Analysis: Investors Don’t Care How Badly Startup Founders Behave

By Carolyn Said
San Francisco Chronicle.

The bad boys of the tech world can behave like bullies with impunity — as long as they are on a path to making money.

That seems to be the lesson from Uber’s latest scandal, in which a top executive publicly floated the idea of a million-dollar campaign to dig up dirt on the personal lives and families of journalists critical of the San Francisco ride-service company.

Uber and some investors responded with apologies via Twitter but otherwise seemed to shrug off the latest in a list of Uber public relations nightmares, including car crashes and assaults by drivers with sketchy records, reports of dirty tricks to sabotage rivals, and violations of rules regulating for-hire cars in cities worldwide.

“It’s clear the investors aren’t acting,” said Sarah Lacy, editor of tech website PandoDaily, whose personal life was singled out for a possible smear campaign after calling for customers to boycott Uber due to a sexist promotion in France.

“If you step back and look at the company, this is an escalating pattern of behavior with seemingly no repercussions,” she said.

“This is the latest and scariest incarnation. The investors are either too scared to act, or feel like it will upset their standing in the company and their equity stakes are just worth too much.”

At a swank New York dinner hosted by a former adviser to British Prime Minister David Cameron, Uber’s Emil Michael talked of organizing a smear team of four opposition researchers and four journalists and siccing it on Lacy and other critics. The remarks, reported by the website BuzzFeed late Monday, have incited a frenzy of online outrage. As senior vice president of business, Michael oversees Uber’s partnership deals.

‘I’m scared’

Uber, valued at $18 billion, has raised $1.5 billion in venture capital. Lacy said she e-mailed three of its investors — people with whom she’s had “deep relationships” for years — to ask if they supported Uber’s discussions of attacking her. “None of the three have written back,” she said.

Worried about her young children, Lacy is now increasing security on her house. “I’m scared,” she said.

After the story broke, Michael tweeted an apology. Uber CEO and co-founder Travis Kalanick — who has cultivated a brash reputation — sent a series of tweets distancing the company from Michael’s statement but did not say whether Michael would face any consequences.

“Emil’s comments at the recent dinner party were terrible and do not represent the company,” Kalanick wrote, saying Uber’s focus should be on telling how much good it has accomplished. He closed his 13-part missive with a brief apology to Lacy.

While investors are supposed to be the “adult supervision,” don’t count on them to step in unless the bottom line is at stake, said longtime Silicon Valley forecaster Paul Saffo. “All venture capitalists are amoral. They will take a cold and clinical look,” he said. “If they perceive a situation as hurting the bottom line, they’ll throw the founders under the bus. But they won’t be doing that because it’s the right thing, but because they have a single-minded focus on the valuation.”

It’s too soon to say whether the latest contretemps will hit Uber where it hurts, although #ubergate trended high on Twitter on Tuesday, and wikiHow reported a surge on searches for how to deinstall the Uber app. Uber did not respond to requests for comment.

“I don’t think what they’ve done, while absolutely vile, is enough to cause people to abandon them en masse,” Saffo said.
Taking stock of image

Jo-Ellen Pozner, assistant professor of management and organizations at UC Berkeley’s Haas School of Business, agreed. “This is nasty business, but the nature of the infraction is relatively mild,” she said, adding that it would be a different story if Uber had actually embarked on a smear campaign. “It’s a chance for taking stock on how they should be perceived in the media, how they conduct themselves, a re-evaluation of their public persona,” she said.

Corporate-governance expert Nell Minow noted that women seeking safe transportation represent a key market for Uber, and brought up Lululemon — a yoga clothier that suffered in the market after its CEO blamed defective pants on customers’ body types.

“You’ve got a CEO/founder who’s managed to offend exactly the people he needs to buy his product,” she said.

Uber has a particularly tricky road to navigate because its customers must literally trust it with their lives and safety. “The last thing in the world a consumer-facing company like Uber wants to do is to come across as a bully,” Minow said.

Uber, like many fast-growing startups, faces the challenge of whether founders can develop their skills and sophistication to keep pace with the company’s rapid expansion.
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“It’s a critical turning point for a company when the visionary who created it all of a sudden has to be responsible for a large institution,” Minow said. “Some can make that transition, and some can’t.”

Investors in Silicon Valley have a history of standing behind CEOs who behave badly. Evan Spiegel, CEO and cofounder of Snapchat, rode out a firestorm of controversy after the release of offensive frat-boy e-mails from his undergrad days at Stanford.

Ad startup CEO’s ouster

It often takes more than minor misdeeds to compel action. This year, the board of advertising startup RadiumOne ousted CEO Gurbaksh Chahal after he was convicted of misdemeanor domestic violence and battery.

“Entrepreneurs who create companies that challenge the traditional wisdom are often individuals who themselves operate at the margins of what’s considered acceptable behavior,” said Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University. “As a company (grows), it has to rein in the more outlandish behaviors and comments of its founders and top executives. Boards have to step in when the behavior of a member of the founding team begins to threaten the viability of the innovation.”

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