val­u­a­tion would prob­a­bly be a lot lower than a year ago, even though the [fi­nan­cial re­sults] haven’t changed dra­mat­i­cally,” Wer­bach said. “Ul­ti­mately, Uber’s big­gest chal­lenge is im­prov­ing its cul­ture and lead­er­ship. If it fails at that, its financing strat­egy won’t mat­ter.”

Money Sharma AFP/Getty Images

UBER CHIEF Travis Kalanick is re­port­edly con­sid­er­ing an in­def­i­nite leave of ab­sence af­ter the sud­den death of his mother last month.

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