Uber: “Battle to the Death” in Benchmark/Kalanick Power Struggle

Perhaps someone will blink, but at this juncture, the power struggle over Uber, the most richly valued venture capital investment, has taken an even more stunning turn, which is a very high bar given how much melodrama the ride-sharing company has managed to generate this year. There is now open warfare within the board, which one faction making a less-than-credible offer to buy out the venture capital firm, Benchmark, that toppled founder and former CEO Travis Kalanick.

Recall that on Thursday, Benchmark took the unheard-of step of suing Kalanick for fraud. The claims look pretty dubious, but the real point was assumed to be to check Kalanick’s efforts to sabotage the CEO search underway and get himself reinstated. The tech community was shocked, since a reputable VC suing a high profile founder is seen to be so anti-entrepreneur as to be disastrous for the VC’s reputation. 1

Moreover, a wee complication of the Benchmark suit is that litigation that is guaranteed to intensify infighting at an already-dived board and take time away from the priority of righting a badly listing corporate ship. It is the sort of thing that will make CEO candidates with any common sense run in the other direction. Of course, Benchmark’s assumption may have been that anyone interested in running Uber had to be so self deluded that this cage match would be seen as mere noise.

And indeed, things went off the rails on Friday. Board members aligned with Kalanick want Benchmark off the board. That’s impossible unless they get Benchmark to give up, as in sell, its stake. And despite this group making an offer to buy Benchmark out, no one with an operating brain cell thinks they can round up the money.

Axios, which has been the go-to site on this row, published the full text of the aggrieved letter to Benchmark:

As a group of shareholders of Uber Technologies, Inc. (the “Company”) we were surprised and distressed to learn through the media of the lawsuit brought by your firm against the Company, and its founder and former Chief Executive Officer Travis Kalanick.

Naturally, we share your concerns about the problems that the Company has confronted in recent months, but we are greatly concerned about the tactics employed by Benchmark to address them, which strike us as ethically dubious and, critically, value-destructive rather than value enhancing.

Specifically, we do not feel it was either prudent or necessary from the standpoint of shareholder value, to hold the company hostage to a public relations disaster by demanding Mr. Kalanick’s resignation, along with other concessions, on a few hours’ notice and within weeks of a personal tragedy, under threat of public scandal. Even less so your escalation of this fratricidal course – notwithstanding Mr. Kalanick’s resignation – through your recent lawsuit, which we fear will cost the company public goodwill, interfere with fundraising and impede the critical search for a new, world-class Chief Executive Officer. Benchmark has used false allegations from lawsuits like Waymo as a matter of fact and this and many actions has crossed the fiduciary line.

Benchmark’s investment of $27M is worth $8.4 billion today and you are suing the founder, the company and the employees who worked so hard to create such unprecedented value. We ask you to please consider the lives of these employees and allow them to continue to grow this company in peace and make it thrive. These actions do the opposite.

Accordingly, we would request that Benchmark help the Company realize its full potential by allowing the necessary work to be done in the Board Room rather than the Courtroom. To this end, at this point, in light of your suit against the Company, we believe it would be best, and hereby request, that Benchmark remove its representative from the Company’s Board and move promptly to divest itself of enough shares in the Company so as to cease to have Board appointment rights. We have investors ready to acquire these shares as soon as we receive communication from Benchmark that they are willing to withdraw their lawsuit and sell a minimum of 75% of their holdings.

We are also asking for a symbolic Board of Directors vote on this matter at today’s Board meeting to show how the Board of Directors stands on this lawsuit brought against the company, its founder and the 15,000 employees of Uber who have all worked so hard in concert to create the fastest growing company in history.

Many other shareholders share our views and will be adding their names in the days ahead. Any shareholders who want to join this letter and petition may email one of our signatories of this letter so that we can submit a final list of shareholders who support this request. Emails can be addressed to Shervin Pishevar at UberShareholderAlliance@gmail.com.

This is pretty comical. “Symbolic Board of Directors vote”? Having other shareholders sign too? It’s a whinge, except for the offer to buy Benchmark out but that is bluster.

Hurbert Horan confirms our reaction via e-mail:

I thought it would be tough to top the absurdity of Benchmark’s “We were shocked! shocked! to discover sexual harassment was taking place” argument in their lawsuit. Or the fact they’d agreed to the initial expansion of the Board based on a Kalanick’s verbal agreement to their proposal on how those three additional Board seats would be handled, and only just discovered that Kalanick had never signed the agreement.

But yes, it was topped within 24 hours. The rest of the Board has openly attacked Benchmark for not being sufficiently appreciative of the “unprecedented value” Kalanick had created. The letter attacking Benchmark (written by Shervin Pishevar and Ron Burkle) did not explain the why the difference between firing Kalanick (which they had all agreed on) and firing Kalanick and then complaining about his efforts to retake control (a la Steve Jobs) justified this major escalation of hostilities.

What’s especially interesting is that the Pishevar/Burkle letter not only demanded that Benchmark resign from the Board, but offered to buy them out, and acknowledged that their stake was now worth $8.4 billion (from an initial investment of $27 million).

Technically they’ve offered to buy 75% of Benchmark’s position (which would eliminate their rights to a Board seat), but that’s still $6.3 billion. I am sure Benchmark would accept this offer in a heartbeat. They’ve been battling with Kalanick for years over his refusal to let early investors cash out any of their original positions, and the effort to fire Kalanick was because they were freaking out about never getting their money out. This is why they were trying to bring SoftBank in, and were willing (according to some press reports) to take a 40% haircut in order to get their money out. Of course, having already been burned by Kalanick’s verbal promises, I’m sure that Benchmark will be careful to ensure the cash has been deposited in their accounts before agreeing to anything.

As I mentioned yesterday, this is a battle for control of Uber. Based on the positions stated in the last two days there is no possibility of compromise, and thus we appear to be set up for a battle to the death.

The first complication is where Pishevar and Burkle et. al. will find the $6.3 billion (or whatever) to buy Benchmark out. It would be madness to put one dollar into Uber at this point; the English language does not have words to describe the mental state of anyone who might be thinking about putting $6.3 billion into Uber at this point (none of which would contribute anything to the company’s future operations).

The second complication is the arithmetic implied by the Pishevar/Burkle letter – Benchmark contributed only 0.2% of Uber’s capital ($27M/$13B) but has 13% of equity ($8.7B/$68B) probably more if you count voting shares. This suggests that later investors put staggeringly larger sums in, for much smaller equity shares, and are facing much greater risk than Gurley and Pishevar of never seeing returns on the money they’ve put in. So there may be even more intra-Board warfare that hasn’t reached the surface yet.

The fact that Benchmark sued Kalanick would strongly suggest that Benchmark had concluded that that SoftBank won’t invest at all, or only at price the other big shareholders would deem to be too low. 2

And one also has to imagine that the board tearing itself apart in public isn’t conducive to a SoftBank investment.

But the only conceivable source of any meaningful dough is SoftBank. The Kalanick allies may hope that Benchmark, given the super low price at which it got in, would take a much lower valuation than the reported 40% discount if it got out largely or entirely (even if Uber were to somehow work out, any meaningful liquidity event is a ways away). SoftBank might shed normal investor qualms about not putting any new money in if the valuation was low enough (recall that one of the core rules of M&A is every problem can be solved by price).

But then you have also to solve the not-trivial problem of how to structure a deal so that a seriously knocked down valuation could be reported as being way way higher (see this recent paper on the valuation of unicorns and how reported valuations for funding rounds are always overstated, often by very large amounts).

Needless to say, this is an awful lot of ifs. And that’s before you get to yet another complication, per a Wall Street Journal commentor:

Tiberius Cross
A complete mess…..add in that multiple rounds of investment in Uber have been debt disguised as equity and you have a devaluation nightmare scenario.

In other words, it now looks like what was going to be an attenuated and bumpy ride downhill has instead become completely different, as in open warfare with no one in sight who could might negotiate a truce. The only profitable play on Uber right now looks to be shorting it on a prediction market, should someone get around to create a current valuation proxy. But even that bet would now be on the late side.
____

1 One factor that might make Benchmark’s legal strategy more rational than it appears is if they have strong suspicions of more serious misconduct by Kalanick. If they think they can firm up the evidence in discovery, they can amend the filing and add charges.

2 Or that SoftBank was never interested at all but was politely listening to Uber’s pitch. Benchmark et al., with their finely honed deal instincts, knew that full well but played the “SoftBank is looking to invest” story to the max because it was important to getting a new CEO.

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32 comments

  1. Foppe

    It’ll be interesting to see whether this grubby little trade war will be spun as a (litigated) culture war, and whether that’ll change perceptions concerning the valuation of “disruptive”-and-supposedly-new business model firms more generally.

    1. amex_padx

      i think the “growth at all costs” playbook has already been put to bed given the high-profile markdowns and flameouts of startups after the froth of 2013-2015. note all the VC blog posts suddenly advocating for positive unit economics and building a sustainable business as though they just discovered what those concepts were.

      more likely is this will halt the rise of “founder-friendly” terms that give the CEO stupid amounts of control. the peak was probably the SNAP IPO w/ the absurdly lopsided voting structure and the stock’s poor performance to date. the era of searching for the next zuck/jobs/sergey/visionary god-sent CEO and stacking the deck for them is probably over

    2. DanB

      All we need now is to have Trump come in to do conflict resolution and you’ve got a new reality show.

  2. Adam1

    Maybe someone at Benchmark is a regular reader at Nakedcapitalism or maybe they’ve actually started to do the math. Cash out now while you can at any positive return. Take your embarrassment licks now and look brilliant in 2 years when it all goes Enron style anyhow. At that point fraud will seem so obvious Benchmark will earn back any cred it is risking now. But maybe that’s giving them too much credit.

    1. Matthew Cunningham-Cook

      this is actually close to what I was thinking. Even if Benchmark gets a quarter of its supposed valuation, it’s a huge net gain. They’ve been trying to pull out at any cost until now, the lawsuit is one of their bargaining chips.

        1. Matthew Cunningham-Cook

          Blackrock is in Uber, which means by extension pension funds are. And of course the IPO is dependent on Uber getting a listing on the S&P, which would lead to a massive institutional flux in.

    2. grayslady

      But maybe that’s giving them too much credit.

      I think you are giving them too much credit with that scenario. If Benchmark had really wanted out at any price, they could have sold their position to Softbank (so the news reports say); but Softbank placed Uber’s valuation at $45 billion, whereas Benchmark claimed the valuation should be closer to $100 billion. That doesn’t sound like an investor desperate to get out with at least some profit. IMO, Benchmark is pursuing a crash-and-burn scenario, even if they don’t realize it.
      Uber was always just a “story deal”, with no likely path to profitability to back it up, as Hubert Horan has so admirably pointed out. In finance, the only way out of a bad deal, short of liquidation, is to find someone else willing to take out your position. For that, you need to polish the turd–not present a situation with no operating management and a divided board.

  3. TomDority

    The easy valuation would be to call it in at one million…..that probably is too high. Anyway, the money value is in operations because, given the investment overhead that has been a ponzi…let it crash

  4. Michael

    Kalanick sounds like a spoiled child. He created a toxic environment and was unable to run his company as it grew. Steve Jobs was a jerk but he was a talented jerk that continually delivered new products and grew his company. Kalanick was at the right place at the right time with the right connections and had the correct skin color, socioeconomic background, and gender. That’s luck, not talent.

    If a founder is turned off by Benchmark’s suit — in this context — then Benchmark is probably best off avoiding the investment anyway.

    1. Larry

      All of those things helped Kalanick get access to the capital and talent to start the company, but they are not predicates for success. The taxi space is competitive, and for whatever Kalanick’s flaws, he massively grew market share and grew the company. That takes a certain talent that not everybody has.

      However, that pursuit of growth and market share does not mean that Kalanick has the skills to lead a company once it’s reached scale and has other issues to contend with. The way this fight has gone down shows how poor his skills are suited to leading a visible and mature company.

      1. Lambert Strether

        > massively grew market share

        Even I could do that, if I didn’t have to worry about profit and a gaggle of squillionaires wrote me a blank check. Oh, and if I could break the law with impunity.

        1. Yves Smith Post author

          You need to emphasize that “blank check” includes massive subsidies to riders, as in giving the service away at a massively unprofitable price for years.

      2. pebird

        Willingness to ignore labor laws, transportation regulations, disrupt local governments, etc., etc. = “a certain talent”.

        Thank God not everyone has it.

  5. jfleni

    The upshot is that the board, K-Nick, and the other parties are all screaming GIMME, at top volume. It will be surprising if anything worthwhile is left when it’s finally over!

  6. p7b

    So Benchmark is just trying to make a scene, so they get to be first to cash out before it all caves in? Actually a pretty sound strategy…

    1. Yves Smith Post author

      I don’t think they could have expected that as an outcome, plus I don’t see the board’s offer as anything other than a bluff. They must have been so frustrated with Kalanick that this was the best way to check him that they could come up with.

      And if what the poster said above is right and SoftBank offered to invest at $45 billion, that may have been a polite way to try to end the talks if they knew Benchmark et al were wedded to a much higher price. But I can’t see how even self-deluded VCs think the valuation is over $50 billion with all the top level vacancies, horrible press, plus the Alphabet lawsuit.

  7. Dean

    Board level infighting, a toxic culture, dubious corporate ethics, an unclear path to profitability…some of the problems an incoming CEO would have to consider.

    This is an interesting juxtaposition against what I see on the ground here in Los Angeles:
    -New-ish cars in traffic or (worse?) parked on the street outside their home with both Lyft and Uber placards in the rear view window
    -An Uber ‘sign up today/make money tonight’ kiosk in a nearby mall
    -Requesting UberX and instead getting late model European luxury car driving me 3 miles to LAX (while paying UberX rates)

    Is driving a ‘dual-branded’ ride sharing car a sign of a healthy, robust sharing-economy? An easy way to seemingly make a few extra bucks? Or a desperate search for income?*

    *With the probability as ‘high’ that costs (depreciation, foregone personal time, insurance, gas, etc) exceed the incremental income earned.

    There are people driving (and working) for Uber whose livelihoods (wholly or partly) depend Uber being a viable, functional, profitable company.

    A lawsuit filed by 0.1%-ers against their fellow 0.1%-ers, facilitated by the 1.0%-er professional class…fighting over billions of dollars (of arguable value) created in no small part by the 99%-ers just trying to stay afloat…while the ship is sailing leaderless directly into a rocky shoreline.

    I don’t know whether to laugh or cry.

    1. Another Anon

      “There are people driving (and working) for Uber whose livelihoods (wholly or partly) depend Uber being a viable, functional, profitable company.

      A lawsuit filed by 0.1%-ers against their fellow 0.1%-ers, facilitated by the 1.0%-er professional class…fighting over billions of dollars (of arguable value) created in no small part by the 99%-ers just trying to stay afloat…while the ship is sailing leaderless directly into a rocky shoreline.”

      This reminds me of the old saying that

      “When the elephants fight, it is the grass that gets crushed.”

  8. HotFlash

    I am not up on revenue recognition requirements these days, but used to be that you couldn’t recognize a gain until sale of shares. Is this still the case? I am thinking that if Benchmark has recognized any part of this $27 million to 8.4 billion Cinderella story, there may be some consequences? Would they have partners, such as pension funds or private investors, that they would, ahem, owe money to? Or something? I can’t imagine that a fund would have this kind of growth (nominally) that wouldn’t mention it *somewhere* to show how smart they are/sell whatever they sell?

    1. Yves Smith Post author

      PE and VC types report unrealized gains all the time. So do other fund managers when they report AUM (assets under management). However, only in PE and VC (VC is a subset of PE) do the fund managers do their own valuations with no third party verification.

  9. Charles Myers

    Uber has been illiquid. It seems like great strategy by Benchmark. They can cash out a winner with this crap.

  10. ChrisPacific

    This is surreal. It’s like watching members of a Mafia crime family publicly accuse one another of racketeering and extortion.

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