Unicorns that get too fat to thrive
As Uber co-founder and former CEO Travis Kalanick surely realizes by now, there is no such thing as a truly private company.
The ride-hailing service in San Francisco does not yet trade on Wall Street, so no one outside a relatively small group of people knows Uber’s true sales and profit, beyond the numbers the company has voluntarily disclosed. No one knows how much cash the company spends to attract drivers and expand into new markets. We don’t even know how much the company pays its top executives, including Kalanick.
But we certainly know that employees, including senior executives and star engineers, have resigned or been fired because of a dysfunctional culture that tolerated sexual harassment. We know that Uber hired a former U.S. attorney general to investigate the company because of said culture. And we know that the board ultimately forced Kalanick to resign as CEO.
Uber may have been able to shield its finances from the public, but not its dirty laundry. The company’s size and impact just became too big for it to tamp down scandal after scandal after scandal.
“Uber is a brand in everyone’s life,” said Adam Epstein, founder of Third Creek Advisors, a Bay Area corporate governance advisory firm. You can’t operate in 622 cities around the world and not expect scrutiny.
Uber is more than a tale of Silicon Valley excess, a bro culture gone rotten. It is also the ultimate perversion of a system meant to help startups stay out of the public eye while they grow into welldeveloped businesses.
Recent changes in federal securities laws have allowed venture-backed companies to stay private longer, away from the scrutiny of regulators and Wall Street hedge funds. An
influx of capital into private equity seeking growth opportunities also meant they could raise far larger amounts of money and postpone an initial public offering. When these companies started garnering investor-set valuations above $1 billion, they were dubbed “unicorns.”
We were promised worldchanging companies, unicorns running free and delivering Silicon Valley’s magic technology. Instead, we got bloated mythical beasts that seem more cautionary story than fairy tale.
Uber had become the fattest unicorn of them all. The company raised an astounding $15 billion, with investors assigning it a valuation of $69 billion, more than the market value of Sony Corp., Ford Motor Co. and Southwest Airlines.
Yet since Uber has not gone public, people continued to call the company a startup. That’s a bit like when people said Kalanick — who recently turned 40 — had some “growing up” to do.
Why would a startup need to worry about a proper human-resources department, or legal niceties or sober management? That mischaracterization played to Uber’s advantage for a while, as it focused on growth at the expense of proper governance.
Give it a break, the company’s enablers said. It’s still a startup!
“We need to stop calling Uber a startup” since it has 12,000 employees around the world, said Johanne Bouchard, a Bay Area consultant who advises executives and boards of directors. “These companies have to grow up. This obsession with growth has shaded their sense of awareness. Some of (Uber’s problems) could have been prevented.”
Stories about the company’s problems with sexual harassment have circulated for years, but it was not until February that the issue drew widespread attention. Susan Fowler, once a rising engineer at the company, wrote a blog post detailing her experiences. Fowler wrote that her manager openly propositioned her for sex on her first day. The human resources department and top managers, including the company’s chief technology officer, failed to do anything, she said.
From there, Uber’s problems accelerated. President Jeff Jones, whom Kalanick recruited from Target Corp., resigned in March. More senior executives followed, culminating in Kalanick’s resignation this week. Two board members are following him out the door.
Uber’s decision to raise so much money was a factor in Kalanick’s downfall. With billions of dollars in investor cash on the line, the company became too big to fail.
The board needed to take action, said Rohit Kulkarni, managing director of research for SharesPost, a San Francisco company that allows investors to trade shares of private firms.
“Never before have we seen a private company raise $15 billion in capital,” Kulkarni said. “Investors have significant parts of their portfolios embedded in one single asset.”
Had Uber been a publicly traded company, its problems would have no doubt reduced its market value, Kulkarni said.
He even estimates that Kalanick’s resignation would have boosted a publicly traded Uber’s stock price by 5 to 10 percent.
It wasn’t always this way. Historically, venture capitalists have been infamous for ousting founders to make way for professional CEOs. Andreessen Horowitz rose to prominence in part by promising to be friendlier to founders, and as it snatched prime deals away from rival firms, they mirrored its approach in giving founder-CEOs a lot of leeway in running their companies.
Then came Zenefits, the San Francisco company that makes human resources software. Investors forced out CEO Parker Conrad last year after BuzzFeed reported that Zenefits employees sold insurance without proper licenses. Another scandal-ridden firm, Theranos, kept founder Elizabeth Holmes as CEO, but only after granting investors a larger stake in the company.
Kulkarni thinks Kalanick’s ouster will spur investors in other unicorns take action if management is not up to par.
“We believe this may not be the last time we see ‘private shareholder activism’ affect a high-profile unicorn, as investors get impatient and reduce the margin of error afforded to company management teams,” Kulkarni said.
Because when so much money at risk, unicorns like Uber will eventually have to step out of the shadows — whether they want to or not.