Uber hopes its new chief executive can restore its reputation, which was tarnished by founder and former-chief executive Travis Kalanickis. Marlene Awaad / Bloomberg
Uber hopes its new chief executive can restore its reputation, which was tarnished by founder and former-chief executive Travis Kalanickis. Marlene Awaad / Bloomberg

Benchmark Uber suit signals end of era for imperious founders



When Uber Technologies backer Benchmark Capital filed a lawsuit against the startup’s founder Travis Kalanick for using allegedly fraudulent means to pack the board with his loyalists, it sent a strong signal that Silicon Valley’s so-called founder-friendly era is coming to an end.

Going back years, venture firms have given Kalanick and his peers outsize control and influence over their companies. Critics say this has led founders to take a freewheeling approach to running their companies, loading up on shares for themselves and their friends and presiding over toxic workplaces.

At the heart of the Benchmark lawsuit is a provision that venture capitalists say stands out for its deference to Kalanick, and is highly unusual. It allowed the Uber founder to personally appoint three new members to Uber’s eight-seat board, effectively letting him slant the board his way after he resigned.

According to Benchmark, Kalanick got investors to sign off on the measure “fraudulently,”  by, among other things, hiding “gross mismanagement” at the company. Jimmy Asci, a spokesman for Kalanick, said the lawsuit is “completely without merit and riddled with lies and false allegations.”

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On Friday three other investors sent a letter to Uber’s board, shareholders and Benchmark, saying the suit was designed to “hold the company hostage” and asked Benchmark to step down from the board. The investors are Sherpa Capital’s Shervin Pishevar, Yucaipa Companies’ Ron Burkle and Maverick’s Adam Leber. They didn’t immediately respond or couldn’t be reached for comment. Members of Uber’s board, not including Kalanick or Benchmark’s Matt Cohler, said they were “disappointed that a disagreement between shareholders has resulted in litigation,” according to an emailed statement.

Kalanick is far from the only founder deemed to have abused investors’ trust in him. Other examples include Jawbone founder Hosain Rahman and Tanium chief executive Orion Hindawi, who were both given considerable autonomy or control by boards and then disappointed in their leadership.

Rahman led Jawbone into bankruptcy and has now launched a long-shot bid to become a player in medical devices. Hindawi was forced to apologize after past and current employees described abusive behavior that prompted a talent exodus.

In the 1990s, it wasn’t unusual for venture firms to replace founders as CEOs, usually because the investors believed the company needed a leader with more experience. That practice fell out of favor but has resurfaced in recent years.

Take GitHub, the developer platform. In early 2014, a former Github employee, Julie Ann Horvath, complained that co-workers—going right up to company’s co-founder and chief executive, Tom Preston-Werner—had harassed and discriminated against her. Preston-Werner ended up resigning after an internal investigation; in a more forgiving time, he might have taken a leave of absence and returned.

The following year, Parker Conrad, founder and chief executive of Zenefits resigned after news broke that he was using unlicensed brokers to sell health insurance in several states.

In those cases, the founders agreed to step down. In other instances, VCs have discovered that the relatively recent practice of ceding voting control has made forced resignations impossible.

At venture-backed company Theranos, once valued at US$9 billion and now worth next to nothing, disgraced founder Elizabeth Holmes controls 98 per cent of voting shares. That has allowed her to continue as chief executive even after it turned out her vaunted blood-testing technology didn’t work, putting the company’s future in peril.

One reason VCs tolerated over-privileged CEOS—at Theranos, Uber, Snap, and other companies—was because so much money flooded into tech, making it easy for founders of the most promising startups to shop around. Last year, $41.6 billion was raised by venture firms, the most since the dotcom era, according to the National Venture Capital Association.

In an extreme case, at vegan food maker Hampton Creek Inc., most of the board, not founder Josh Tetrick,  was forced to resign after directors lost all rights due to the voting control they had allowed Tetrick to amass.

But once again, venture firms are wising up.

Today, while more late-stage private companies are creating classes of shares with extra voting power, only 27 per cent of recipients of those shares are founders and management, according to a study by law firm Fenwick & West. Three years ago, 43 per cent of recipients were founders and management, rather than investors.
For a long time venture firms were loath to crack down on founders for fear they'd go elsewhere for capital. But that theory doesn't really hold up, says angel investor Keval Desai, a backer of Optimizely, The RealReal and others. "Benchmark's reputation has been built over many decades, and other entrepreneurs who have taken money from them will be proof that Benchmark isn't in the business of suing their entrepreneurs," he says. "Benchmark will be fine."

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Favourite book: ‘Purpose Driven Life’ by Rick Warren

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Favourite place in UAE: Dubai Museum

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Engine: 1.5-litre 4-cylinder petrol

Power: 154bhp

Torque: 250Nm

Transmission: 7-speed automatic with 8-speed sports option 

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Based: Gaza
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The major Hashd factions linked to Iran:

Badr Organisation: Seen as the most militarily capable faction in the Hashd. Iraqi Shiite exiles opposed to Saddam Hussein set up the group in Tehran in the early 1980s as the Badr Corps under the supervision of the Iran Revolutionary Guards Corps (IRGC). The militia exalts Iran’s Supreme Leader Ali Khamenei but intermittently cooperated with the US military.

Saraya Al Salam (Peace Brigade): Comprised of former members of the officially defunct Mahdi Army, a militia that was commanded by Iraqi cleric Moqtada Al Sadr and fought US and Iraqi government and other forces between 2004 and 2008. As part of a political overhaul aimed as casting Mr Al Sadr as a more nationalist and less sectarian figure, the cleric formed Saraya Al Salam in 2014. The group’s relations with Iran has been volatile.

Kataeb Hezbollah: The group, which is fighting on behalf of the Bashar Al Assad government in Syria, traces its origins to attacks on US forces in Iraq in 2004 and adopts a tough stance against Washington, calling the United States “the enemy of humanity”.

Asaeb Ahl Al Haq: An offshoot of the Mahdi Army active in Syria. Asaeb Ahl Al Haq’s leader Qais al Khazali was a student of Mr Al Moqtada’s late father Mohammed Sadeq Al Sadr, a prominent Shiite cleric who was killed during Saddam Hussein’s rule.

Harakat Hezbollah Al Nujaba: Formed in 2013 to fight alongside Mr Al Assad’s loyalists in Syria before joining the Hashd. The group is seen as among the most ideological and sectarian-driven Hashd militias in Syria and is the major recruiter of foreign fighters to Syria.

Saraya Al Khorasani:  The ICRG formed Saraya Al Khorasani in the mid-1990s and the group is seen as the most ideologically attached to Iran among Tehran’s satellites in Iraq.

(Source: The Wilson Centre, the International Centre for the Study of Radicalisation)

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The specs

Engine: Direct injection 4-cylinder 1.4-litre
Power: 150hp
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Name: HyperSpace
 
Started: 2020
 
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
 
Based: Dubai, UAE
 
Sector: Entertainment 
 
Number of staff: 210 
 
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
 
 
 
 
 
 
 
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