COMMENTARY
The View
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Uber left highly vulnerable, as Kalanick joins top executive exodus

HKEX would do well to learn from what’s happened at the car-hailing giant, as it pulls together plans for Hong Kong’s New Board, which hopes to attract the tech start-up giants of the future

PUBLISHED : Thursday, 22 June, 2017, 2:42pm
UPDATED : Thursday, 22 June, 2017, 2:42pm

With Travis Kalanick’s departure from Uber, the ride-hailing app company he co-founded and nurtured into a US$62.5 billion behemoth, he joins a league of distinguished gentlemen, among whom are other over-the-top Silicon Valley renegades to leave under investor pressure, including Apple’s Steve Jobs and Twitter’s Jack Dorsey.

However, Kalanick’s controversial exit leaves no succession plan and no immediate replacement as chief executive.

Investors shouldn’t have waited until the CEO’s intolerable behaviour tore the company asunder.

Most of Uber’s most senior leaders have left in recent months, leaving it without a chief financial officer, chief operating officer, general counsel or head of engineering. That may be the closest Uber gets to realising its dream of autonomous driving.

It is unprecedented for a company of this size, valuation and stage of development to suffer from such a depleted management roster.

In a start-up, the values of the founder are reflected throughout the company’s culture. Silicon Valley’s absolute respect for the cult of the “founder-led” start-up is responsible for Uber’s absurd situation.

It took several months of business drift and 215 complaints from Uber’s staff, including serious allegations of sexual harassment, for investors to demand new leadership at the ride-hailing company.

Venture capital investors rarely engage in shareholder activism and champion equal opportunity hiring policies.

Developing and bringing to market new technology demands an unusual level of drive that corporate executives have never experienced. It takes a major problem before founders are fired. VCs prefer to stay in the background while the founders front the public profile.

But when publicity turns particularly odious, as in Uber’s case, tolerance and moral probity can be rapidly overcome by financial self-interest.

And there is plenty of potential loss and embarrassment for Uber investors with a record setting US$62.5 billion to US$70 billion of valuation at stake.

San Francisco based Lyft appears to be chipping away at Uber’s US market share, which has dropped from 84 per cent at the beginning of 2017 to 77 per cent at the end of May, according to data from research firm Second Measure.

Uber’s global sales are still growing, with first quarter revenues surging to US$3.4 billion, triple the levels of the previous year. However, its growth rate in the US is slowing. And investors are now worried, after a period of self-destructive crisis has left its top ranks in disarray.

Uber’s investors must be seeking an IPO as soon as possible to rid themselves of this expensive mess. But that is unlikely to happen soon, and until the company finds new managers and at least demonstrates how it might approach profitability.

Luckily, Uber wasn’t listed with a dual-class share structure. Otherwise, shareholders would have little recourse to force entrenched managers and a board of directors to reform its corporate culture. As a private company, Uber’s investor group has more direct control over management.

Hong Kong Exchanges & Clearing needs to consider these kinds of potentially bad governance outcomes when placating tech companies to raise capital on the city’s proposed New Board.

It might be easier for shareholders to sell Uber to a buyer that can absorb it into a stable management structure. It would make an ideal US acquisition for one of the big mainland Chinese internet companies, or perhaps its China partner Didi Chuxing.

It might be easier for shareholders to sell Uber to a buyer that can absorb it into a stable management structure. It would make an ideal US acquisition for one of the big mainland Chinese internet companies, or perhaps its China partner Didi Chuxing

Uber’s immediate future does not look hopeful. Kalanick set the business tone. Nobody can immediately replace him. Despite the allegations against him, he is also someone who built the business from nothing into a major force. You cannot readily match and replace the drive of a key shareholder and founder with a salaried employee.

Unfortunately, ugly traits like arrogance, ruthlessness and an insatiable desire for power are easily mistaken by investors for clarity of vision, determination and intelligence.

This is especially a risk when there is a large and diverse group of private shareholders ranging from VCs, high net worth individuals and sovereign funds, all of whom are looking forward to a glorious IPO rather than dealing with underlying problems.

Even then, aggressive VCs might fully back an early stage CEO who will push legal and ethical limits to gain share and introduce new technology.

Shawn Fanning and Napster is an example of taking file sharing to the limit and risking lawsuits from record companies. It works out perfectly as they benefit from someone’s risky pioneering even if the business is eventually shut down.

The traditional VC game plan usually involves a handover from entrepreneur to professional CEO with experience from a major company. The Google founders hired Eric Schmidt (a former CEO of Novell) as chairman and CEO to manage their rapid growth in their early years. However, this exercise has been badly mishandled with Uber.

The absence of a clear succession plan and Uber’s weak management roster suggests that investors made a panic move when they should have taken action years ago.

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