Since its founding, Uber has redefined what it means to be a startup. It's lost more money than any modern tech company pre-IPO. It's pioneered the use of stock buybacks before it even had public stock to buy back. And now, Uber is facing what amounts to a stock-drop lawsuit, prior to the public offering and subsequent trading malaise that typically (and, uh, by definition) precedes one:
Uber Technologies Inc. and former Chief Executive Officer Travis Kalanick were accused in a lawsuit of covering up a series of “illicit business tactics” while raising funds, leading to billions of dollars in losses for the ride-hailing giant’s investors. The startup and its ex-CEO failed to reveal at least six instances of malfeasance while “successfully soliciting billions of dollars in private investment,” according to a complaint filed Tuesday as a class action in San Francisco federal court.
The plaintiffs, the Irving (Texas) Firemen's Relief & Retirement Fund, invested $2 million in Uber back in 2016 through a fund operated by Morgan Stanley. Since then, the lawsuit claims, Uber's private valuation has dropped $18 billion. So they're suing.
If Uber had recently gone public in a massively overhyped IPO, only to shed double-digits as the true depths of its mediocrity came to light, a lawsuit would not be unusual. Just ask Blue Apron. But it's rare for a startup to face investor suits in any situation short of complete and utter fabrication on the part of the founders. It basically signals that the highly illiquid startup stake you've got – and for which you'd like good money – is worthless.
The Firemen's Fund managers might not consider Uber a complete fraud, but they do wish Travis Kalanick and friends were a bit more forthcoming about some of the dirty tricks they were up to:
"In a span of only a few months a shocking litany of corporate misconduct came to the fore, and investors learned startling truths about the willingness of Uber's C-Suite executives to flout local, national and international law, stifle competition, misappropriate trade secrets and seek vengeance against detractors," the suit claims. "The Company's vaunted corporate culture was revealed to in truth consist of a toxic hotbed of misogyny, sexual discrimination, and disregard for the law that threatened the Company's reputation, business and prospects."
The suit claims that practices Uber used to track its rivals and deceive authorities — which Uber called "Hell" and "Greyball," respectively — threatened the health of Uber's business.
It's easy to sympathize with the investor who bought into Uber at the exact moment that the company's narrative was undergoing that beautiful reverse alchemy known only to certain Silicon Valley types that turns gold to shit. But what is the alternative scenario here? Were Uber's investor documents supposed to include a section that explained how the company was a simmering cauldron of sexual harassment and wanton roguery? Were they supposed to have a sidebar on Hell? Moreover, how could Uber have known, suffused as it was with Ayn Randian levels of hubris, that it would get caught at all this?
Even if Uber's investors have a case that the shocking particulars of the company's many sins were hidden from them, it would have taken a child's naïveté to think Uber was operating totally above-board. In 2016, a diligent investor would already have heard about Uber openly discussing espionage against journalists, engaging in a sophisticated sabotage campaign against Lyft and, of course, boob-er. You gave your money to boob-er.
That said, what's come out in the past several months about Uber has shocked even the staunchest of its skeptics. And it appears that the investors are trying to tie Uber's shenanigans not just to its diminished public reputation in the present, but to artificially inflated revenues of the past:
"Kalanick and Uber failed to disclose that, in order to show strong short-term growth, the Company was employing and plotting to employ a variety of illicit business tactics that threatened Uber's business, reputation and long-term prospects," the suit claims.
In this formulation, the early results Uber provided to investors were the result of illegitimate business practices, not true demand. This is a step beyond “you're worse than we thought,” but not a great one.