Wednesday, June 14, 2017

Uber’s Growing Pains

The ride-sharing app won’t survive if lawyers and HR run the show.

By Review & Outlook
The Wall Street Journal
June 14, 2017

Ride-hailing app Uber Technologies’ growth curve has been as meteoric as its learning curve has been steep. But its leadership turmoil shows the perils of moving from Silicon Valley darling to durable success, especially if it wants to tap public markets for capital anywhere close to its $68 billion valuation.

Uber said Tuesday that CEO Travis Kalanick will take an indefinite leave from the company he built, a day after chief business officer Emil Michael stepped down. The moves followed a unanimous vote by Uber’s board—which consists of private investors—to adopt reforms to its “workplace culture.” The San Francisco-based startup enlisted former U.S. Attorney General Eric Holder’s law firm Covington & Burling after several women complained that Uber executives ignored sexual-harassment allegations.

Workplace culture often flows from the top, and the internal analysis seeks to correct lapses in executive judgment. In 2014 Mr. Michael floated a plan to dig up details about the private lives of journalists critical of the company. Earlier this year Mr. Kalanick was caught on camera berating a driver.

Yet Uber would never have achieved what it has if not for Mr. Kalanick’s hard-charging attitude. The company has had to break through regulatory barriers backed by the taxi lobby in city after city, and it didn’t do that by bowing at the first sign of resistance. Uber’s innovation has greatly improved the lives of millions of urban travelers, and that breakthrough has in turn invited competitors like Lyft, Via and Gett. There’s no guarantee that Uber will emerge as the Facebook of this pack.

But Uber’s hardball tactics also present business risks. Last year the California DMV pulled the registration on Uber’s self-driving cars because the company didn’t obtain a $150 permit to test its vehicles. Twenty other car manufacturers had obtained permits, but Uber didn’t see the need. It finally conceded to apply for a permit in March. The Justice Department is also investigating Uber’s use of “greyball” software to evade regulators in jurisdictions where it wasn’t authorized to operate.

Uber is the dominant ride-hailing app in most U.S. cities because private investors bankrolled its rapid expansion with recruitment bonuses for drivers. A high concentration of drivers in cities reduces rider wait times while heavy customer traffic deters drivers—in effect free agents—from defecting to other apps.

Millennials are fickle customers, and a drop in ridership could divert drivers to competing apps. This would make it harder for Uber to raise capital to sustain its huge losses ($2.8 billion last year) as it expands. Investors who may have tolerated Uber’s earlier blunders because of its growth potential will draw a line when management failures impair the company’s performance and profitability.

Consider the lawsuit by Google’s self-driving startup Waymo that accuses former employee Anthony Levandowski of lifting trade secrets before joining Uber. Last month federal Judge William Alsup referred the case to prosecutors after declaring that the evidence that Mr. Levandowski pilfered Waymo’s technology was highly incriminatory. Uber has denied colluding with Mr. Levandowski. But even if Uber isn’t found complicit in the alleged piracy, the judge could bar it from using any cribbed code or technology. This would be a major setback in Silicon Valley’s autonomous car race.

All of this explains why investors are shaking up Uber’s management, but that also carries risks. Sheryl Sandberg’s collaboration with Mark Zuckerberg worked for Facebook, but John Scully clashed with Steve Jobs when he arrived at Apple from Pepsi. Jobs left Apple but returned to revive it with a new burst of innovation. One certainty: Uber won’t survive the ride-sharing shakeout if the lawyers at Covington & Burling are in charge.

One question for capitalism is whether Uber’s shakeup would have occurred sooner if it had already braved public equity markets. Two decades ago startups went public much earlier in their business cycle. But Sarbanes-Oxley and other regulatory demands have made going public far more costly, and even successful tech startups tend to delay listing shares on exchanges. Public markets are sensitive to losses and bad publicity, so they can be as useful for disciplining managers as they are for rewarding investors.

The only story the business press likes better than a glorious startup is an inglorious failure, so Mr. Kalanick is now getting a rough ride. But he’s built an innovative business that fulfills a public need, and Uber’s investors had better hope his replacement is as good a manager as Mr. Kalanick has been an entrepreneur.

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