Uber’s board members have been embroiled in conversations over a thorny question: what to do about Benchmark, the venture capital firm that is one of the ride-hailing company’s largest shareholders. While Benchmark had long supported Uber’s management, the investor had recently turned against the company’s top echelons.
In June, Benchmark helped oust Uber’s co-founder, Travis Kalanick, as chief executive. The firm has escalated its actions against Kalanick by suing him for fraud and saying he should be removed from Uber’s board. Then, Benchmark published an open letter to Uber employees intimating that the company had dark secrets that had not been revealed.
Uber’s board was blindsided by Benchmark’s lawsuit. News of the suit led to a flurry of emails and phone calls between directors in recent days over what to do. Benchmark owns a 13 per cent stake in Uber and also holds a board seat. Benchmark’s influence on Uber’s board, however, is now diminished.
Benchmark’s board representative, Matt Cohler, recused himself from a board committee that discusses litigation issues until the lawsuit is resolved. The change means that for the time being, Benchmark will have restricted access to information about legal battles that are set to shape Uber’s future.
For Benchmark, this puts the venture firm further out on a long limb. The firm — which has backed companies including eBay, Snap and Twitter — became one of Silicon Valley’s most successful start-up investors by keeping a low profile in its partnerships with entrepreneurs.
Now with Uber, the firm is mired in a bitter and highly public fight while it is being isolated on the company’s board. The battle has caused other Silicon Valley investors to take Benchmark to task. Shervin Pishevar, an early Uber backer who is leading a coalition of other investors, has asked Benchmark to sell its shares in the ride-hailing company and leave its board.
Pishevar called Benchmark’s lawsuit against Kalanick “irrational in the extreme” and its other actions “culpably wrong-headed”.
“I can’t help but wonder how recent events will impact founders’ views towards raising capital from Benchmark,” Michael Boswell, a tech entrepreneur, wrote on Twitter.
He called Benchmark’s actions against Kalanick “ruthless”. Anand Sanwal, chief executive of CB Insights, a research firm that tracks the venture capital industry, said that litigation between founders and venture capitalists had never been seen “at this scale or in as public a way”.
“Resorting to litigation was an extremely difficult step for Benchmark,” the company’s statement said. “Failing to act now would mean endorsing behaviour that is utterly unacceptable in any company.”
Benchmark, which was founded in 1995, has developed a reputation for prescient start-up investments. It rode the late 1990s dot-com boom by backing companies like eBay and Palm. The company is also known for its network of influential tech executives, including Meg Whitman, the chief executive of Hewlett Packard Enterprise.
But Benchmark has been involved in disputes with entrepreneurs, sometimes leading to legal trouble. In 2005, most of the founders of a start-up called Epinions, which Benchmark had invested in, sued the firm and one of its partners, Bill Gurley, among others, accusing them of withholding information in an ownership deal.
The suit was eventually settled. Silicon Valley’s memory of such episodes was often short because of Benchmark’s success. The firm, which invested $5 million in the e-commerce company eBay, reaped a 50,000 per cent return when it went public in 1998.
Twitter, Zillow and New Relic were also lucrative investments. More recently, a $21 million investment that Benchmark made in Snap became worth more than $2 billion when the social media company went public in March.
Benchmark invested in Uber in 2011, putting in an initial $12 million at a valuation of around $60 million. (That stake is now worth more than $8 billion.)
Gurley, Benchmark’s most prominent partner, also took a board seat at the company. He has since promoted Uber on his blog, “Above the Crowd”, and on social media.
“‘Uber is a great place to work w/ loyal employees!’” he wrote on Twitter last year in response to an article on the technology news site “TechCrunch” about the company’s aggressive employee retention tactics. Gurley has warned start-ups of irrational exuberance in recent years, saying that a combination of easy money, high valuations and reckless spending had created a “risk bubble” in the industry.
The message may have been applicable to Uber, which had raised money at ever higher valuations, burnt through billions of dollars and did not file to go public.
Initially, Gurley and Kalanick appeared closely linked. But as Gurley privately cautioned Kalanick about overspending and overexpansion, their relationship frayed. The investor encouraged Kalanick to get Uber out of China, where it was spending billions, for example.
Gurley also advised Uber to hire a chief financial officer and think seriously about going public. Thanks in part to such fretting, Kalanick would sometimes reference the character Chicken Little, who always claimed the sky was falling, when speaking of Gurley, according to a person who spoke on condition of anonymity.
Benchmark’s ability to work with Uber became strained. This year, Gurley became worried that he did not get the full results of an internal Uber study that examined the reputation of the company and Kalanick.
Eventually, the relationship disintegrated. Benchmark spearheaded the effort to push Kalanick out as chief executive in June. That same month, Gurley left Uber’s board, and Cohler replaced him.
Until Benchmark sued Kalanick, the venture firm had not publicly admonished Uber’s executive team. In its lawsuit against Kalanick, Benchmark claimed that it had no inkling until this year that Kalanick was mismanaging the company or that Uber’s culture was deeply troubled.
The ride-hailing company had made headlines for years in its clashes with legislators and regulators, among other issues. Now Benchmark must prove that there was fraud at Uber that it had no way of knowing about, said Bart Friedman, senior counsel at the law firm Cahill Gordon & Reindel. “If they didn’t know, they created this monster by looking the other way,” Friedman said.
— New York Times News Service
