Uber CEO Travis Kalanick.
Uber CEO Travis Kalanick. Photograph by David Paul Morris — Bloomberg/Getty Images

Why Uber was right to ‘kneecap’ Lyft’s fundraising

Updated: Nov 11, 2014 9:11 PM UTC

At first glance, it was shocking. Uber CEO Travis Kalanick admitting to Vanity Fair that he had tried to interfere with the fundraising ambitions of rival Lyft:

"We knew that Lyft was going to raise a ton of money," says Kalanick. "And we are going [to their investors], 'Just so you know, we're going to be fund-raising after this, so before you decide whether you want to invest in them, just make sure you know that we are going to be fund-raising immediately after.'"

Venture capitalist Fred Wilson -- whose firm has backed Uber rivals Hailo and SideCar -- pounced a few days later, calling the tactic unethical, unsavory and ineffective. He also acknowledged that it's neither unique to Uber nor a new phenomenon:

"When I get a phone call from a company telling me that they are going to raise more money and we should think about investing in them instead or at least not investing in their competitor, I hear fear and it makes me more excited about investing in the competitor. If you can’t win in the market on the merits and have to turn to messing with a competitor’s fundraising, what does that tell you about the defensibility and differentiation of a company’s service?"

My instinct was to agree with Fred. But I don't. And here's why.

Uber's primary key to success is mass scale, particularly if it wants to ultimately diversify into local delivery (drivers+data+downloads=success). That's why it's pushing new launches so aggressively. But to solidify its global footprint, the company apparently needs an extraordinary amount of money. Uber raised $1.2 billion just five months ago, and reportedly is back in market for another $1 billion. Even in a venture capital market that is flush with cash, there only are a limited number of firms that can handle such large asks. And Uber needs each and every one of them at the table -- both to fill its coffers and to create enough competition for it to keep increasing its valuation (word is the new round will be at $25 billion). Every large investor that backs Lyft is a large investor that didn't back Uber, thus making its road to scale more treacherous.

To be clear, Uber only is telling investors that (a) They have a choice, and (b) They have to choose.

The latter is not surprising. Very few entrepreneurs want their venture capitalists to also invest in a rival. It has come up a lot recently in the Bitcoin world, and John Doerr tells a story about how search engine Excite had once tried to prevent Kleiner Perkins from backing Google (Excite, which had tried to acquire Google (goog), ultimately acquiesced). Not only do you not want your rival to get "richer," but you don't want one of your investors to have split loyalties or be tempted to betray confidences.

But it's really the first part -- the choice -- is why I don't fault Uber for its actions.

Uber has no leverage over potential investors except for the opportunity to invest in Uber (or the lack thereof). If an investor doesn't think Uber is adequately differentiated or defensible, then the threat of losing access isn't a threat at all. It's little different from warning a diner not to fill up on bread, because there will be a delicious brownie sundae for desert. If he doesn't like brownies, then he'll keep chowing down on rolls. Moreover, if I'm an investor, wouldn't I rather be aware of all my options? Imagine backing Lyft when Uber was your first choice, only to learn two weeks later that you could have invested in Uber? Or vice versa, depending on your preference.

Perhaps Wilson is correct that such tactics are unsavory, but I'd prefer a CEO who over-advocates for his company (and its existing shareholders and customers) than one who overcompensates in the direction of being polite. Or than a CEO who pretends that he's above such actions, while engaging in them). And given how much money Uber has raised, in the context of how vital capital is for the company's success, I'd also argue that Kalanick's choice has been quite effective indeed.

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