Brad Stone’s new book, The Upstarts, recounts the surprising rise – and possible fall – of the sharing economy. By looking at Uber and AirBnB, Stone brings life and drama to the origin stories of how a few lucky guys made the right decisions at exactly the right time. What follows is an excerpt detailing the rise of Uber.
Back in the summer of 2013, just as Silicon Valley investors were moving from optimism to outright exuberance, Travis Kalanick set out to raise Uber’s fourth round of financing. Colleagues say Kalanick set the terms of the financing round himself. He initiated discussions with half a dozen large investors and ran the process as an auction, searching not just for the most capital at the highest valuation, but for a powerful partner who could facilitate Uber’s coming global expansion. Yuri Milner’s fund, Digital Sky Technologies, was involved in the bidding, as was the venture capital firm General Catalyst Partners. But ultimately Kalanick’s attention settled on the dominant technology company in the land—Google.
Kalanick started talks with Google’s investment division, Google Capital, but gravitated to its older venture capital group, Google Ventures, or GV, and one of its partners, David Krane. Krane was an early Google PR manager turned investor with a penchant for wearing colorful designer sneakers. He wooed Kalanick with a vision of Google’s sixty thousand employees whose collective energies and 20 percent free time at work could be deployed to aid the Uber cause. Kalanick was intrigued by the idea of aligning himself with Google but wanted reassurances from the top and asked for a meeting with founder and CEO Larry Page.
So one evening in August 2013, Kalanick checked into a suite at the Four Seasons Hotel in East Palo Alto, paid for by Google, and woke up the next morning for a ten o’clock meeting with the most powerful man in Silicon Valley. Krane had orchestrated an experience that would blow Kalanick’s mind. When Uber’s CEO came down to the lobby, a prototype driverless car from the Google X lab idled in front of the hotel, waiting to ferry him to Mountain View. Sitting in the front seat was a Google engineer who could answer all his questions. It was Kalanick’s first ride in a self-driving car on real roads.
At the Google campus, Kalanick met with Page, Google senior lawyer David Drummond, and Krane’s boss at GV at the time, Bill Maris. Page assured Kalanick that the companies could work together to develop Google Maps, which Uber relied on for navigation in its apps, but he didn’t say much or stay very long. The more important legacy that day was Kalanick’s developing awareness of the technology that might radically change Uber’s business.
“The minute your car becomes real, I can take the dude out of the front seat,” Kalanick told Krane excitedly after the meeting. “I call that margin expansion.” In Kalanick’s estimation, payments to drivers were contra-revenue—a deduction from the top line. The inevitable future of robot cars was going to be awfully good for his business, he surmised.
Krane thought he’d sealed an exclusive investment for Google Ventures after a subsequent four-hour meeting with Kalanick and Uber’s head of finance, former Goldman Sachs exec Gautam Gupta. But it wasn’t done quite yet. That night, Kalanick called Krane and told him he also wanted to include a second investor in the round: TPG Capital, the San Francisco private equity firm that had engineered leveraged buyouts of such companies as Continental Airlines, J. Crew, and Burger King. Kalanick wanted the experience and connections of TPG’s legendary founding partner David Bonderman, then a board member at General Motors, and thought he could help Uber with its regulatory problems around the world.
Google invested $258 million in the ridesharing company. David Drummond joined the Uber board, while Krane joined as a board observer. TPG invested $88 million, buying shares directly from founder Garrett Camp and obtaining a provision that allowed the firm to get additional shares if Uber’s valuation ever fell below $2.75 billion, says a person familiar with the deal. Clearly nervous about investing in a startup, the private equity firm was hedging its bets; it also received an option to buy another $88 million worth of stock at the same price within six months. David Bonderman joined the Uber board as a director while his colleague David Trujillo, who had orchestrated the investment, joined as a board observer. (Bench- mark also invested another $15 million, and the rapper and entrepreneur Jay Z agreed to invest $2 million—then wired Uber $5 million, hoping for a larger stake. Although Kalanick was impressed by the brash move, he returned the difference.)
Uber’s coffers were now brimming. After the round closed, Kalanick climbed aboard TPG’s Gulfstream jet with Bonderman, TPG co-founder James Coulter, and Trujillo, as well as investor Shervin Pishevar and his partner Scott Stanford, to visit countries in Asia and gauge the company’s expansion opportunities there.
The world seemed wide open. Yet nearly every assumption Kalanick and his investors were making about the future in the fall of 2013 turned out, in the end, to be at least partially incorrect. Google was reluctant to cede the results of its driverless car research to another company and would soon look more like Uber’s mortal enemy, not its ally. Within a year, David Bonderman would leave the board of General Motors, which in 2016 would make a sizable investment in archrival Lyft.
And remarkably, according to multiple people familiar with the transaction, when the time came for TPG to purchase its second $88 million allotment of Uber shares at the same valuation, the private equity firm wavered and waited until the last possible moment before attempting to exercise the option. Characteristically stingy about giving out Uber stock and diluting the ownership stakes of existing investors, Kalanick declined the transaction. Calculating for the dramatic rise in Uber’s value between that round and the end of 2016, TPG’s lack of faith ended up costing the firm hundreds of millions in unrealized gains.
The biggest miscalculations may have been Kalanick’s own.
Asia would prove more challenging and costly than he had ever anticipated. He especially misread the atmospheric shifts in Silicon Valley’s fund-raising climate. “Emil,” he had said gleefully to Emil Michael, his new vice president of business development, after closing the investment from Google and TPG, “we’re never going to have to fund-raise again.”
Emil Michael was disappointed to learn that Kalanick thought Uber’s financing efforts were over—he considered fund-raising one of his talents. Born in Cairo, Michael had immigrated with his family to the United States as an infant, graduated from high school in New Rochelle, New York, and earned an undergraduate degree from Harvard University and a law degree from Stanford. He had a brief stint at Goldman Sachs before decamping to Silicon Valley in 1999, right at the peak of the dot-com bubble.
During his ten years in the industry, Michael had cultivated a reputation as being effective, loyal, and upbeat. He first met Kalanick in 2011, when he was taking a hiatus from high tech to work in the White House as a special assistant to Secretary of Defense Robert Gates. Kalanick tried to recruit him to join the startup, but at the time Uber looked like a luxury town-car service, not a worldwide transportation juggernaut. Michael was skeptical that it could ever be a big business.
But Michael remained friendly with Kalanick and by the time he joined Uber, in the fall of 2013, he recognized that Uber’s future was brighter than he had originally believed. While Uber Black remained one and a half times more expensive than a traditional yellow taxi, UberX was, on average, 25 percent less expensive and was starting to dominate the emerging rideshare wars.
Lyft and Sidecar had introduced ridesharing, but when Uber started aggressively rolling out the service, first in the United States in 2013 and then in Europe in 2014, the two rivals struggled to keep up. Uber had a more established brand and more money in the bank as well as upscale product lines, like Uber Black and Uber SUV, whose profits could be used to subsidize UberX rides and offer financial incentives to new drivers.
Uber was growing 20 percent each month and, thanks to UberX, had gone from nonexistent to ubiquitous nearly overnight in San Francisco, Los Angeles, DC, and Boston. That fall, Uber had moved out of its cramped offices on Howard Street to more spacious digs a few blocks away, on the ninth floor of 706 Mission Street, around the corner from the San Francisco Museum of Modern Art. Kalanick’s desk was across from Emil Michael’s, and the two would often peer at each other over their computer screens to marvel at new growth statistics.
“We’d have these moments, asking each other, ‘Did you see this thing?’ ” Michael says. “It just kept going.”
Some U.S. cities, such as Austin, Las Vegas, Denver, and Miami, resisted the arrival of unregulated ridesharing; amusingly, New Orleans sent Uber a cease-and-desist letter before it was even operating there. But Kalanick still had his trusty playbook as well as the political theorem known as Travis’s Law, which dictated that politicians accountable to the people could be pressured to accommodate any service that was markedly better than the alternative.
In October 2013, most of Uber’s four hundred employees flew to Miami on another workation, staying in rooms in the ritzy Shore Club in South Beach. When employees weren’t at dinners or parties around the hotel pool, which had the giant U from the Uber logo illuminated on the water, they walked the beach handing out Uber postcards and affixing pro-Uber posters to light poles. The company’s campaign to drum up popular support to legalize ride-sharing in South Florida had a website, an Instagram page, and a Twitter hash tag: #MiamiNeedsUber.
Miami was a challenging market for Uber. Private for-hire limos and sedans were required by law to wait an hour before picking up passengers and had to charge more than seventy dollars for the ride. The ordinance was backed by the region’s taxi fleets and meant to keep them safe from loosely regulated competition from limos and town cars. It didn’t stand a chance against sustained popular demand for ridesharing. Lyft and then Uber would open for business in Miami-Dade a few months after the visit by Uber employees. Though the companies’ services were still technically illegal, courts only occasionally levied fines against drivers, and the police didn’t shut down either service. By 2015, lawmakers were ready to change the rules.
“Demand is too great,” Miami mayor Carlos Gimenez told the Miami Herald. “I’m not going to drag Uber and Lyft back into the 20th century. I think the taxi industry has to move into the 21st.”
Uber was entering adolescence, winning political battles, growing, and adding executive talent. A few months before Emil Michael joined the company, Kalanick had also recruited a new chief technology officer, Thuan Pham.
Pham had left Vietnam as a child, spent ten months in an Indonesian refugee camp, attended MIT, and became an accomplished technical leader at the online advertising firm DoubleClick and cloud company VMWare. Joining Uber as a senior executive meant a grueling interview process that included a cumulative thirty hours of one-on-one conversations with Kalanick. Pham reorganized Uber’s technical team, accelerated the hiring of engineers, and oversaw a complete revision of its dispatch algorithms and database storage systems to keep up with a business that was doubling every six months and showing no signs of slowing down.
Pham’s impact at Uber was evident on New Year’s Eve, typically a night of frantic activity that had overwhelmed Uber’s systems for three straight years. “Thuan, if we have a system breakdown, I’m going to have an aneurysm and my death will be on your hands,” Kalanick told him earlier that day. But for the first time, Uber’s systems survived the night relatively unscathed. A few days later, Kalanick took Pham and his team out for a celebratory dinner and offered a rare bit of praise. “You did a great job,” Uber’s CEO said. Characteristically, the praise came with a new challenge. “From here on out, anything you can predict, I expect you to handle.”
Over the next few months, Kalanick executed two ideas that further propelled the growth of UberX. The first, helping Uber drivers finance the lease of new vehicles, originated with former Goldman Sachs commodities trader Andrew Chapin, who was working as a driver operations manager in Uber’s New York office. Chapin had observed that the biggest obstacle facing many prospective Uber drivers was the lack of a vehicle; a lot of them didn’t own cars because they were immigrants with bad credit or no credit.
Chapin thought Uber could help drivers obtain car leases and then divert a certain percentage of their earnings toward paying them off. The arrangement would pay dividends for the company, not only by putting more cars on the road but by ensuring that drivers devoted their energies to Uber rather than to rival ridesharing or delivery services. “The demand is there, but if we don’t help our partners and drivers get cars on the road, then it just doesn’t matter. We’re just not going to be able to grow,” Kalanick said that year.
To canvass for interest in such a program, Uber executives visited car companies and auto-loan financers around the country. Their initial reaction was skepticism. “The car companies were like, ‘Yoober? Who are you guys? Aren’t you the town-car company?’ ” Emil Michael recalls. Kalanick, Michael, and investor Bill Gurley visited the Detroit offices of Ford Motor Company, often referred to as “The Glass House,” and met with executive chair- man William Clay Ford Jr., who was also noncommittal. Kalanick got a photo of himself with Ford, the great-grandson of founder Henry Ford, plus a tour of the company’s historic displays in the lobby, where Gurley recalls the Uber CEO got lost in reading about the automaker’s storied past.
Ultimately, the big carmakers, GM, Toyota, and Ford, would sign on to the program, as would dealerships and auto lenders, and in time Uber would bring the financing in-house and make loans through its own subsidiary, Xchange. The program would be criticized for offering subprime loans with onerous terms and for repossessing vehicles when drivers didn’t make their payments on time. Michael argued that the program helped credit-challenged drivers who simply had no other options. “You are taking people who are already getting killed on loans and doing something better for them,” he says. “Of course the interest rate is high, but at least they have a chance.”
While driver loans helped stimulate the supply of Uber cars, a second move helped to spark demand and was just as controversial. In early 2014, hoping to improve business during the annual winter slowdown, when people curtailed their nights out, Kalanick cut UberX fares by up to 30 percent in U.S. markets like Atlanta, Balti- more, Chicago, and Seattle. The theory was that if prices went down, customers would use the service more and bypass rental cars, public buses, and subways. With more passengers, drivers would spend less time idling between rides, replacing the lost income from the fare cuts by completing more rides.
While the plan made sense, subsequent fare cuts would create unrest among drivers, and Uber would eventually have to reverse them in cities where lower prices didn’t spark higher demand. But it also accelerated the growth of UberX and, perhaps just as important, forced the less highly capitalized Lyft to introduce its own fare and commission cuts. Uber had discovered what startup gurus like to call the virtuous circle, the links between various parts of its business. Lower prices led to more customers and more frequent usage, which led to a larger supply of cars and busier drivers, which enabled Uber to further cut prices and put more pressure on competitors.
Even Uber’s most fervent supporters had not grasped the true potential of the business. Uber wasn’t just taking passengers out of yellow cabs, it was growing the overall market for paid transportation.
“I knew Uber was going to be big, but I didn’t know it was going to be so outlandish,” says venture capitalist Bill Gurley. “When we started testing lower price points, that’s when it was really ‘Oh my God.’ The price elasticity was impressive.” The increasing pace of the business surprised Kalanick himself. “I didn’t understand the scope of the Uber opportunity and I didn’t understand how the private equity and venture worlds would go to massively unprecedented places in order to be a part of that opportunity,” he says.
Nothing could stop Uber now, it seemed, except perhaps itself.
THE UPSTARTS by Brad Stone. Copyright © 2017 by Brad Stone. Reprinted with permission of Little, Brown and Company.