Not surprisingly, the financial press has been all agog about the drama of Travis Kalanick’s forced departure from Uber’s CEO position yesterday, fixated on salacious insider details.
That means journalists largely have ignored what ought to be the real story, which is whether Uber has any future. I anticipate that Hubert Horan will offer a longer-form treatment of this topic. Hubert had already documented, in considerable detail in his ten-part series, how Uber has no conceivable path to profitability. Its business model has been based on a massive internal contradiction: using a ginormous war chest to try to achieve a near-monopoly position in a low-margin, mature business that is fragmented geographically and locally.
Monopolies and oligopolies are sustainable only when certain factors are operative: the ability to attain a superior cost position through scale economies, which include network effects, or barriers to entry, such as regulations, very high skill levels, or high minimum investment requirements. Neither of these apply in the local car ride business. Even if Uber were able to drive literally every competing cab operator in the world out of business due to its ability to continue its predatory pricing, once Uber raised prices to a level where it achieved profits, new entrants (or revived old entrants) would come in. Uber will thus never be able to charge the premium prices (in excess of the level for a traditional taxi operator to be profitable) for the very long period necessary for Uber to merely be able to recoup the billions of dollars it had burned, mainly in subsidizing the cost of rides, let alone to achieve an adequate return on capital. And that’s before you get to the fact that systematically much higher prices would mean fewer fares and thus lower revenues and profit potential at the new pricing level.
Uber’s managerial upheaval of the last few months mean its decay path is sure to accelerate. I’ve been following the business press for over 30 years. I can’t think of a single case where even an established, profitable business with an solid franchise has had so many top level positions vacant, and for such bad reasons. As reader vidimi quipped, “With no CEO, CFO, COO, and CIO, uber is coming very close to becoming a self-driving company.” And that’s not even a full list.
For instance, world-class flack Rachel Whetstone, recognized as a key force in rebuilding the Tories’ brand in the UK, quit in April. The heads of engineering departed for failing to disclose a previous sexual investigation; the head of product and growth was forced out over a sexual impropriety at a company function. And in a scandal that will have a much longer tail, Uber’s former head of its driverless car unit, Anthony Levandowski, has had his case involving alleged theft of intellectual property from Google referred to the Department of Justice. Kalanick was deeply involved in Levandowski’s sudden exodus from Google. It seems implausible that Kalanick didn’t know Levandowski was making off with boatloads of files. If the case does lead to a criminal prosecution, it is hard to see how Kalanick could escape scrutiny as a potential criminal co-conspirator.
The closest analogies I can think of to Uber’s level of senior departures in the last six months don’t come close in terms of number and seriousness. Investment banking powerhouse Salomon Brothers, hailed as the King of Wall Street in the mid 1980s, had its chairman/CEO, vice chairman, president, and head of Treasury bond trading forced out by the Fed in 1991 over a Treasury bond auction market rigging operation. Warren Buffett, who already had a stake in the firm, came in as chairman and CEO for nine months. Salomon as a top Wall Street firm had strong and if anything overly independent profit center managers. Yet Salomon never fully recovered and was sold six years later.
More recently, Barclays had its chairman, CEO, and president forced out by unwisely choosing to challenge the Bank of England over the Libor trading scandal. Barclays weathered that crisis better that Salomon had because among other things it was considered to have, and apparently did have, a very deep bench at the top level.
What has happened at Uber is orders of magnitude worse from a managerial perspective. This is an immature company in every sense of the word, despite its huge valuation. Some of the top executive departures, such as of its recently hired COO, brought it to help the company grow up, its CFO and its head of communications, were voluntary. That’s not what you see in Silicon Valley stars on a winning path. Confirming that picture are rumors of insiders being cashed out at valuations well below that of recent fundraisings.
And particularly worrisome is the resignation of Uber’s chief financial officer, Gautam Gupta, at the end of May, when Uber announced $708 million in quarterly losses. Gupta curiously appears to be leaving voluntarily (he’s serving till July; someone turfed out would have been shown the door immediately), yet appears to be going from a high profile and presumably well-remunerated post to join a no-name “startup in San Francisco”. A CFO departure is often a red flag, particularly when it is abrupt and mysterious. It also appears that these events roughly coincide with the decision of the investor that orchestrated Kalanick’s ouster, Benchmark, to move against him. From the Wall Street Journal:
But a few weeks ago, partners at Benchmark began hatching a plan to pressure Mr. Kalanick to resign, according to the people familiar with the matter. Benchmark’s partners, who include Uber’s longtime board member Bill Gurley, were concerned that the firm’s reputation would be sullied by all of Uber’s problems, these people said.
And Vanity Fair confirms what ought to be obvious: that Kalanick’s defenestration was not about sexual harassment or its dangerously immature culture. Amazon is a famously toxic place to work, but Bezos gets away with it because the company is lauded as the epitome of a successful technology company. Kalanick was seen increasingly as an obstacle to getting an IPO done promptly:
Virtually everything moves fast in Silicon Valley, but there are a few rare exceptions. The path to taking a company public, for instance, remains insanely protracted and slow. …According to several people close to both Kalanick and Uber investors, Kalanick’s demise was mostly motivated by the board’s goal of bringing Uber public at the highest possible valuation….
For now, they’re focusing on hiring a C.E.O. who can help settle the rocking ship and then take Uber public so that they can add another comma to their personal net worths….As Axios’s Dan Primack wrote, “Someone close to Uber recently said to me: ‘It’s wrong to say that Uber doesn’t care about women. It doesn’t really care about people, and women are people. It’s incidental.’ ”
The wee problem is it will prove impossible to effect anything resembling a turnaround at Uber. As Hubert Horan pointed out, the very culture that made Uber a success is now its biggest liability. And as a result, investors don’t appear to have a plan for how to straighten out Uber. From the Financial Times:
Among Uber’s dozens of outside investors, opinion is divided over whether the sudden exit of Mr Kalanick will really help right the company after months of turmoil…
“It will be difficult for the company to function after losing its entire C-suite,” points out one investor.
And before we get to the lack of a shared view among the outside investors as to where to go now, there is the additional problem that Kalanick still controls about 60% of the votes. What executive in his right mind would become the CEO of a company where there are certain to be ongoing power struggles within the board? Either one who is sorely deluded or out to take Uber for a ride for by taking a very sweet deal for what is likely to be at most a one-year gig.
This was also a troubling section in the Financial Times story. Notice from the link above that depicted Gautam Gupta, the financial executive whose resignation Uber announced in late May, as the chief financial officer. He was apparently a placeholder that investors didn’t see as having the necessary expertise:
One area of particular concern is Uber’s finance department, and the investors who demanded Mr Kalanick’s resignation also asked in their letter that the company immediately hire a chief financial officer.
Uber has been without a CFO for more than two years, during which time that department has been led by Gautam Gupta, Uber’s head of finance, who is leaving next month.
Uber may simply have been fabulously paranoid about revealing any more than it needed to, but some of the tidbits out of Uber raise further worries. For instance, Kalanick had maintained he wanted Uber to stay private as long as possible. That may be a fad with some unicorns, but it’s not the way for a shareholder to maximize his net worth, so it’s a preference that raises questions about the founders’ ulterior motives. Needless to say, that desire put him at odds with his investors.
Similarly, in its last round of financing, to rich
suckers individuals, Uber managed to produce 290 pages of blather that not only failed to include net profits but even revenues! Deutsche Bank and JP Morgan refused to market the private offering to their customers. Uber was also considering “non IPO” via buying a shell company. The last time I saw that trick used was with penny stock scammers in Florida.
From Hubert Horan via e-mail:
I remain amazed (but not surprised) that not a single one of the dozens and dozens of articles, either after the Kalanick “leave” or the Kalanick sacking, mentioned the company’s multi-billion dollar profit problem. I obviously understand that many of the stories wanted to take a very narrow factual approach (“Uber announced yesterday…”) approach, but none considered financial results to be relevant facts, and most of them actively gave the impression that Uber’s problems were strictly “cultural”/governance, and gave the strong impression that no one thought there were any problems related to competitiveness or finances.
Even with an open rebellion of investors, no one as much as hinted that concerns about earning returns on the $13 billion they’d invested might be part of their motivation. Even Sarah Lacy, who ought to know better, insists Uber is still worth billions above and beyond the value of their Didi stock, and seems to think Uber becomes the next Yahoo that slowly fades into oblivion over many years because its core operations remain basically ok (but can’t justify the historic valuation). Since it has been 7 years the investors need to get roughly $25 billion when the company is finally sold/merged/whatever just to save face (it will still be seen as a major failure). Not gonna happen, especially after the Waymo case and another year of huge losses.
Uber has absolutely no path to sustainable profits. No two people in what is left of Uber management/Board could agree on a financial turnaround strategy would require, and some appear to have achieved clinical levels of delusion. If King Solomon showed up on Market Street tomorrow, he couldn’t come close to saving the company, and would run as fast as he could once he saw the mess. None of the names being floated make any sense because their alleged skill sets aren’t useful given the company’s actual problems. You can imagine my reaction when I saw suggestions for bringing someone from the airline industry. I’m sure they can find some new hires, like the new Board member (from Nestle) or the woman from HBS, because all they know about the company and the industry are the glowing stories they’ve read in the paper. I watched those kind of people join the airline industry for decades. Failure rate was 100%.
Someone needs to do a “this isn’t like any previous big company turnaround ever in history” story. As Yves mentioned, past cases of mature companies with a stable core business and lots of positive inertia are totally irrelevant. Previous examples where you can quickly cut operations back 25% and raise prices in order to get the cash flow needed for a more serious restructuring don’t apply. There were no past cases where the failed previous regime still had total voting control of the board.
— David G.W. Birch (@dgwbirch) June 22, 2017