Uber Descends Into Even More Turmoil With Benchmark Suit v. Kalanick

Due to having an unusually distracted day yesterday, I haven’t had a chance to dig into the lawsuit that Benchmark, the venture capital firm that led Travis Kalanick’s ouster from Uber’s CEO post, filed against Kalanick. You can read the filing here. On a very quick pass, what was striking was the allegations read a lot like accusing Kalanick of acting like a normal, as in greedy, CEO. And that’s before you get to the fact that until pretty recently, the VCs prized Kalanick for his hyperaggressiveness. So now they act if it was a big surprise?

For those of you who missed the fun, here’s a quick overview from the New York Times:

Benchmark, a Silicon Valley venture capital firm that is one of Uber’s largest shareholders, filed suit against Mr. Kalanick on Thursday in Delaware Chancery Court, accusing the former chief executive of fraud, breach of contract and breach of fiduciary duty.

At the heart of the suit is how Mr. Kalanick obtained outsize control of several Uber board seats in 2016, which Benchmark said he achieved through “material misstatements and fraudulent concealment” of information. Mr. Kalanick’s “overarching objective is to pack Uber’s board with loyal allies in an effort to insulate his prior conduct from scrutiny and clear the path for his eventual return as C.E.O. — all to the detriment of Uber’s stockholders, employees, driver-partners, and customers,” the suit said.

The suit added that Mr. Kalanick’s position on Uber’s board “is thus improper and inequitable, and should be invalidated.”

And the Financial Times flags that the suit has only increased divisions within the board:

One early Uber investor, Freada Kapor of Kapor Capital, told the Financial Times she was concerned that the lawsuit and board divisions would mean less focus on the cultural changes that the company had committed to make, including implementing the recommendations prepared by former US attorney-general Eric Holder.

“With what is going on now, I don’t think anybody is paying attention to those recommendations,” Ms Kapor said.

“As an investor, I’m apoplectic,” said another shareholder. “The people who founded the company are increasingly at loggerheads.”

Based on the press reports, and a very cursory skim of the filing, I checked in with our Uber expert Hubert Horan, since the suit seemed like a gambit as opposed to a real case. From Hubert:

My guess is the immediate issue is just the CEO hire, which was due to be made in the next couple weeks. I think Benchmark wants a strong outsider (like Immelt) who can at least give the appearance of being totally in charge and will get the press to stop asking questions about “cultural” issues. I think all the stories about how Travis envisions himself making a “Steve Jobs-like” return to power is what triggered this suit. And it is unclear how the Board could ever come together to support any particular hire. If the CEO hiring process collapses, then Uber is quickly back to being a laughing stock in the press. Also unclear why anyone would take the job to work under a dysfunctional board incapable of backing their decisions. It may be that Whitman told Gurley that Travis’ meddling was a dealbreaker.

Much of what’s in the Benchmark filing seemed like pretty weak tea. I just don’t see how a court would invalidate a May 2016 agreement to expand the Board from 8 to 11 members because of major problems other Board members didn’t discovery because Travis deviously concealed them (the Board had no idea there was a sexual harassment problem!!!). I assume the suit is a pure PR gambit. But it clearly starts an open war where there can no longer be a diplomatic settlement and one of the two sides ends up being totally humiliated. Benchmark has decided that if Kalanick keeps hanging around absolutely nothing of any importance can be resolved and they get totally screwed in the end. Remember that Kalanick’s shareholding is almost the same size as Benchmark’s (much larger if you include his allies like Camp and Huffington), so however this ends one very large block of shareholders or another will feel seriously aggrieved.

I’m sure Benchmark is also thinking about Softbank, but that’s a couple of moves away on the chessboard. The Softbank deal might be wishful thinking on Benchmark’s side, but (if it were to happen) it is a deal that provides major immediate benefit to Benchmark while creating risk for everyone else, and that might be a legitimate reason for Kalanick to oppose it. Less legitimately, I’m sure Kalanick is totally opposed to anything that creates any appearance that Uber isn’t still worth $68 billion. Even if Kalanick quits the Board. and Immelt (or someone like him) takes over, Benchmark’s hoped for liquidity event may not happen. But if Immelt replaces Kalanick, he’d clearly be working for the outside investors, and wouldn’t be working for any of Travis’ friends or anyone in management.

Pass the popcorn.

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16 comments

  1. RenoDino

    The Valley’s most sophisticated investment fund admits that it was fooled by Uber founder, overlooked due diligence and now wants its money back. Must be really,really bad for them and the outlook for the company. Are the class action investor law suits far behind?

    Can you imagine all the loans outstanding on those now devalued private Uber shares?

  2. paul

    I keep wondering if special K is still a proper billionaire.
    Did he actually manage to take out 20% of the loot VC’s were throwing on the bonfire?
    Is he our new Elizabeth Anne Holmes?

    1. Mark P.

      He’s Bill Gurley’s very own Frankenstein monster. Uber was Gurley’s idea and Kalanick was Gurley’s pick to play founder.

      Pass the popcorn, as Yves said.

      1. paul

        Is that how it works?
        I’ve always wondered about the front of house staff and their h.alger stories

        1. Kevin Carhart

          I had always wondered about this too. I had a very interesting exchange about it with blennylips here.

          https://www.nakedcapitalism.com/2017/06/wheels-come-off-uber.html#comment-2834479

          blennylips points out that at least at the incubators, the founders are coached. Go to yclist.com for a strange top-down view of entire portfolios, tons of companies.

          There was also an audio interview with Tom Slee, where he refers to the CEOs/founders of VC-funded startups as a sort of middle management.

          1. Mark P.

            Kevin wrote: at least at the incubators, the founders are coached.

            That’s part of the point of incubators and perfectly legitimate. Arguably, the guidance and expertise of good VCs constitutes as much of the rationale for the VC business as the VC money. Certainly that was the case in the past, starting with Georges Doriot who was the “Father of Venture Capital.”

            https://en.wikipedia.org/wiki/Georges_Doriot

            Paul wrote: Is that how it works?

            Only infrequently, as far as I know. Bill Gurley — and indeed the other Benchmark partners — are special. Part of their schtick is that they’re all very tall, dominating white American males (or where when I last looked). There’s an old book from 2000, the time of the dotcom boom, about them, which essentially valorizes them as ubermensch types —

            eBoys: The First Inside Account of Venture Capitalists at Work
            by Randall Stross

            1. Kevin Carhart

              Thank you Mark. This is a useful thread. Boy is information hard to come by, when these entities have been all around (I live in SF) for decades, yet I am trying to find out crumbs about how the hell they function.

              Yeah, the Something Ventured film also goes back to Doriot at HBS. I recommend it. I learned some things when I stopped retching at the tone. Don Valentine at Sequoia remarks “These are very fragile companies with a lot of things missing. And the approach we’ve always taken is if we make this investment, is our rolodex strong enough to help these people.” That remark from Valentine is another interesting crumb.

              One more link that I thought was useful, Henry Blodget’s story abut John Doerr.
              http://www.businessinsider.com/no-conflict-no-interest-john-doerr-twitter-2011-3

              Regarding legitimacy: I guess. The contraption works, I see the point of mentors, but they pump out pilot projects which then kill, rape or injure bystanders. And which exacerbate precarious work with the new 1099 story. Precarity has a hand in making a more extreme politics. So I’m pinning part of the blame for Trump on the crappy jobs that came out of sharing-economy founders and their VCs, and that’s why I want to know about agency and whether there are puppeteers. Which of these layers is signing off on precarity? Which of these layers is signing off on the psychological tricks described in the Noam Scheiber stories? Why aren’t the VCs ever sued in the class actions, commensurate with their deep and profound role as experts and coaches?

  3. phichibe

    I haven’t followed the internal funding of Uber. Did they set up a multi-class share structure a la Google and Facebook? If so who owns the Class B shares and what are the respective voting rights? For example, I believe that Larry, Sergei, and Schmidt own all the Google/Alphabet Class B shares and can not be outvoted by the Class A common stock.

    CHeers

    P

    1. Mark P.

      Did they set up a multi-class share structure a la Google and Facebook?

      Of course.

      I’d have to dig to find out how exactly Uber was structured and for whom, and I’m too busy right now. But we can assume that anyway a lot of that will be reported in the media in the weeks and months to come as the Uber principals become more hostile to each other.

  4. bobkelly

    of the 1000 problems uber is facing .,, number 1 is more investors … to me its all over now ,,but i think uber knew this long ago …and went for the sex drugs rocknroll parachute

  5. Mark P.

    Kevin Carhard asked: Which of these layers is signing off on precarity?

    Let’s stick to specifics. My understanding is that Gurley was responsible for the original idea for Uber and chose Kalanick as a psychologically suitable type to implement the business model — which, yes, entails disrupting now-existing regulatory regimes and more social precarity — and that Gurley furthermore very consciously would like to extend the Uber model to other realms and industries. Beyond that ….

    Why aren’t the VCs ever sued in the class actions, commensurate with their deep and profound role as experts and coaches?

    [1] It’s not useful to generalize too much about VCs, as if they’re guilty as a class to the same extent as bankers have been. Much depends on the specific VC partners, the specific company and technology they’re backing, and who they’re disrupting (if it’s not you) — for instance, some of us would see the disruption and precarity in the U.S. health insurance industry that single-payer implementation would entail as a potentially good thing, right?

    [2] And as far as suing VCs for the social damage, who the hell is going to do that, and on what grounds, and with whose money? And how do you determine what damage has been done and what it’s worth? Like that.

    1. Kevin Carhart

      [1] Yes you can. And yes, they are as guilty as a class as bankers. They are basically bankers in the first place. Elite kids go to Wall Street and elite kids go work in tech. There’s overlap back and forth in the career paths. I have met some of them. The common thread is MBA. The common thread is narcissism and self-regard, and the unappreciated genius of your project. Kalanick, Holmes, Leah Busque, Kevin Cruz and Brian Rothenberg from Taskrabbit, Ari Seidman from Gigwalk, Bastian Lehmann from Postmates, Adora Cheung from Homejoy, Oisin Hanrahan from Handy, and VCs like Doerr (“no conflict, no interest”), Valentine, the early dudes in the Something Ventured film like Tom Perkins or Dick Kramlich, Peter Thiel, Reid Hoffman, Scott Sandell from NEA – they all have a demonstrable history of stomping the little people because they believe in their own transcendent brilliance. They do systemic, similar things in systemic, similar ways and dole out arguments from a similar playbook. Did you see the one where Tim Draper was asked about Theranos and blamed incumbents?

      “‘Theranos is being attacked by the powers that be in big pharma,’ Draper told Bloomberg at the Global Entrepreneurship Summit. He also cited mysterious forces in ‘the world of medical insurance’ and ‘the people in government who are going to be very much affected by a really cheap, really effective, wonderful solution.'” (https://www.theregister.co.uk/2016/06/27/big_pharmas_trying_to_kill_us_says_man_with_literally_millions_to_lose/)

      If you’d really like to continue invoking disruption and the incumbent interests argument, maybe you ought to stop digging, because nobody has invoked disruption or the incumbent interests argument over the past several years louder than Kalanick and Holmes.

      [2] The same plaintiffs and attorneys who do it now, against the portfolio companies. Same dynamics and complexities as happens already, in suits against the portfolio companies.

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