Article by Les Trachtman, Author of Don’t F**K it Up
It feels like only yesterday when the investment world looked up to Uber as the consummate Unicorn. Venture and private capital investors elbowed each other trying to chosen for the opportunity to hand the company their billion dollars to fuel the company’s triple digit growth. Although Uber’s revenue continues to flourish, there seem to be some mighty large (and growing) cracks emerging in its foundation. Maybe Uber’s original architects didn’t give the concrete sufficient time to cure?
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Benchmark Capital’s unprecedented and relentless shareholder attack on Travis Kalanick, Uber’s founder, has left the once mythical one-horned creature headless and floundering. Despite the pleadings of fellow shareholders for Benchmark to back off, the battle between this A-round lead investor and the company’s founder and now former CEO seems destined to continue until one or the other vanquished.
We’ve already seen this movie and we know its ending. Uber will emerge from this debacle much less powerful. Competitors like Lyft, having opportunistically raised a half a billion dollars at a significantly increased valuation, will become more formidable. After having the majority of its claims denied in its ill-conceived lawsuit, Benchmark will ultimately realize that its purpose in life is not to be right but in fact is to make money for its limited partners and will back off and agree to have its shares bought out for far less money than the most recent round’s valuation. Kalanick will remain on the Board and from that perch will take pot shots at whomever the Board ultimately appoints as CEO, retarding real progress and change. The Board will appoint a high profile replacement to whom they will offer riches to guide them to an IPO. But the divided Board and deep lack of profitability will drive the new CEO down a crooked path. Almost no matter who this replacement is (rumor is that the pick is Dara Khosrowshahi of Expedia), the company will limp along, he will fail, Kalanick will try to reclaim the CEO role and the company will be acquired and fade from our popular vocabulary. It’s a sad result that didn’t have to happen. However, there are some very important lessons that investors, Board members, and executives can already glean as the remainder of these events unfold.
Lesson # 1: Every founder needs to make a binary choice of whether their goal is to become rich (they are in it for the money) or they want to be king (rule over their company kingdom). This conundrum was first identified by Noam Wasserman his 2008 Harvard Business Review article, The Founder’s Dilemma. Wasserman’s research illustrated that trying to do both usually results in achieving neither. Investors should be wary of a founder unwilling to make this choice; it portends conflict with most investors’ goal of maximizing the return on their investment. It’s apparent that a dual class of common stock (found at Uber and popular in other high profile investments) is a pretty good indicator that a founder has already decided that being King is important. Essentially, these super-voting shares allow founders, and sometimes early investors, to maintain control over decisions the company makes, even if their ownership in the company is significantly reduced. Buyer (investor) beware.
Lesson # 2: A fish rots from its head. When a company’s leader is not concerned with ethics, exhibits bad behavior and the board is too busy counting their money, the company will begin to spoil. That foul odor in the room is something decaying. When events don’t pass the smell test you can’t simply ignore them expecting them to go away.
Lesson # 3: The loudest one in the room is the weakest one in the room. That actually is a quote from Frank Lucas (played by Denzel Washington) in the 2007 movie American Gangster. Every board has a loud mouth. Often volume is a substitute for substance. Board members should be wary of being bowled over by aggressive tactics and should be sure to consider varied sometimes controversial opinions of its members. Good Board decisions come from consideration of varied views not just aggressively argued positions.
Lesson # 4: It's never too early to create a succession plan. You never know when something will swoop down and steal away your CEO. Whether the fateful terrorist attacks of 2001 that killed Danny Lewin of Akamai, a passenger on American Airlines Flight 11, thought to be the first person killed in that attack, or the bad behavior that caused the removal of Travis Kalanick as well as a host of other founder-CEOs, organizations that aren’t prepared will end up keeping their flawed CEOs too long or with voids in their executive suite wasting precious time as they flounder along headless.
Lesson # 5: When a founder is unceremoniously removed from the CEO role, it is foolish to leave them on the Board. It is a unique founder indeed who then sits on the board of a company they used to run and wishes for his successor’s success. Don’t hold your breath expecting to hear, “Yes, please change everything that I put in place and I will applaud your efforts.” Bluntly put, the Board is the CEO’s boss. Expecting a former CEO to objectively evaluate his successor’s performance is ridiculous.
Uber’s Board either knew or should have known about all of these before they took on the billions of dollars of investment that fueled an almost $70 billion dollar valuation. It’s hard to feel sorry for them or Benchmark Capital in its all-too-public battle with Travis Kalanick. No matter the outcome of their lawsuit, each has the opportunity to walk away wealthy. The Uber Board still has the opportunity to right this ship before it hits the rocks and sinks. And whether it does or not, future Unicorn investors would be well warned to learn from these mistakes.
Article by Les Trachtman, Author of Don’t F**K it Up
LES TRACHTMAN is currently the CEO of The Trachtman Group – focused on helping companies grow and scale, as well as managing director (and majority investor) of Purview, an early stage company focused on disrupting the medical imaging business. For the past two decades, Trachtman has worked directly with founders in half a dozen growing organizations while acting as a Sherpa for dozens of others. He has lectured at numerous universities across the country including the Harvard Business School, the MIT Sloan School of Business, University of Southern California, Rensselaer Polytechnic Institute, Kent State University, University of Maryland Smith School of Business, Union College, and Quinnipiac University School of Business. Trachtman also has published articles in the Harvard Business Review and Quinnipiac University Business. A portion of his career is chronicled in the Harvard Business School case study; Les is More Times Four, which educates entrepreneurs at leading business schools.