What was Benchmark thinking?



Yesterday, Benchmark, the powerful venture firm and a major Uber shareholder, filed a lawsuit against the company’s recently ousted CEO Travis Kalanick in a remarkable move. The suit seeks to remove Kalanick from the board, while eliminating three additional board positions that it says Kalanick sought (and won) approval for last year, partly by withholding crucial information from the board.

The central issue: When Kalanick resigned as CEO, he also resigned from his board seat, but he quickly re-appointed himself to one of those outstanding and “fraudulently procured” seats, says Benchmark. It now alleges that Kalanick ultimately hopes to “pack the board to facilitate his desired re-appointment as Uber’s CEO,” and it aims to stop that maneuver.

The suit casts Kalanick in a highly unflattering light yet again. But if I were an investor in Benchmark’s funds, I’d be just as furious with the venture firm. What was Benchmark thinking, giving Kalanick three new board seats and carte blanche to do with them whatever he liked? It’s beyond belief that the firm wasn’t acutely aware of Kalanick’s management style a year ago when it agreed to this crummy deal. It had front row seats into what was happening at the company — not to mention unfettered access to the endless media coverage that Uber’s controversial corporate culture has received since its initial launch in San Francisco. A February blog post by former Uber engineer Susan Fowler may have set off the chain of events leading to this moment, but nothing new transpired between last year and this year other than intensified media scrutiny combined with growing public outrage.

“It feels a little to me like they painted themselves into a corner, and now they’re crying about it,” says succession expert Jeff Cohn of Benchmark’s lawsuit. “It was poor and unusual governance practice, and now it’s come back to bite them.” Adds Cohn, “There was always doubt around Kalanick’s style.”

We reached out to Benchmark earlier this morning. The firm hasn’t responded to our request as of this writing.

Despite the unprecedented nature of the suit — Benchmark has been sued in the past by a former portfolio company but has never sued one of them, as far as we know — it isn’t surprising, looking back at the last decade or so. As one institutional investor with many years of experience (and a penchant for privacy) tells us, “Giving away three board seats is far from standard operating procedure, but as you’ve seen over time, the leverage has swung from investors to founders, and now there’s this worship of the genius entrepreneur founder who can do no wrong.”

The problem, continues this person, is that, “that’s bullshit. It started with the Google guys, then Mark Zuckerberg. Now we have Snap, which gave shareholders no voting rights at all,” and is also backed by Benchmark, notably.

Asked if Benchmark’s own investors might have the stomach to sue Benchmark, this person jokes that “every VC today could probably be sued by [their own institutional investors]” for their overly relaxed approached in dealing with startups.

Either way, he believes that Benchmark’s lawsuit — which he calls a “misstep” — is “a completely obvious outcome of all this excess and absurdity of the recent years. It’s like when you’re a parent and you spoil your kid and he turns out not to be what you hoped. Are you going to love him or cut him off?”

Benchmark has clearly made its choice — cutting off ties to Kalanick with this lawsuit — but the move puts Benchmark in a particularly precarious position.

Not only does the lawsuit feel disingenuous, but the six-person partnership — considered among the top firms in the world and a unique alternative to fierce rivals like the sprawling Andreessen Horowitz, as well as the more metrics-driven Sequoia Capital — has now made plain that when push comes to shove, it won’t be so founder-friendly after all.

Even for seemingly thick-skinned Kalanick, that must sting. Given Benchmark’s reported 10 percent stake in Uber, its partners each stand to make hundreds of millions of dollars from the company in carried interest.

“They were riding the gravy train, and now they’re sticking it to him,” says the institutional investor of Benchmark. The optics, he notes, aren’t great. “These guys are all billionaires anyway, but this could definitely taint their reputation.”

A second institutional investor who also believes Benchmark should shoulder more of the blame, agrees that founders may grow wary of the firm following its recent actions. But he notes that even this worst-case scenario isn’t likely to turn off Benchmark’s backers.

Aggravated though they may be, “every [limited partner] will still re-up with Benchmark,” says the second investor. Between Benchmark’s early bets on Uber and Snap, as well as Benchmark’s early investment in the co-working juggernaut WeWork, now valued at $20 billion, “the fund that owns a position in Uber [and these others] is still one of the best funds ever.”



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