By Alexandre Taylor
On any given day, Adam Neumann, co-founder and CEO of American real estate firm WeWork, could be drunk, stoned, or both. Meetings were held between working hours, from midnight to two in the morning. Company retreats included regular blackouts, and for one employee, the unfortunate experience of being urinated on. Despite leaving the company, that same employee told New York Magazine that the retreat was one of the greatest moments of her life.
Thirty years ago, a marijuana-smuggling, tequila-guzzling CEO would have sent investors running for the hills. Today, considering WeWork’s multi-billion-dollar series run, not to mention rabid employee loyalty, it seems the opposite is true: investors tend to prefer rockstars, the crazier the better.
So, what changed? In short, the nature of start-up venture capital (VC).
Within the past twenty years, particularly after the death of Steve Jobs, a new focus emerged in private investment: company culture. The deified Jobs, whose pressure on employees to innovate is now canonized as the secret to Apple’s continued success, made a lasting impact, not only on tech firms, but also on their early partners. VCs got hooked on growth, pushing for returns to maximize their selling positions. Desire for effective management began to overshadow the need for market-ready products, and multi-series returns became the priority. The result is that today’s startups face incredible pressure to grow as fast as possible, by any means possible.
Considering 70-80% of new companies fail, individuals who can match such investor fervor are often highly impulsive and delusional. To succeed is to gamble, and when one succeeds, praise and reward are unlimited. The outcome is that a section of tech CEOs are willing to take enormous risks, suffer from God complexes, and are incredibly passionate about their work. In turn, their achievement in the face of failure fosters a cult of personality, enabling unique business environments such as WeWork’s open bar policy (as of last year, employees are now limited to four drinks a day) and early-morning meetings. Unbound by convention, such CEOs treat themselves less like executives and more like rockstars, soaking in alcohol, throwing outrageous parties, and hiring, firing, and promoting employees at the drop of a hat.
Yet the emergence of impulsivity and delusion in tech executives isn’t only a result of natural selection—VCs also nurture such traits. “The most critical part of [venture investing] is to identify great entrepreneurial leaders,” writes Bryan Stolle of Wildcat Venture, the firm behind Ticketfly. In the eyes of VCs, great leaders are outliers. As Mr. Neumann famously claims, Masayoshi Son of SoftBank, WeWork’s leading investor, once told him that he “appreciated how [Neumann] was crazy—but thought that he needed to be crazier.” For Son, Neumann’s “craziness”—his ambitions as a presidential candidate, his vision for WeWork to end world hunger, and his rabid cult following—was evidence of executive potential. Yet as WeWork’s IPO (initially valued at $47 billion) grew nearer, cracks began to show. WeWork’s valuation, based on Softbank’s $2 billion investment, dropped as the company’s cash hemorrhage (reporting yearly losses of $2 billion) drew fire from investors. As of late September, Neumann stepped down as CEO after a $1.7 billion Softbank buyout. For investors, the buyout spells disaster. Without Neumann’s misguided direction, WeWork’s days masquerading as a tech innovator are dwindling.
Had Son and others, including JPMorgan Chase’s Jamie Dimon, looked back only two years to Uber’s “Travis problem,” the Neumann and WeWork story could have ended differently. In many ways, Travis Kalanick’s fall and Uber’s corresponding IPO drop (down roughly 20%) reflects the crux of the Rockstar CEO phenom. Mr. Kalanick, a UCLA dropout and Uber co-founder, succeeded Ryan Graves as Uber CEO in 2010. By that time, he had already been accused of tax fraud by the IRS as a Red Swoosh executive (his second failed startup), which Kalanick denies knowledge of.
VCs and the public were quick to forget about Kalanick’s past. The same traits which could have landed the Uber CEO in prison were soon being lauded as Uber’s saving grace. “Kalanick’s relentless personality has pushed Uber to enter and thrive in city after city,” wrote Richard Feloni of Business Insider. Kalanick’s deceit and recklessness continued to rule, even in dealings with Apple’s Tim Cook. Kalanick, one of the first CEOs to be named a “tech world rockstar,” defied Apple’s privacy policies by “fingerprinting” Apple devices. Uber account fraud, where drivers wiped phones to take advantage of new-rider discounts, had been running rampant in China. Desperate to increase Uber’s revenue in China, Kalanick pushed to leave permanent data on Apple devices, shielding their new code from prying eyes by geofencing Cupertino’s access to the new version of Uber’s app. Surprisingly, Cook went quietly.
Just as with Mr. Neumann, Uber’s business policies reflected Kalanick’s leadership style. In a company-wide email dating back to 2013, when Uber was celebrating its “50th global city,” Kalanick pushed employees to “have a great fucking time” and noted the importance of consent (“emphatic YES!”). Another note cautioned employees to not “throw large kegs off of tall buildings” or vomit at the Shore Club. In 2017, Kalanick, along with other top executives, visited a karaoke-escort bar in Seoul, which prompted a public complaint by a female Uber employee. At the time however, Uber was growing at incredible speed, racing past an $80 billion valuation. Yet the nightmare of Rockstar CEOs, the initial public offering, was soon approaching.
Uber’s valuation depends on one key assumption: that the company is in its early stages of growth. Uber has indeed grown, with revenues more than doubling to $15.8 billion since 2017. However, as seen with WeWork, which lost nearly $700 million in the first half of 2019, firm growth is not synonymous with profitability. Travis Kalanick’s strategy of “growth above all else” is pitched easily, but difficult to translate into returns as investment-backed growth is successful in taking market share but affords little long-term financial security. Indeed, as Uber’s losses climb ($5 billion in its last quarter), Lyft continues to sap Uber’s customer and driver loyalty. In the past three years, the percentage of US customers who only use Uber fell from 74% to 51%, while the percentage who only use Lyft rose from 5% to 15%.
Market disruptors can be, and will be for the foreseeable future, one of the most profitable opportunities available to venture investors. Clamoring for the next Amazon, VCs for the past decade have surrendered to magnetic personalities, whose ideas, often grounded in fantasy, fail to create returns for investors. Moreover, from WeWork to Uber, such personalities are wholly unfit to lead multi-billion-dollar companies. Their impulsion and delusion, either un-checked or actively encouraged by investors, seeps into every framework of their business. Yet until investors and the market begin to differentiate personality from product, the world will continue to be captivated by the Rockstar CEO phenom. For the likes of the charismatic, deluded, and reckless, the limit for funding is the depth of VC pockets.