2017-06-22 09:46:03
Silicon Valley Investors Flexed Their Muscles in Uber Fight

SAN FRANCISCO — The conventional wisdom in the world of Silicon Valley start-ups has been that the founders call the shots and that the investors are cheerleaders — and sometimes enablers — of the entrepreneurs they backed.

But on Tuesday, when investors pressured Travis Kalanick to step down as the chief executive of Uber, the start-up universe was abruptly reminded that investors can flex their muscles and that founders are not untouchable.

“The examples people cite of founders having all of the power are exceptions,” said Lenny Mendonca, a senior partner emeritus at the consulting firm McKinsey. “If investors are worried about returns, they engage. They take control. And that’s what happened at Uber.”

The balance of power at young tech companies has long been a delicate issue. Silicon Valley’s start-up ecosystem relies on founders’ and investors’ getting along — the entrepreneurs come up with the ideas and need the financiers’ money while the financiers need the founders to help them strike it rich. Over time, who holds the upper hand has shifted back and forth.

In recent years, the pendulum has swung decidedly in the direction of entrepreneurs. As with most things in the Valley, the reason is money. In 2016, $333.5 billion was directed into the venture capital industry, compared with $213.7 billion in 2006, according to data from the National Venture Capital Association and Pitchbook.

That has allowed entrepreneurs to have their choice of investors. And they have been able to demand provisions that benefited them financially and cemented their control.

About a decade ago, for example, Mark Zuckerberg, the founder of Facebook, got his early financial backer, the venture capitalist Jim Breyer, to agree to a board structure that gave Mr. Zuckerberg control. Facebook’s success has been used to support the idea that good things happen when founders lead and investors stay quiet.

But then few companies ever match Facebook’s success. Some start-up founders, like David Byttow at the defunct app Secret and Andrew Mason of the online deals company Groupon, were allowed to cash millions of dollars out of their companies long before anyone could call their start-ups a success.

“Because companies have been able to raise capital from all of these sources at high valuations, there has been a delay in the growing-up process,” said Jeffrey Bussgang, a general partner at the venture firm Flybridge Capital Partners and a professor at Harvard Business School.

Founders have increasingly taken control of the voting rights at their companies as well. The percentage of company financing rounds that gave extra voting rights to founders and early investors nearly doubled from 2014 to 2016 — to about 39 percent, from 20 percent — according to data from the law firm Fenwick & West.

Mr. Kalanick and a cohort of early employees owned stock with 10 votes for every share, according to Uber’s corporate charter.

While such provisions have given the impression that founders are firmly in charge, the reality is different. In an acrimonious situation, it could be difficult for the founder to exercise the control that he or she technically has.

At Uber, Mr. Kalanick may have had a path to outvoting the investors who asked for his resignation, including Benchmark, First Round Capital, Lowercase Capital, Menlo Ventures and Fidelity Investments.

But that would have come with risk: Winning that battle could have meant burning bridges with powerful Silicon Valley investors he might need help from somewhere down the line. Alienating Fidelity risked Uber’s relationship with the powerful mutual fund, whose support would be key should the company trade its shares on public markets.

Still, the dramatic ouster at Uber is not unique in recent years. Last year, venture investors ousted Parker Conrad, the founder and chief executive of the insurance start-up Zenefits. At the time, Mr. Conrad had stock with enhanced voting rights, but he was forced out amid questions about the company’s hyperaggressive culture and revelations that he had created a tool that let employees skirt the law.

Over the past few quarters, venture firms have gained a bit more of an advantage in negotiations as worries have increased that private valuations are too high and as the frenzy for start-ups has ebbed.

“There’s no question that founder power peaked in 2015 and we’ve been two years into normalizing,” said Paul Martino, a partner at the venture firm Bullpen Capital. “We’re not in an investor-friendly environment, but we’ve certainly moved closer to the center.”

Mr. Martino said there was a big difference between being supportive of founders and ceding absolute control to them. “If a board can’t hire and fire the C.E.O., why is there a board?” he said. “That is their only job.”

While investors can push out founders, they are aware that start-up dynamics still favor entrepreneurs. If venture firms want to court the best ones, they need to have a reputation for playing nice.

In the hours after they pushed Mr. Kalanick out of his post, Uber investors took to Twitter to praise him. Bill Gurley of Benchmark, an Uber board member who was once a close ally of Mr. Kalanick’s, wrote, “There will be many pages in the history books devoted to” Mr. Kalanick. The day after Mr. Kalanick was asked to resign, Mr. Gurley stepped down from the board, according to a person familiar with the move.

Shawn Carolan, an investor at Menlo Ventures, said over the course of several Twitter posts that Mr. Kalanick had “done a lot of good” and that investors were “grateful for all that he accomplished.”

When venture investors become board members at a very young company, they can think about their funds and founders first, but later on they have fiduciary responsibility to all shareholders, Mr. Bussgang said.

“Bill Gurley was not speaking as an individual Benchmark partner, but as someone who represented the interests of a broad group,” Mr. Bussgang said. “He exerted leadership through influence by rallying other investors.”

Giving up voting control to Mr. Kalanick caused headaches for the company’s board and investors, but Mr. Martino said the episode was unlikely to deter companies and investors from giving that power to founders. “Travis didn’t try to start a war with the investors,” he said. “We didn’t get our teachable moment.”

But entrepreneurs may have. Mr. Bussgang said the executives he worked with had been closely watching the Uber saga. “They recognize that it’s not helpful to grow up later,” he said.