UBERS pre-initial public offering (IPO) valuation was as high as $120 billion, making it the most valuable privately held company ever. Yet when Uber had its IPO on May 10, 2019, it was valued at $76 billion at the end of its first trading day. What happened to the difference in valuations? Where did the $44 billion or some 37 percent of its valuation go? Answer: It evaporatedand many argue that the pattern of un-ethical behavior over the years was a major contribut-ing factor. Unicorns (private startups with a valuation of

$1 billion or higher) such as Uber are not subject to the same public scrutiny as publicly traded companies are, which allows them to push the envelope in their legal and ethical business practices. A potential down-side, however, is that a track record of ethics and legal problems may prevent a successful IPO in the future. In the process of achieving such success, Ubers uneth-ical, if not illegal, activity generated controversy after controversy. Before we look more closely at those ethi-cal issues, we need to understand the business success that could have tempted Uber to engage in ethical shortcuts.

Record-Breaking Growth Facebook took seven years to reach a valuation of $50 billion for a private, venture-capital-backed firm; Uber only took five. If we compare Uber with the car-rental giant Hertzwhich has 150 locations, a fleet of 500,000 cars, and about 30,000 employeesits as-tounding to learn that Hertz reaches less than 1 per-cent of Ubers valuation. Uber reached its astronomical valuation because it successfully expanded both in the

United States and globally. Today this ride-hailing company serves approximately 600 cities in more than 60 countries worldwide and with 100 million monthly users. As a powerful platform business, Ubers popularity

grew exponentially; it currently transports millions of riders daily and continues to expand rapidly in the United States and abroad. Revenues grew almost 30-fold, from $400 million in 2014 to more than $11 billion in 2018yet Uber is not profitable. Why? The answer is that Uber continues to subsidize its rides to build a strong position in this winner-take-all market. In 2018, it lost a whopping $3 billion, more than any other startup in the year before its IPO.

Ethically Challenged?

Trailing Ubers meteoric rise were multiple lawsuits and accusations, often tied directly to decisions and ac-tions made by its co-founder and now former CEO

Travis Kalanick. Consider just some of the incidents and issues in the companys short history: Early disregard for laws, rules, and regulations. Within months of its San Francisco launch, the lo-cal Metro Transit Authority and the state Public Utilities Commission ordered Uber to cease and desist. They called out Uber as an unlicensed and illegal taxi service. Similar injunctions followed in major markets, including New York City, Los An-geles, Toronto, Paris, London, Berlin, and Delhi. Ubers response? Ignore all such warnings.

Dynamic pricing. Unlike the taxi industry, in which pricing is fixed by regulation, Uber uses dynamic pricing, following the model of airlines, hotels, and other industries. Ubers fares go up or down based on real-time supply and demand. During a snow-storm or on New Years Eve, short Uber rides can cost hundreds of dollars. Kalanick argued that surge pricing efficiently matches supply and de-mand. But many Uber users rant online against the practice and call it price gouging.

Punking the competition as well as its own drivers. Lyft, the main competing ride-share company, ac-cused Uber of ordering over 5,000 rides from Lyft

Poaching drivers. Uber brand ambassadors have been accused of actively targeting successful driv-ers from Lyft and other competitors and pressuring them to defectallegedly all part of Ubers secret Operation SLOG (Supplying Long-term Opera-tions Growth).

Poisoning competitors well. Given their significant burn rate, startups live or die based on access to capital. Kalanick reportedly poisoned Lyfts efforts to raise venture capital, telling investors, Before you decide whether you want to invest in [Lyft], just make sure you know that we are going to be fund-raising immediately after.2

Attacking critics. Uber senior executive Emil Mi-chael suggested spending $1 million to hire private investigators to dig up dirt on journalists who wrote damaging pieces on Uber, with particular focus on Sarah Lacy, of tech blog PandoDaily. When the re-marks became public in 2014, Michael apologized and Kalanick decried the attempt, but Michael w not disciplined. In the wake of Kalanicks forced resignation in June 2017, Michael also resigned.

Tech transfer by stealth. Uber opened its Advanced Tech Center in Pittsburgh in 2015 to develop au-tonomous cars and sophisticated mapping services. Funding research at Carnegie Mellon Universitys National Robotics Engineering Center (NREC) brought Uber access to the universitys scientists. A few months later, Uber poached the entire NREC research team with signing bonuses, twice the sala-ries, and stock options. The NREC was left a shell, with its entire future in question.

Allegations of sexual harassment and gender dis-crimination. A blog post by a former Uber engineer went viral. It alleged rampant sexual harassment, persistent mistreatment of female employees, and the companys failure to respond to complaints. The former employee said that women engineers in her work group dropped from 25 percent to as low as 3 percent within a year because of the hostile work environment. She also claimed managers downgraded her performance review for reporting a supervising manager for harassment.

Slow response. Public outcry forced Kalanick to act on the allegations of sexual harassment, and once he acted, he went big. He hired former U.S. Attor-ney General Eric Holder to lead an internal investi-gation with Arianna Huffington, then Ubers only female board member.

Operation Greyball. The New York Times exposed Ubers use of stealth technology for a number of years to foil law enforcement and regulators investigating Uber and its drivers.3 In a secret operation code-named Greyball, Uber programmed its software to set up GPS rings around government offices and track low-cost phones and credit cards linked to government ac-counts. Thus, when law enforcement officers posed as Uber customers, Uber showed them dummy screens with fake Uber cars moving, none of which would stop and pick them up. Greyball was deployed worldwide, especially in cities where Uber was outlawed.

Kalanick caught on video. When an Uber driver complained to Kalanick about recent fare cuts, he told the driver upon leaving the vehicle, You know what, some people dont like to take responsibility for their own sh**,4 and slammed the door. Kalanick did not realize he was being filmed by the drivers dashboard cam. The driver uploaded the video to social media, where it went viral.

Forced to Resign

Many of the issues described came to a head in mid-2017. In May, the results of the Holder investigation, along with 50 recommendations, were delivered to the Uber board. In June, responding to pressure from key investors, Kalanick formally resigned as CEO. The in-vestors had expressed no confidence in Kalanicks abil-ity to continue to lead the company that he co-founded. You could say the company developed a reputation

to live down. Ubers ethical challenges were called out publicly throughout its rise, and as early as 2014, ven-ture capitalist Peter Thiel called Uber the most ethi-cally challenged company in Silicon Valley.5 Of course, Thiel, the billionaire co-founder of PayPal and Palantir (a data analytics company), is also an investor in Lyft. Lyft (featured in ChapterCase 9) also went public in the spring of 2019 (before Uber) and ended up with a valuation of $26 billion at the end of its first trading day, roughly one-third that of Uber. Echoing Thiels assessment, The Wall Street Journal

argued that Uber itselfrather than Lyft or old-line taxi and limo servicesis its biggest threat, thereby func-tioning as its own biggest rival. The competitive tactics and comments by Uber executives and constant scan-dals surrounding Kalanick were harming the compa-nys reputation and becoming a liability.

BEYOND CYNICISM. On the other hand, business as usual for Uber is becoming increasingly problematic. For years, Uber seemed willing to flout rules, laws, and regulations because the service was liked by users who didnt want to see it be removed. Ubers customers were happy because they could hail rides conveniently and cheaply, often in areas that were underserved by regular taxis; drivers were happy because they could choose when and how long to work. Local politicians were cautious about throwing a monkey wrench in the works. Why make your voters unhappy? Such tactics may work fine at the local level, but not

beyond. Ubers challenges are growing increasingly broader, both nationally and internationally. Uber now fights well-funded lawsuits instead of hamstrung municipal bureaucrats. Uber can no longer fly under the radar. The company is so big and established that the CEOs boorish behavior or an employees com-plaints about sexual harassment quickly go viral on a global basis.

EYE ON THE PRIZE. Uber may be at a point in its trajectory where investors simply wont allow it to continue its self-destructive tendency to cut ethical corners. Too much is at stake. In this line of thought,

the biggest opportunity with Uber is not its current business. Ubers goal remains centered around self-driving cars, supported by high-powered mobile logistics networks and online mapping systems. In this view, its current business is secondary. Which takes us back to Ubers inherent disruptive

nature. With a fleet of autonomous vehicles offering cheap rides, people dont need to own cars anymore. When car ownership is no longer needed, it will impact the old-line car manufacturers. From there Uber might expand into the delivery of everything, taking over last-mile deliveries for Amazon and other online retail-ers. Uber might even work in concert with shippers such as UPS and FedEx.

ONE POSSIBLE FUTURE. In this version of the future, Uber is the primary player and provider of self-driving car technology. It controls the platform under which customers might summon a car to their door, and some of Ubers current challenges would disappear. According to Kalanick, The reason Uber could be expensive is because youre not just paying for the caryoure paying for the other dude in the car. When theres no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle.6 Kalanick is pitching benefits of self-driving technology for both the firm and the consumer. Paying for the driver is currently the largest single cost of an Uber ride. Not having to deal with drivers thus becomes an attractive option not only because it saves on costs for customer and firm, but also because it eliminates a contentious relationship once shared between the firm and its work force (as evidenced by driver walkouts). Globally, courts are still considering whether Uber

drivers should be considered freelancers or actual employees, given the rules by which they must abide. If drivers are to be classified as employees, Uber must pay benefits and so forth; the cost per ride would further increase. Moreover, Uber loses money on each ride and continues to subsidize both the consumer and driver to build an installed base of as many users as possible. On the regulatory front its reasonable to assume that states will continue to remove obstacles to self-driving cars and the companies that manage them. So in this future, many of its compliance failures go away.

CURRENT CHALLENGES. But Uber has to get through current challenges to reach its future goals. Before Kalanick resigned, the firm engaged in perception management to deal with all the scandals and controversies. In 2015 Uber hired David Plouffe as senior vice president of policy and strategy, explicitly to improve public relations and to lobby politicians. Previously, Plouffe had been the manager for the 2008 Obama presidential campaign and then a senior adviser in the administration. At Uber he pitched the social benefit of Ubers contribution to the transportation ecosystem and its ability to fix traffic congestion, cut down on drunk driving, and provide reliable and safe services to underserved city and suburban areaseven helping to end poverty by increasing access to reliable transportation. He also minimized the criticisms, calling them misguided. EXODUS OF TALENT. Plouffe walked away in early 2017. He was followed by Rachel Whetstone, who headed policy and communications globally; she was hired in 2015 and left in April 2017. The number of senior executives and lead engineers that have left Uber in the wake of continuous scandals has been a steady stream. They include Ubers head of autonomous-car technology, head of online mapping, and an artificial intelligence (AI) expert. Some cited issues with the companys values as the reason for their departure. When resigning after only six months on the job in spring 2017, Uber President Jeff Jones stated, The beliefs and approach to leadership that have guided my career are inconsistent with what I saw and experienced at Uber.8 As these executives departed before Ubers IPO, they left behind promised stock options estimated to be worth millions. HOPE FOR THE FUTURE? If Uber is able to mend its waysand much depends on how the full board responds to major investorsUber has a much better chance of realizing the future it hopes will unfold

ANSWER THE FOLLOWING QUESTIONS:

How did Uber get from its founding in 2008 to be the most valuable start-up ever prior to IPO?

• What product, service, and value does Uber provide? and for whom?
• What is its innovative business model? Is it easy to imitate?
• Who were its competitors in 2008? Who are its competitors today?