Kalanick is out, but Uber’s VCs royally screwed up, too, say industry watchers

Travis Kalanick, who last night resigned from his post as CEO of ride-share giant Uber, has taken the blame for the company’s very long list of problems, from allowing a culture of sexual harassment to thrive, to skirting the law with its Greyball program, to mishandling the medical files of a customer raped by one of the company’s drivers (for starters).

But many view the VCs who pushed Kalanick from his role are nearly as culpable for what’s gone wrong. Indeed, while Benchmark, First Round Capital, Lowercase Capital, Menlo Ventures and Fidelity Investments all reportedly pressed Kalanick to quit last night, it was also their fault the company drove into trouble, say industry types who’ve watched the saga from the sidelines.

“The investors were really caught with their pants down here,” says Jeff Cohn, a succession planning expert at the New York-based leadership development firm Elevate Partners, who’d immediately predicted that the leave of absence taken last week by Kalanick wouldn’t work.

“The fact that Uber is right now being led by 14 internal people is absolutely insane,” says Cohn of the company’s current status as without a CEO, CFO, COO, or general counsel, among other executive openings. “It’s not uncommon for leaders to suddenly depart for whatever reason; that [the company and its board] weren’t developing any viable candidates in recent years in case Kalanick were hit by a bus . . . for a company with 14,000 employees and a $70 billion market cap, that’s nuts.”

There have been changes since Kalanick announced to employees late yesterday that he was relinquishing his role. The New York Times is reporting tonight that longtime director Bill Gurley of the venture firm Benchmark is leaving the board; Gurley’s colleague, Matt Cohler, will replace him. David Trujillo, a partner at the private equity firm TPG Capital, is also joining the board, as Bloomberg reported earlier today; Trujillo is replacing colleague David Bonderman, who resigned as an Uber director last week after making a sexist remark at a company presentation.

That’s perhaps as it should be.

“While the Holder Report was a blunt indictment of how the company mismanaged its employees and culture, it fell short in failing to identify sources of these issues,” says Shriram Bhashyam, the cofounder and general counsel at EquityZen, a marketplace of pre-IPO shares. “Travis Kalanick created and reinforced a poor culture [but] the board failed to supervise him in any meaningful way,” he notes.

One glaring obstacle, carps one Sand Hill Road VC, was fear. Uber’s investors “were so worried about jeopardizing what looked like it was going to be the second biggest payday in the history of venture capital, they weren’t willing to call bullshit on anything,” says this person. “It’s been perfectly clear for a long time that things were a mess over there, and someone should have reigned in Travis. But [Uber] was working, so they buried their heads in the sand.”

Adds this VC, “I still don’t think they would have done anything if it didn’t look like [continued bad press] was going to jeopardize the prospects of the company.” Uber’s backers had “billions of dollars riding on the outcome, and that translated into hundreds of millions of dollars for each individual. They weren’t going to put that at risk just because Uber’s culture was disgusting.”

No doubt, there are plenty who would agree with such sentiments. (Bhashyam also observes that “only when there was unwanted media and public scrutiny were any real measures taken.”)

Still, a related, and far more problematic, issue was the control that Kalanick has wielded from the outset. Even if Uber’s investors had wanted to course-correct the company at some point, there was little as fiduciaries that they could do. As the Times recently reported, Uber’s equity was structured from the start to favor its founders, including Kalanick and serial entrepreneur Garrett Camp, both of whom hold super voting shares that give them 10 votes per share.

More, Kalanick has been absorbing the voting rights associated with every share of stock that Uber employees have sold, says the Times. (Uber long ago instituted severe restrictions on these shares, though it slightly eased these rules earlier this year).

Presumably, Uber’s investors didn’t love this particular buy-back agreement or the broader way that Uber architected its stock structure. Gurley — who led Uber’s Series A round on behalf of Benchmark and sits on the company’s board — has been in venture long enough to know that historically, the greater the wedge between voting rights and ownership, the more detrimental to a startup’s value.

But in a broader “founder friendly” shift, one that has seen boards look the other way all too often at founder indiscretions or mismanagement, Uber’s VCs nevertheless sanctioned such maneuverings.

Very possibly, they thought it in their longer-term interests to do so. “When a company is growing quickly, investors forgive their sins for fear of missing out on that follow on round, or missing out on the next big deal,” notes Bhashyam. Generally speaking, too, “People who aren’t VCs grossly overestimate how much power VCs have over the day-to-day responsibility of a company,” notes another source who also asked not to be identified.

In fairness, no venture-backed company has grown as quickly as Uber; it was impossible to anticipate the kind of challenges the company would face, particularly as it battled to establish an entirely new market.

Either way, allowing a founder so much voting power looks like a kind of mismanagement in hindsight.

If Uber ultimately succeeds, you can bet VCs will keep allowing it, too.

Says one grudging fan of Kalanick who didn’t invest in Uber but still wishes he had: “I think most founders, if they built Uber and got fired as its CEO, it would be the greatest professional achievement of their career by several orders of magnitude.”

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