In­vestors may play role in Uber woes

Bound­less cash may al­low tech founders like Travis Kalan­ick to grow too pow­er­ful.

Los Angeles Times - - FRONT PAGE - By Paresh Dave and James Ru­fus Koren

Bound­less cash could be al­low­ing tech founders like Travis Kalan­ick to grow too pow­er­ful.

Sil­i­con Val­ley knew well the ag­gres­sive cor­po­rate cul­ture key to Uber’s global dom­i­nance — and all about that cul­ture’s down­sides.

Tech work­ers had seen it in law­suits filed against the ride-hail­ing ser­vice, can­di­dates turn­ing down jobs at the San Fran­cisco com­pany and those flee­ing the firm amid a drum­beat of scan­dals and crit­i­cal news ar­ti­cles. So the 47 struc­tural and pol­icy rec­om­men­da­tions handed down by at­tor­neys to the ride-hail­ing com­pany Tues­day weren’t rev­e­la­tory.

But for ven­ture cap­i­tal­ists, the stark as­sess­ment un­der­scores a grow­ing con­cern: As com­pany founders have amassed his­toric amounts of fund­ing in the last five years, they have also at­tained greater con­trol and au­ton­omy. That has al­lowed en­trepreneurs in­clud­ing Uber co-founder and Chief Ex­ec­u­tive Travis Kalan­ick to pur­sue ag­gres­sive tac­tics and foster cul­tures that trou­ble work­ers and in­vestors — with limited checks on their power — for longer than ever be­fore in the tech in­dus­try, ob­servers say.

“Are we as in­vestors giv­ing up too much of the store to en­trepreneurs?” said Jonathan Tower, who re­cently founded in­vest­ment firm Cat­a­pult VC af­ter work­ing at TriplePoint Cap­i­tal. “Maybe dur­ing this boom pe­riod, we’ve be­come too founder-friendly.”

Had Uber been cre­ated in a dif­fer­ent era of the tech in­dus­try, the 8-year-old firm prob­a­bly would have been pub­licly traded by now — or at least near­ing the day of an ini­tial pub­lic of­fer­ing. And many of the changes that for­mer U.S. Atty. Gen. Eric H. Holder Jr. and Tammy Al­bar­rán put for­ward would have long been in place. Those would in­clude sub­stan­tial per­for­mance re­views for se­nior ex­ec­u­tives, an over­sight com­mit­tee on

the board of direc­tors, a welloiled hu­man re­sources de­part­ment and clear guide­lines on ro­man­tic re­la­tion­ships be­tween em­ploy­ees.

Such bu­reau­cracy, which of­ten comes as large star­tups prepare for an IPO, has long been seen as a curb on growth by en­trepreneurs who pri­or­i­tize fast de­ci­sion­mak­ing and rapid ex­pan­sion.

“You don’t want to snuff out that germ of in­no­va­tion at an early stage,” Tower said.

De­spite Uber reach­ing more than 12,000 em­ploy­ees, Kalan­ick — who an­nounced Tues­day that he would take an in­def­i­nite leave of ab­sence — has been able to de­lay the in­tro­duc­tion of ac­count­abil­ity mea­sures typ­i­cal for com­pa­nies of its size. Bound­less cash from in­vest­ment firms around the world has given com­pa­nies lee­way to stay pri­vate. Ven­ture cap­i­tal fundrais­ing alone has topped $55 bil­lion in three straight years, ac­cord­ing to re­search firm Pre­qin.

With no short­age of in­vestors knock­ing at the door, the power of any sin­gle one has also taken a hit, ac­cord­ing to ven­ture cap­i­tal­ists. That lim­its the amount of over­sight they can ex­er­cise.

“They are chas­ing the same deals, push­ing up the valu­a­tions and soft­en­ing deal terms,” Tower said.

Uber, like many tech com­pa­nies, has dif­fer­ent classes of shares that give some own­ers — founders and early em­ploy­ees — more vot­ing power. Some Uber shares al­low the owner to cast a sin­gle vote, while other shares come with 10 votes.

Uber is a pri­vate com­pany, and it is not clear how many of those su­per-vot­ing shares Kalan­ick owns, or the ex­tent to which he and other in­sid­ers con­trol the firm’s su­per-vot­ing shares. A com­pany spokesman did not re­spond to ques­tions about share struc­ture and Kalan­ick’s vot­ing power.

But an­a­lysts say Uber is like other big tech com­pa­nies — in­clud­ing Al­pha­bet, Face­book and Los An­ge­les chat app maker Snap Inc. — in that Kalan­ick con­trols a ma­jor­ity of Uber votes ei­ther by him­self or with fel­low board mem­bers (co-founder Gar­rett Camp and early em­ployee Ryan Graves).

Natasha Lamb, a man­ag­ing part­ner at in­vest­ment firm Ar­juna Cap­i­tal, said this type of share struc­ture makes it eas­ier for prob­lems to fes­ter.

“Uber’s record on sex­ual ha­rass­ment, di­ver­sity and com­pany cul­ture has been a big hit to their brand,” Lamb said. “You run into th­ese is­sues be­cause of cul­ture, and the vot­ing struc­ture en­trenches that cul­ture.”

Dovi Frances, who runs the SGVC start-up in­vest­ment firm out of Bev­erly Hills and sits on six cor­po­rate boards, said he rec­og­nizes that en­trepreneurs can get car­ried away. He tries to pro­tect against that by pass­ing on in­vest­ment op­por­tu­ni­ties where he has doubts about lead­er­ship.

“I don’t want to im­pose re­stric­tions on them driven by the fear of them do­ing the wrong thing,” said Frances, whose in­vest­ments in­clude SoFi, OpenGov and Won­der­mall. “I’m in­vest­ing in them be­cause I know they are go­ing to do the right thing.”

Frances said he spends enough time with man­agers of the com­pa­nies in which he in­vests that he can spot when some­body is los­ing their moral bal­ance. He also de­mands trans­parency about is­sues only vis­i­ble deeper in­side the com­pany, such as a ju­nior man­ager en­gag­ing in tawdry be­hav­ior.

“I ex­pect se­nior man­age­ment to bring it up, es­pe­cially when it comes to sen­si­tive is­sues like gen­der in­equal­ity,” he said. “Th­ese are su­per­charged is­sues to­day, and I def­i­nitely want to be aware.”

Why it took for­mer em­ployee Su­san Fowler’s blog post com­plain­ing of a sex­ist work­place to ig­nite an in­ves­ti­ga­tion into Uber’s cul­ture rather than an ear­lier board ac­tion isn’t clear.

But Kalan­ick was al­lowed to start op­er­at­ing in a vac­uum the sec­ond his com­pany raised $258 mil­lion in 2013 from GV, the in­vest­ment arm of Google par­ent com­pany Al­pha­bet, said Amit Shah, a part­ner at Ar­ti­man Ven­tures. That and sub­se­quent in­vest­ments prob­a­bly di­luted the in­flu­ence of early board mem­ber Bill Gur­ley, a gen­eral part­ner at ven­ture cap­i­tal firm Bench­mark. GV de­clined to com­ment and Bench­mark didn’t re­spond to a re­quest to com­ment.

“In the high times, when you’re a hot com­pany, you can get away with any­thing,” Shah said. “It’s a del­i­cate bal­ance — what makes Sil­i­con Val­ley tick is the lack of too much struc­ture, and the way cur­rent pub­lic-com­pany boards have to op­er­ate is a nightmare for busi­ness.”

The lack of di­ver­sity on Uber’s board, which re­cently picked up a fe­male mem­ber in me­dia im­pre­sario Ar­i­anna Huff­in­g­ton, may have con­trib­uted to lax over­sight too.

“It’s some­thing Sil­i­con Val­ley has been grap­pling for years,” Tower said of di­ver­sity. “It’s mov­ing in the right di­rec­tion.”

Julie Goodridge, chief ex­ec­u­tive of Bos­ton-based North­Star As­set Man­age­ment, has asked com­pa­nies in­clud­ing Face­book and Al­pha­bet to change their share struc­tures so that ev­ery share has the same vot­ing rights. Though many out­side share­hold­ers sup­ported that pro­posal at the com­pa­nies’ re­cent an­nual meet­ings, the pro­pos­als pre­dictably failed to win a ma­jor­ity of share­holder votes.

That, Goodridge said, could be prob­lem­atic for the com­pa­nies in the long term. If Al­pha­bet, Face­book or Uber limit the in­flu­ence of many in­vestors and share­hold­ers, they risk miss­ing out on valu­able in­sight that could help them avoid rep­u­ta­tional prob­lems.

Lamb of Ar­juna Cap­i­tal noted that Google is now un­der in­ves­ti­ga­tion by the fed­eral De­part­ment of La­bor for al­legedly un­der­pay­ing women. Share­hold­ers have raised the is­sue of a gen­der pay gap at the com­pany for two years, she said.

“If the com­pany had been more proac­tive, maybe they wouldn’t be in this predica­ment,” Lamb said. “De­spite the fact that share­hold­ers have ex­pressed con­cerns about gen­der pay eq­uity and other good gov­er­nance is­sues, with the struc­ture of th­ese com­pa­nies, we’re not able to ef­fect change through a vote.”

Ad­vis­ers to tech­nol­ogy com­pa­nies point to Uber as an ex­treme ex­am­ple and say that it shouldn’t be the ba­sis for sweep­ing changes in how the in­dus­try treats founders.

“The over­whelm­ing ma­jor­ity of the time, the founders are the ones best equipped to make big de­ci­sions for a com­pany,” said Jonathan Greechan, co-founder of busi­ness in­cu­ba­tor Founder In­sti­tute. “If any­thing, [the Uber case] just high­lights that the best founders hire to fill the gaps in their short­com­ings, and it doesn’t seem like Uber did a great job of this — or sim­ply didn’t em­power those peo­ple to prop­erly do their job.”

In­vestors Lamb and Goodridge said de­spite their mis­giv­ings, Uber may con­tinue on the same path as Al­pha­bet, Face­book and oth­ers with con­trol con­sol­i­dated among Kalan­ick and a few oth­ers. De­spite that, there should be con­tin­ued de­mand for Uber shares.

“Peo­ple would to­tally buy Uber shares” if the com­pany went pub­lic, Goodridge said. “A lot of peo­ple, all they care about is short-term per­for­mance.”

Kevork Djansezian Getty Images

TRAVIS KALAN­ICK, chief ex­ec­u­tive and co-founder of Uber, ar­rives for the Allen & Co. Sun Val­ley Con­fer­ence in Idaho in 2012. Kalan­ick an­nounced Tues­day that he would take an in­def­i­nite leave of ab­sence.

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