Chicago Booth’s Steve Kaplan and Starr Marcello are joined by New York Times reporter Mike Isaac to discuss the role of corporate governance in entrepreneurship.
Hal Weitzman: Startups can struggle with their working practices and reputations. Uber, under its founder, Travis Kalanick, seemed at times to lurch from crisis to crisis, while WeWork was widely criticized for the excesses of its founder, Adam Neumann. So is there a culture problem among startups? And do funders need to do more to ensure better corporate governance right from a company’s earliest days? Welcome to The Big Question, the video series from Chicago Booth Review. I’m Hal Weitzman, and with me to discuss the issue is an expert panel.
Steve Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at Chicago Booth and the Kessenich Faculty Director at Chicago Booth’s Polsky Center for Entrepreneurship and Innovation. Starr Marcello is executive director at the Polsky Center and adjunct associate professor of entrepreneurship at Chicago Booth. And Mike Isaac is a tech reporter at the New York Times, and the author of Super Pumped: The Battle for Uber. And we tried several times to ask Uber to join us for this panel, but they didn’t make anyone available.
Panel, welcome to The Big Question. Mike Isaac, let me start with you ’cause you wrote this rip-roaring account of what happened to Uber in the early years, through Travis Kalanick’s founding and then departure. A lot of your book and your observations in your reporting about the cult of the founder, and how it sometimes goes wrong, and as I said, we saw the same story at WeWork. Is the cult of the founder still as strong as it has been?
Mike Isaac: I think for the past, I wanna say two years, probably since 2017, we’re seeing a total curbing of this idea that the CEO, the founder is this know-all being that can lead companies into a new Nirvana of whatever tech thing that they’re proposing. My thesis is, like, the first, let’s say the past 15–20 years of the rise of consumer internet has been really largely getting behind the Larry Pages and Mark Zuckerbergs of the world, and thinking that, look this young boy genius—usually boy genius—in their dorm room can build the next consumer app and make billions of dollars and be successful, and we should get in line behind them.
And now I just think with people like Travis and people like Neumann, who was pretty clearly a snake-oil salesman, the latter at least, we’re seeing the limits of that type of thinking and not only the press and folks in academia, but the public is actually seeing that too. And I think there’s gonna be a real reckoning and we’re seeing that just—
Hal Weitzman: You’re saying there’s going to be, but Adam Neumann
(both talking over each other)
So it’s happening now because of these particularly high-profile cases.
Mike Isaac: I think so. The thing that I’m sort of curious about is that . . I thought that Travis was gonna be the peak of that, and then Neumann kind of one-upped him in many different ways. Like for all his faults, I think Travis produced an actual product that is very compelling and serves a purpose, and a lot of what Neumann built is falling apart as we sit here, right?
So I think we’re in the middle of it, but I’m wondering what the lag time is behind how many of these other cult-like leaders are gonna fall from grace, or if folks are gonna learn from it at all, or keep doing that.
Hal Weitzman: Steve Kaplan, let me bring you in ’cause these companies that start up and then go huge valuations and then are on their way to an IPO, whether at the moment they’re not making it, but in previous years they have, they’re often backed by very savvy, smart, experienced funders. Are those funders partly to blame for this cult of the founder?
Steve Kaplan: So it’s very tricky. And it’s tricky in the sense that if you ask VCs what they look for in an early-stage investment, there’s a big chunk of them who say, I invest in the founder, and so—as opposed to the business. So there’s this big long-standing debate: Do you bet on jockey or the horse?
I did a big survey of about 600 VCs around the world. And we asked them, and it’s like 50-50, 60-40, they bet on the jockey. And so, those people who are betting on the jockey, what are they looking for? They’re looking for people who know their industry, if it exists—doesn’t always exist when they do it. And they’re looking for people who have passion. And you know, you say, what is passion? That’s kind of, you know, and you ask them, and they say passion is an ability to energize people and hire people and get them to follow you. Because you have this idea, you kinda have nothing to start with, and to get it going, you have to, like, motivate people. And so that’s the, the real tricky thing. They’re looking for somebody who can take an idea and really push it.
On the other hand, you don’t want them to morph into a Neumann, or a Travis or Elizabeth Holmes—we forgot about her. She’s No. 3 on the list right there. There are three that have kind of crashed and burned. So, you—
Hal Weitzman: Although that was a slightly different case. It was more about deception than—
Steve Kaplan: It was deception, but it was also she was charismatic. She convinced the VCs. And so that’s the tricky part for the VCs is their sort of way of looking at things is to bet on the founder. My research pushes for the business, because the businesses typically change less than the people.
And so take Uber. Uber’s business is there. Travis is gone. The business is progressing. And that’s kind of true if you look at these big businesses. They’re doing what they did when they started: Google, Amazon, Facebook, they’re like the same businesses and the people sometimes change. Sometimes they don’t.
Hal Weitzman: Well, in the case of WeWork, it seems like the business—
Steve Kaplan: The WeWork, that’s a different . . . Well, and Theranos too, doesn’t have . . . you know, there wasn’t a business there. That’s going back to the funders. Their job . . . three things they do. They source the deals: they gotta find it. Then they’ve got to evaluate it. And so, in evaluating the deal, you put resources to understand the business, and one can argue in Theranos’s case, they didn’t get it right. And WeWork’s case, they probably didn’t get it right. Uber they probably got it right. It was business. It just went off the rails a little bit for other reasons. And then the third thing they do is they run the company—or not run the company but they monitor and advise the company after the investment. So that’s the period where they’re on the board. That’s the period where they’re trying to help the company. And that’s where the board is really your, that’s where you’re trying to figure out, is the company doing the right thing? And that’s your first line of defense against bad behavior, and in these cases, they didn’t really get there.
Hal Weitzman: They manipulated the boards, putting their family members on, and whatever else.
Starr Marcello, you work with these, the founders when they’ve got their new ideas, and you’re helping them develop them and actually make them real. To what extent do you talk about these corporate governance issues? Who is on your board?How do you curb excessive behavior? What guidelines do you put in place right from day one?
Starr Marcello: We do talk about it right from day one with the students because often they are looking at even building an advisory board before they create the company and before they even incorporate. And a lot of the times in our work, we’re working with young people who are starting these companies, and they need advisors who have more experience, who know the industry, who know the work that needs to get done to really guide them along the way. So we start talking about issues like that very early. In the cases that we’ve just been talking about, one of the things that really stood out to me was what happened with the voting power that Travis had and that Neumann had at WeWork, and how similar those situations were that made it hard to make changes at the CEO level when there were problems that occurred.
And so some of those types of issues, we don’t touch on in the early days of coaching these founders, and it’s something interesting to think about as we broaden the discussion around culture and responsibility and what it’s like to grow a company from the very beginning, which is where we often are with the founders through to something so scalable and impactful as an Uber or a WeWork.
Hal Weitzman: Founders are often very reluctant. You don’t need to watch Shark Tank or Dragons’ Den or whatever to see that founders are extremely reluctant to give up any control, let alone majority control over their companies. Is that what you’re seeing?
Starr Marcello: That is true. And one of the things we teach them is how to even think about going after venture-capital investors, and what that means in terms of control and what the goals are for how you wanna scale your company and what’s required to do that. The businesses that we work with are in all different industries, not only tech businesses. And some of them don’t have the same capital needs that these big high-tech companies have. And so some of our founders choose not to engage with VCs at all and to bootstrap their companies if they can.
Steve Kaplan: You see, what’s so puzzling, though, about this, is that the venture model really is to have good governance, where they have the board, and if things don’t go so well, they get control. And so what happened in these— and I’m curious what you think— is that they were able, in these situations to get the superior voting rights, which happened in Google. It happened in Facebook. It happened in Uber. It happened in WeWork. And that’s really not the typical model, as the typical model we see with our students, where the VC . . . And what you’re saying is the pendulum sort of moves back and forth. And now it sounds like it’s moving more toward VC a little bit more control.
Mike Isaac: So the thing that I keep hearing from VCs out West . . . It’s very interesting to hear that it’s not the case, at least in other parts of the country, but one of the sources that I talk to keeps telling me that you have to play the game that’s on the field, meaning the control that the VCs are giving up is part of a wider trend of a lot of folks, especially when there’s a wealth of capital flowing into the Valley right now. There’s a ton of different family offices there. Fidelity is investing. All this money is moving down to as early as they can get in because companies are staying private longer. What do you have to do to get into that deal?
And I think that once [Facebook’s Mark] Zuckerberg and [Google’s Larry] Page and [Snap’s Evan Thomas] Spiegel and probably untold CEOs that I just don’t know about have started to really popularize the idea that—and this goes back to the cult thing—that the founder should have the control, then the VCs, at least, had to give up some of that.
Now, the point that I would make is that I think there are just as many examples of the private-equity guys coming in and perhaps ruining the business entirely, or taking the founder out or ousting them or working on some more short-termism-type things that I think is anathema to how people in the Valley like to run companies, and so I totally get that, but I do see a lot of this in a spectrum, and I feel like if Neumann—or let’s say Zuckerberg, for the first 10 years of Facebook, pre-2017, was considered an ideal CEO, or at least the ideal of what you can get by giving up all the control to them, then perhaps the Neumanns and the Holmeses and the Kalaniks of the world are the other end of that, which is where this can go totally wrong. My thesis, again, is: Is this going to shift as we see it?
And maybe. But maybe there’s just so much money in there that they have to continue giving up that control? I don’t know.
Hal Weitzman: Starr Marcello, let me come back to you and ask you about the companies that are really starting up right now. One of the problems that happened with Uber, as Mike described in his book, is they really didn’t understand what their reputation was. They weren’t managing it very well. They didn’t really care at times. Are your new startups very aware of how they’re being seen the whole time? Are they self-aware?
Starr Marcello: I would say yes, they are aware that reputation is important. And, especially if they’re working on something that touches consumers, a B2C-type company, they are monitoring how they’re being talked about in social media and they’re looking and thinking about how to grow their reputation. I think just that in the early days that we work with founders, there’s so much that they’re trying to do all at the same time that, you know, would I say that they are very sophisticated in how they think about reputation management? It’s probably on the list, but maybe not at the top of the list, because they’re thinking about really fundamental business drivers for actually making a successful venture. And so—
Hal Weitzman: I guess one of the reasons I ask is because the story of Uber and many of these very successful hockey-stick-type startups is they grow almost too fast to add on the amenities. So they’re very, very fast growing, and suddenly they realize they’re a giant company, but they’re not behaving like a giant company. So that’s why I’m asking if they think, well, what if it does work out, what will it look like? Is that a conversation that you have?
Starr Marcello: Yes. In terms of the culture and defining what are the cultural values of the company, we do have that conversation with the founders so that they can try to think in the future what they’ll look like as a big company. One of the things we talk about with the ones who grow early on is when to bring in an HR person, for example, which seems maybe simple, but in Uber’s case, they waited a long time to do that.
And, there’s other things you will read . . . Ben Horowitz’s book, The Hard Thing about Hard Things, he says that at 50 employees, you should have a dedicated HR person. And so, we talk about some of those structural things you can do with a company to try to keep people on best behavior, to establish practices and protocols so that as you scale up and grow, you have some systems in place.
Hal Weitzman: OK, Steve Kaplan, apart from corporate governance, which is always a good thing to get right, what about culture? Do the funders care enough about culture? Do they watch culture?
Steve Kaplan: I think, again, it’s very tricky ’cause the culture that gets you started and gets you successful can at some point get outgrown. And I think the really tricky part—and I keep saying tricky because it is tricky. Basically more than half of venture investments, they lose money. So having a successful venture investment is hard. And then they make something like, I think the numbers, they make more than half their money on the 5 or 10 percent of deals that are more than five times their money. So they are making their big money on the things like Uber and WeWork. And so what happens, and when these things start scaling and going really well, they’re going really well.
Hal Weitzman: And no one asks questions.
Steve Kaplan: It’s like, things are great! Everybody’s drinking the Kool-Aid. So it’s very hard to get it to go from a startup-y business, where now that you’re getting bigger, and it no longer makes sense, and you have to put in some of these structures that Starr mentioned, it is very hard. And when the board pushes on it, if the CEO or the founder pushes back, the founder has a lot of power because he or she has just, you know, skyrocketed. And so that’s the dynamic that makes it hard. Now, what you ought to do if you’re the VC or the board member is push back really hard.But as a practical matter, and I think your book shows that it’s hard to do.
Mike Isaac: You don’t want to mess with a good thing when it’s going up. Like you said, like VC investments, most of them are not designed to lose, but most of them are probably gonna lose, so the big winners, you just wanna, OK, do what you’re doing, and I don’t wanna mess that up.
Steve Kaplan: And you put rocket fuel on them.
Mike Isaac: Yeah, exactly, pouring it on there. But I agree with you. lt’s a difficult . . . I think the problem for Travis was that he wanted to keep that startup-y feel even when Uber was at global scale and hired more than 10,000 people, and you just can’t— at some point, probably the best CEOs learn that you can’t operate the same way as when you’re in a garage or with 50 people or whatever. And maybe there’s a point at which you bring in more-experienced hands or people who have run—not necessarily to replace the CEO—but that have run global businesses with tens of thousands of people around the world.
Steve Kaplan: So well, Zuckerberg brought in Sheryl Sandberg.
Mike Isaac: That’s right.
Steve Kaplan: Bezos is unusual. He seems to be able to have just done it. I mean, he’s impressive.
Mike Isaac: But those are, I would imagine, uncommon.
Steve Kaplan: (laughing) Obviously. And Schmidt came and that was where the board, see that was an example where the board saw there was chaos in a good business, and they brought In the CEO to kind of manage the chaos and then at some point, Page was, you know, learned enough to go in and be CEO himself.
Hal Weitzman: Steve, I wanted to ask you. One of the things that comes out in the book and in many of these stories is that startups—you think of Airbnb and Uber—they often operate in these sort of murky areas. It’s not entirely, not maybe illegal, but not necessarily legal. Often that’s where they get their edge. They’re challenging the system. If they’re truly disruptive, the rules have been written by the big incumbent companies to keep them out. How do you guide startups that are really disruptive to think about that gray area without stepping over the line, and it all going horribly wrong?
Steve Kaplan: I think, you know, that’s a risk-return question. And I think each person answers that differently. Like we, in the last several years, in the New Venture Challenge, we had a number of cannabis companies and, you know, students who wanted to do cannabis companies. And that’s like, OK, that wouldn’t be for me.(panelists laughing) And it was not for me. And it was risky. But if you did it, the regulation and the legal went your way and some of those people did extremely well. So that’s one where I think I would tell them, like, “Don’t do something that is gonna have you end up in jail, because that’s not a good thing.” And but if you’re—
Hal Weitzman: What’s a good example? Because, I mean, the weed industry or cryptocurrency, you’re often dealing with large amounts of cash. They can’t find a bank to put it in. What do you advise those companies?
Starr Marcello: Yeah, well, and regulatory hasn’t caught up yet, and so there is this gray area, and many of the entrepreneurs see that as an opportunity.
Steve Kaplan: And it is.
Starr Marcello: Which it is, yeah. And so, yeah, it is a difficult area, and there’ll be a period of time where there is this opportunity,and then regulators will catch up, and then the circumstances will change. One of the things that your question reminded me ofwas just this concept of the entrepreneur as disrupter. And this is also, I think, in Mike’s book too. This concept of what’s allowable with the disrupter title on, and one of the things that Steve and I talk about a lot with the students and other entrepreneurs that we are supporting is this quality that we look at called coachability. And I was thinking about that, and marrying it against this concept of the disrupter, because often, when you’ve worked for years with entrepreneurs, you see this coachability aspect as a signal for whether they will be the persuasive, successful founder. Do they take advice?Do they listen? What are they like to work with? And we can see that those often correlate to people who then are able to raise money, find a cofounder, hire people, that kind of thing. But the entrepreneur as disrupter would speak against that, that it’s OK to not be coachable, or to really be a maverick or not necessarily take all the advice, and that that’s maybe what we accept as some entrepreneurs who carry that mantle.
Hal Weitzman: Mike Isaac, among the companies that you cover, tech startups, are they looking at Travis Kalanick and Adam Neumann as examples of what not to do, or are they just people that went slightly too far?
Mike Isaac: Oh, did I write a rule book on how . . .
Steve Kaplan: Because they are billionaires.
(panelists laughing and talking over each other)
Hal Weitzman: They made out well, but is the lesson really getting through? I guess is my question.
Mike Isaac: No, no, that’s a great question. I’ve been thinking a lot about this because someone asked me recently, “Is your fear that you wrote an instruction manual on how to get very rich?” And I mean, Travis is a billionaire many times over right now. He’s got a new venture. He’s investing alongside of the Sequoias of the world and other different companies and has not—he was at the Met Gala— has not been exorcised from polite society or whatever. So the consequences there, as much as people like me report onthe ethically questionable practices, have not really come around.
That said. I’ve said this a few times. I do think that there’s been a sort of generational change in how they’re viewing behavioror what companies should be doing or not doing. I’m seeing employee . . . Even outside of startups—in the big companies, the Facebooks, Googles, Amazons of the world—there’s like—
Steve Kaplan: Nike
Mike Isaac: Right, right, right. There’s a real, I think it’s a real thing that they want the products and the software that they’re building to live up to the ideals that they joined the company for in the first place. I think every corporation has some sort of corporate platitudes, mission statements that are probably glossed over a lot of the time. I’m sure any of the investment banks have the same sort of statements as the ones in Silicon Valley. But the difference seems to be that the people in Silicon Valley actually want to live that ethos, and we’re starting to see the workers push back. And that’s really scary for the CEOs, because they’re not used to that, right? Zuckerberg isn’t used to getting an internal letter leaked to the press that pushes him to change his policy on political ads, or GitHub not taking ICE contracts anymore because the employees don’t feel comfortable with that.
So I do think there’s a real sea change there. And I think the positive part of this is, to your earlier point, Starr, is thinking about culture at earlier levels and how that can scale. If you’re lucky enough to be successful, how that can scale over time.
Hal Weitzman: Now SoftBank was a key funder of both Uber and WeWork, and you talked about family money. There’s Saudi Arabian money flowing into the tech and all kinds of startups. How is the good-old fashioned funding formula that we talked about where you actually have to have a company that will eventually actually make a profit, how is that formula being changed by all this fresh money coming in? SoftBank apparently telling Adam Neumann to dream big and do whatever he wanted. (Mike laughing)
Mike Isaac: The SoftBank thing has been the most fascinating shift in dynamics in the Valley over the past few years, just because they have this enormous fund, the Vision Fund, $100 billion that they have to invest over a period of five years, I think. That means parking enormous amounts of capital into a number of startups, and they can’t do small, strategic investments. That means they plunk a billion dollars into WeWork or DoorDash or a bunch of different companies across the Valley.
And I think that has repercussions in a number of ways. A lot of the VCs have been just privately complaining to meand other reporters about it, but it creates a level of indiscipline. When you have, just, unlimited money, you don’t have to worry about building a business because you can always go back to the capital faucets, and SoftBank is the one that seems to be pouring it out.
Hal Weitzman: And it’s also, I mean, is it not famous also for not going through very rigorous checks. It’s about relationships and instinct and—
Mike Isaac: Yeah, right. Masa Son is hailed as this visionary. And the big question for me has been: Is he a genius or totally nuts? And I really, I honestly don’t know. But that’s probably a whole other book in and of itself. But I think that we’re starting to see the limits of some of that if you look at his media tour over the past few weeks. It’s been in him eating humble pie and saying, we made some bad calls and now we need to rein it in. And I think the Vision Fund is not up. I don’t think it’s down but I think it’s up far less than it was.
Steve Kaplan: No, it’s got to be down. This was something where it’s closer to totally nuts than visionary. Because if you look at the amount of money going into venture-capital funds every year in the United States, it’s $40 billion. And so a $100 billion dollar fund, which is $20 billion a year over five years, that’s like, increases the amount of venture money by 50 percent in one fell swoop. It didn’t make sense when he raised it. And you’re seeing the fruits of that is it’s just too much money into that ecosystem. It’s a little bit like what happened in the dot-com boom. In the dot-com, there was more money then. It was worse then, but you have a destabilizing force.He raises the valuations on these companies. They spend too much money. It’s actually great for the consumer, right? The consumer, you get your free delivery guys.It’s awesome. It’s awesome, but at some point, it breaks down. And the really good news is it has broken down. He’s gonna take a huge loss on WeWork, which is terrific. And Uber, we’ll see. Uber is a real company. I’m a little more optimistic that it’ll be cash-flow positive someday. But is it worth $45 billion? We don’t know. But Lyft is actually about cash-flow neutral now if you look at the cash flows.So I’m sure the potential is there. But the point is they inflated these valuations, and then the other VCs had to follow. And so you got this sort of treadmill, which is a little crazy. I think now it’s been broken. I don’t think he’s gonna get that same kind of fund. And you’ll have a little bit more sanity, which is a very healthy thing.
Hal Weitzman: Starr Marcello, you’ve seen some of the insanity but at the lower level. These newest companies, are they looking to get these giant injections from—(panelists chattering)—from Saudi Arabia. Is that considered success, getting a big Saudi investment or a big SoftBank investment?
Starr Marcello: Getting any investment they count as a success in the early days. So something on the scale of that—
Hal Weitzman: But would they prefer to get a billion dollars from a company that tells them to do what they want? Or $75, 000 from a Chicago investor who sits on the board and tells them what to do?
Starr Marcello: I wanna answer that question a little differently. I just want to support, maybe, our entrepreneurs for a minute, which is that in my experience over the past 15 years or so working with them, they really do wanna build real businesses.
Steve Kaplan: It’s true.
Starr Marcello: So you know, what inspires them, what they think of it as success is actually building something real and having it have an impact and actually touch people’s lives and solve whatever problem they’re trying to solve. And that has been my experience for this entire time that I’ve been working with entrepreneurs here is that that is the primary thing that they want to happen. And if they get investors, would they love to have a billion dollars and just free rein to do whatever? I’m sure that sounds very exciting to them. But really, they’re very interested in the practical things that need to get done and what needs to happen in order to have something that can sustain for the foreseeable future.
Mike Isaac: Will you ship some of those out to San Francisco? (all laughing) Because that is not the mentality out West.
Steve Kaplan: But it’s very tricky, ’cause we had two at about the same time that had very different outcomes. So we had Grubhub, which was a startup in our venture competition, and they stayed here and they kind of built themselves and they’re actually cash-flow positive and they’re having some issues now ’cause of all this money coming in. But it’s a real business. They’ll be fine when sanity returns. But they stayed in Chicago and they were trying to find a business model that worked.
Bump won our competition two years later, and it was one of the top 10 iPhone downloads in 2008, 2009. They won in 2009. They went to the Bay Area, and they were not encouraged to make money. They were encouraged just to get users and they ended up—
Mike Isaac: They sold to Google for not a lot, right? They sold to Google for not a lot and they never had $1 of revenue.
Mike Isaac: Wow.
Steve Kaplan: And so those are two extremes, like, you can do the West Coast model, but at some point, you have to make money. And the Midwest a little bit more will make money earlier. Now, maybe you don’t get the moon shot, but that’s . . . They’re very different philosophies. It’s very interesting.
Hal Weitzman: OK, Midwest is definitely best. We can—
Hal Weitzman: Mike Isaac, I wonder what lesson you think there is about handling the gig economy. Something that’s happened to Uber since Kalanick left, or continues to happen, is their relationship with their drivers is often very, very fraught, contentious. The drivers, some of them at least, want to be treated like employees. They’re not earning what they used to earn as taxi drivers or limo drivers. Is there a lesson there? And other companies like Airbnb will have that with their contractors or the people that they’re pulling together? They don’t control them, but those contractors sort of represent the company. How do companies think about that now? Is there a lesson there?
Mike Isaac: It’s very interesting. I think Uber, they probably didn’t, definitely didn’t invent the category of contract workers, but they popularized the idea of a hybrid model of what it means to be an employer or a contract worker, and I think there’s tension there. And the interesting thing . . . In California, we have this bill, Assembly Bill 5, that’s basically to make a lot of gig people employees. I was on some radio show, and there were people calling in, and probably just as many people were against the idea of becoming employees as there were people supporting it. But there has been a real concern that a lot of labor protections have been eroded—very hard-fought labor protections—over the past hundreds of years are being eroded by this idea of hybrid employment. So my guess on a lot of this, it’s kind of the cat is out of the box or whatever metaphor. Like, the model is sort of here, but I feel like we settle on some hybrid thing, where protections increase. Maybe they have . . . Governor Newsom in California was sort of nodding to maybe a compromise between full contractor and full employee, like added protections or a wage floor or something. That seems to be where they’ll end up. Or otherwise, I imagine what they don’t want to do is decimate a bunch of businesses that were created that rely entirely on this model completely. So that’s my guess.
Steve Kaplan: I would just, weigh in that, like, the contractors are providing their labor voluntarily, and one of the strengths of the US system are relatively free labor markets, relative to Western Europe, and I’d hate to become Western Europe, particularly given the current political situation, becoming France and Spain and Italy is not a good thing. And so you have to have a balance here.
Hal Weitzman: I guess the question is, do they owe any responsibility beyond the particular contractual payout to those workers?
Steve Kaplan: I think if people are coming voluntarily. A lot of people—it’s what you heard on the radio show—a lot of people are doing this voluntarily and are quite happy. I often ask Uber drivers, “Is this good or bad?” And the majority of them are quite happy. But not all. Not all. So that’s the, you know.
Hal Weitzman: And I want to come back to this question of profitability because Uber . . . Well, WeWork definitely isn’t profitable.
Steve Kaplan: No, that’s not . . . We don’t like that business.
Hal Weitzman: Uber, for all that it’s, you describe as a real company or a success, it’s not yet turned a profit. So what do we think of as success? Is there a difference, again, between Midwest, good ole Midwest make-money values, and Silicon Valley values? How do you think about—
Steve Kaplan: First of all, have you heard this one? CIMITYM?
Mike Isaac: No.
Steve Kaplan: I use this all the time. “Cash is more important than your mother.” And so that’s the thing where, like, if you have your mother, your business can fail, or your business can succeed, rather, if you have your mother, but if you don’t have cash, it will fail. So at some point, you have to make money, but some of these things go a long time. Like Amazon went a long, long time. But Amazon, I think, always had that path to profitability. And I think that’s what you need. And I think Lyft, if you look at the numbers, the cash-flow statement, they’re actually about cash-flow neutral now. So they’re close. And they’re, I think, reporting that they’re gonna go cash-flow positive in the next year or two. So they have a clear path. Uber has a different business model. It’s a broader business model. So it’s a bit more ambitious, and they’re gonna be losing money for longer. And that’s what you have to decide as an investor. Do you have that path?
Hal Weitzman: But if Uber had come to you and said, “We have this disruptive idea. We don’t know when or if we’re ever gonna make money ’cause we have to give away so many subsidies to drivers and—”
Steve Kaplan: Well, you gotta do that, that’s the analysis you do. That’s the analysis that public shareholders—
Hal Weitzman: Do you think it would have passed the smell test in Chicago?
Steve Kaplan: The answer is I don’t know. And, I think that, yeah, I don’t know.
Hal Weitzman: OK, Starr, how do you think about profitability? What would you tell—
Starr Marcello: Yes, I mean it’s just an interesting question. Because when you teach entrepreneurship, you have a lot of students who see these models that get talked a lot about in the media, and that are in Silicon Valley, where you don’t have to make money right away if you get enough users, if you build your base. And so every year, we see a number of business ventures with that model, saying, “I’m gonna be the one who makes it.” And it’s really hard to do. And it’s hard to find, I think, I tell people, it’s hard to find investors in this geography, at least, who have seen a lot of those be successful here. So often, we will send them to places like the Valley or the East Coast to talk to some of the investors out there and get other perspectives, because it really is hard to do, to build a business that way, and to hope at some point in the future that revenue will be generated.
Steve Kaplan: But that’s why people look at things like the lifetime value of a customer-to-customer acquisition costs. And they are looking at these metrics to say, “OK, for each customer, I make money, even if I’m pumping a lot of money into getting the next customer, if in a particular customer, I make money, then at the end of the day, it oughta be OK.” And that’s true here. But it’s also true. They do that on the West Coast as well.
Hal Weitzman: Yeah. Mike Isaac, what about profitability in Silicon Valley? (Steve laughing) Do people care? Is it becoming more important?
Mike Isaac: I think that a path to it is more attractive than it probably was before. I think particularly because everyone looked at Uber’s IPO and saw the very grim reality of, this is not $120 billion dollar company. Or the valuation was just way out of whack with what the public markets thought it was gonna be. And so, the days of, I think it was Twitter that was unprofitable for a very long period of time. I’m not even sure if it’s profitable now, but it still had 40x valuations on revenues for a long time during its public life. And I think those days of tech-company public overvaluations are coming to an end, or at least sort of tamping down. And that, I think is, to your point earlier, like a healthy behavior. That’s probably a good thing.
And so, I imagine that . . . I think it’ll be hard to get the idea that, “chase users first and money will come,” you can’t really beat that out of the heads of people in the Valley, ’cause that’s gonna be what Marc Andreessen says. That’s gonna be what the Zuckerbergs of the world say, and it worked for their businesses, so it can work for you too sort of thing.
Hal Weitzman: So you’re not saying specifically that profitability is a criterion that is very important to funders?
Mike Isaac: Not at the earliest stages, you know? I think once you get to, OK, we’re at our D round or we’re taking later-stage capital, we need to think about when we’re going public. Then that’s when you need to start thinking about it. But not at the earliest stages.
Hal Weitzman: OK. Well, so it sounds like the party is still going.
Mike Isaac: We’re still having fun out West—
Hal Weitzman: Just enjoy it ’cause it probably won’t last for very long. On that note, our party is definitely over for the moment. My thanks to our panel, Steve Kaplan, Starr Marcello, and Mike Isaac. For more research, analysis, and commentary, visit us online at review.chicagobooth.edu, and join us again next time for another The Big Question. Goodbye.
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