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Uber CEO Travis Kalanick appears in Washington, DC on November 6, 2013. Stephen Voss—Redux

Uber Fail: Upheaval at the World’s Most Valuable Startup is a Wake-Up Call For Silicon Valley

Updated: Jun 15, 2017 5:38 PM ET

On the morning of June 13, Uber employees shuffled into an all-hands meeting at the company's San Francisco headquarters. They came to hear the results of an investigation that, like many in Silicon Valley, they had been anxiously awaiting for months. In February, a former female engineer at the company wrote an exposé describing a workplace plagued by sexism and mismanagement; the explosive allegations led Uber to hire former U.S. Attorney General Eric Holder's law firm to find out how far harassment and retaliation had gone at the world's fastest-growing startup. "The process, as you all know, was longer than we thought and more painful than we thought, but it comes to an end today," board member Arianna Huffington told employees during a presentation in which executives' voices at times sounded brittle with emotion.

Over the past eight years, the hard-charging ride-hailing company has grown into a global powerhouse worth nearly $70 billion, disrupting the taxi industry in 76 countries and creating an app relied on by millions both for rides and for income. The wildly successful company has also been plagued by scandal from the start. Class-action lawsuits, driver revolts, cringeworthy faux pas by its brash CEO, you name it. But the past few months were something else: the February exposé was followed by a string of revelations so relentless, many started to wonder if Uber was in the midst of an existential crisis. In the end, the Holder report didn't recommend reform so much as exorcism. The biggest change: CEO Travis Kalanick announced he would be taking a leave of absence, of undetermined length, and would eventually return to a diminished role. He described it as a time to grieve for his mother, who recently died, as well as a time to grow as a CEO. It was an acutely humbling turn for a founder who had cultivated an aura as a brawler. "If we are going to work on Uber 2.0," Kalanick wrote in a message to the firm's 14,000 workers, "I also need to work on Travis 2.0 to become the leader that this company needs and that you deserve."

More is at stake in Uber's crisis than one company's future, no matter how much venture capital it has raised. Because Uber is the defining technology success story of this era, its woes--and how it weathers them--are a wake-up call for all of Silicon Valley. This place, having made itself the hope for the future of the U.S. economy, is also producing a fair amount of anxiety. Even before the Holder report, Uber's unraveling had undermined some of the Valley's credos: the cult of the founder, the rabid pursuit of growth, the virtue of disruption. Nor was Uber's failure to address issues of workplace inclusiveness unusual; it was simply spectacular.

In the end, what makes Uber a cautionary tale is not that it's the only tech company with a winner-take-all worldview or toxins in its culture. It's that it happens to be one of the most valuable.

If there has been one constant for Uber, it has been extraordinary timing. With shocks of gray on either side of his spiked hair, Kalanick is, at 40, considerably older than many ambitious founders in the Valley. He was born in Los Angeles and studied engineering at UCLA before dropping out in 1998 help to found his first company. His Napster-like file-sharing service ended when some of the world's biggest media companies sued the startup, forcing Kalanick to take the firm into Chapter 11 bankruptcy. He called his next company a "revenge business" because it provided technology to some of the very companies that had targeted him. It sold for $18.7 million in 2007.

By 2009, Kalanick had moved to the hills of San Francisco's Castro neighborhood. His townhouse there became an entrepreneurial salon and techie hangout he once described on Twitter as a "church of creative capitalism." A friend, Garrett Camp, had become enamored with the idea for an app to hail private luxury cars after he was unable to catch cabs in the city. UberCab, as it was then known, started its service in San Francisco in May 2010. By the end of the year, Kalanick had taken over as chief, and the company had changed its name to Uber in order to dodge legal complaints that it was advertising itself as a taxi firm, the first of many squabbles with regulators.

The firm was aggressive. Because taxi companies held monopolies in many cities, Kalanick cast them as the villains in a big-guys-vs.-good-guy drama. The big guys--which he once referred to as a collective "asshole"--were heavily regulated, with laws varying greatly from city to city. And the good guy, Uber, ignored these rules in order to bring consumers a better service--like rides that actually showed up when it was raining or that showed up at all. Ignoring the rules also allowed almost anyone to make money by ferrying around people as Uber drivers. That was attractive to many workers, but caused several cities to ban or suspend the service.

Even amid turmoil--strikes by angry taxi drivers, unresolved questions of legal liability--Uber expanded fast. Smartphones had become common, and consumers, especially the urbanites with disposable income that Uber catered to, were waking up to the new world of apps. Using it had that magic "it just works" element common to revolutionary technology: open the app, press a button, and in a few minutes a chauffeur appears. Customers were also getting familiar with the so-called peer-to-peer economy, renting out people's private homes on sites like Airbnb. The idea of getting in a car with an unprofessional stranger didn't sound as crazy as it once would have.

The year 2010 also turned out to be a fine time to start a company. After the financial crisis and the subsequent dearth of exciting tech firms to invest in, Uber came onto the scene promising the kind of world-changing big payday investors craved. The company continually rolled out flashy new services from helicopter rides to puppies on demand. Executives made plans not only to expand worldwide, including China, but also to remake everything from food delivery to driverless cars.

Kalanick's approach was brazen and nakedly capitalistic. Unlike Google or Facebook, which famously brought in "adults" Eric Schmidt and Sheryl Sandberg to help manage a growing enterprise, Kalanick remained the face of the firm, which he referred to as "Boob-er" in a 2014 interview with GQ because it had made him more popular with women. Traits often ascribed to Steve Jobs--pique, occasional churlishness--were in Kalanick married to the missionary zeal of an engineer who would make the world more efficient if only obstructionists would let him. "He's a fighter. He is against institutional structures," Schmidt told TIME in 2015. "He can be disagreeable in that sense that, well, he disagrees."

Kalanick's readiness to fight--with lawmakers, competitors, reporters--was at first an asset. Compared to firms like Google, which flew under the radar for years before rubbing up against regulators, Uber was born into conflict. "Everything this company has almost ever done has been a battle," says Avi Savar, CEO of Dreamit, a startup accelerator and venture-capital firm. That made Uber successful going up against comparatively sclerotic municipal governments in cities like New York, but also encouraged what some employees have described as a bunker-like paranoia among executives.

"When you have a value system that is in some ways a benefit to you in the early days when you're charging really hard, it can turn into a tragic flaw," says Stephen Beck, founder of consulting firm cg42. "'Run fast, break things, and we can pick up the pieces later' is O.K. until it's not O.K."

Even as his penchant for public arrogance increasingly made Kalanick a bête noire to some, it worked for Uber. Between 2009 and today, the company raised more than $15 billion, eventually becoming the most valuable venture-backed company in history. In an era of "unicorns"--startups valued at $1 billion--Uber was the decacorn. Until it looked liked it was on the way to becoming the first hectocorn, valued at $100 billion.

Some of Uber's problems were on public display. Drivers sued over their legal classification, saying Uber should treat them as employees--with the attendant benefits--if it was going to do things like set the price they could earn per mile. Some complained they weren't even making minimum wage. Among its millions of riders, horror stories of being assaulted or kidnapped made news, and legal battles ensued over who bore responsibility when people got hurt or mistreated. Competitor Lyft accused Uber of underhanded tactics like calling for and canceling rides to jam up the smaller rival.

Inside Uber, gender and diversity problems festered as they have at other tech firms. Silicon Valley, for all its ingenuity and economic clout, maintains a reputation for inhospitability to women, people of color, anyone who didn't go to an Ivy League school or is older than a graduate TA. There are the accounts of misbehavior at startups like Tinder and Snapchat. But there are also plenty of studies: one found that women leave tech jobs at twice the rate men do. In another, half or more reported being asked to do menial tasks men aren't expected to, dealing with unwanted sexual advances and feeling they don't have the opportunities of male counterparts.

"Tech has a culture that is worse than many other industries. And that culture in the past has been promoted and been a badge of honor," says Ellen Pao, a venture capitalist at Kapor Capital who sued her previous VC firm for gender discrimination and lost. She would know, having previously tried to rein in machismo-fueled culture as CEO of Reddit.

After her experience working at Uber, where the cultural pillars included "Always Be Hustlin'" and "Principled Confrontation," software engineer Susan Fowler decided to write the February blog post that became the epicenter of Uber's shake-up. In a 2,900-word essay, she described a workplace that was not only Darwinian but profoundly sexist. Her experiences ranged from being sexually propositioned by a male manager--who was allegedly never disciplined because he was a "high performer"--to enduring a counterproductive "game-of-thrones political war" and "organizational chaos" as managers tried to one-up each other. Kalanick tweeted that the behavior she described was "abhorrent" and promised an investigation. The next day the company retained Holder's law firm to look into claims of harassment, discrimination and retaliation as well as "diversity and inclusion at Uber more broadly."

As Holder's firm launched into its work--interviewing hundreds of current and former employees, reviewing millions of documents, holding anonymous focus groups--the bad news kept coming. Kalanick was caught dressing down an Uber driver on a dash-cam video. The company became embroiled in a lawsuit about the theft of self-driving technology from rival Google. The widow of an employee tied her husband's suicide to the company's aggressive work environment.

Bernard Coleman, Uber's head of diversity who joined the company in January after doing the same job for Hillary Clinton's presidential campaign, jokes that the chaos made him feel like he was back on the trail: "The only difference between Uber and a campaign is campaigns end."

During the drumroll that preceded Holder's recommendations, a separate investigation by another law firm led to the firing of more than 20 Uber employees. That probe looked into more than 200 claims of infractions like sexual harassment, discrimination and retaliation. It also made it possible to read between the tightly spaced lines of Holder's 13-page report, offering a point-by-point blueprint for dismantling the culture that made a juggernaut. Its recommendations ranged from increasing the board's oversight to changing the time of staff meals to accommodate employees with families.

When asked for comment on the report, Uber directed TIME to an email the company's HR chief, Liane Hornsey, had sent to workers. "There's lot of incredibly hard work ahead, but I have never felt more confident in a company's ability to change," it read in part. "Together, I want us to show the world what a truly incredible redemption story looks like."

Silicon Valley's heroes have always been rule breakers: Bill Gates' willingness to "borrow" a good idea, Jeff Bezos' disregard for epic losses, Elon Musk's flouting of the status quo. Being a founder means having the moral flexibility to promote (and raise money for) things that don't quite exist yet. When Steve Jobs first showed the iPhone in 2007, his demo was mostly artifice; the device barely worked. Which didn't mean it wouldn't change the world when it came out.

On their way to epic success, companies like Google and Facebook broke the rules and made their own. Most of us went along with it so long as we were getting better stuff, smarter search, faster phones. Occasionally mistakes are made, such as when it was revealed Facebook data scientists had run social-psychology experiments on unsuspecting users or when a local paper reported that instead of providing air-conditioning at one of its fulfillment centers, Amazon simply stationed ambulances outside to resuscitate downed workers. But so long as proper contrition is made, forgiveness comes easily.

The tech industry subsists on a virtuous cycle of consumer trust in exchange for continually improving and mostly free services. It's the price of living in a permanent future tense. Plus, who really wants to read a 50-page terms-of-service agreement or wait more than two days for a package?

That bargain may be fraying, though. Lately it seems that Silicon Valley has started to reach the limits of its old maxims. Uber, with its adherence to a Cro-Magnon corporate culture and obsession for breaking rules, is just the case of the moment. Recently, once high-flying firms like Theranos, Hampton Creek and Magic Leap have been brought low by being shown to have perverted the old rules--over-promising or underdisclosing. The more tech companies dressed in Valley values--grand ambitions to innovate and revolutionize--turn out to disappoint, the faster the compact unravels.

It's not just a matter of mission statements. The Valley's money culture has changed drastically in the last decade. For one, there's more cash in the system: more venture capital was injected into U.S. startups in 2015 than at anytime since the peak of the dotcom boom, according to researcher PitchBook. For another, there's considerably less transparency as more companies stay private longer to avoid pesky old-economy stuff like oversight and governance--174 private companies are each worth at least $1 billion.

"There's a general sense in Silicon Valley, and there has been for five to 10 years, that it's all about growth," says Dan Lyons, a longtime journalist who has written for two seasons of HBO sitcom Silicon Valley. "Not just reasonable growth, but hypergrowth. Do anything you can to get that growth. That in itself causes a lot of problems."

Then there's the Valley's self-image. It has always seen itself as the outlier where engineers can improve the world. Its promises have been commensurate: Facebook isn't just a place to post your vacation photos, it's working "to give people the power to share and make the world more open and connected." Apple isn't just churning out gadgets, it's on a quest "to change the world for the better," as CEO Tim Cook likes to say. And Uber is not just a car service for millennials when they're too sauced to drive home. It's on a mission, as Kalanick said in a 2016 TED talk, to have such an impact on U.S. infrastructure that Americans can "reclaim our cities."

So far, Valley companies have mostly delivered on promises to change our lives and make them better in ways that other industries generally can't. But if these promises start falling through--if a company like Uber begins to look like a naked grab at monopoly rather than an earnest attempt to make life easier to navigate--the Valley will appear out of touch.

There's another reason these questions are likely to matter more in the coming years rather than less. The reality is that, somewhere between Xerox Parc and Uber, Silicon Valley achieved escape velocity. Technology is advancing so rapidly that, at this point, it is always going to outpace the law, the government or the public's capacity to fully understand its ramifications. The genie is never going back into its flip phone. How else could history's most valuable startup, however troubled, emerge from nothing in eight years? Future startups are going to make decisions that will impact the lives of millions, defining the world the way religions and empires used to. iPhones and tweets and more convenient taxis were one thing. But the wave on the horizon now--artificial intelligence, genetic engineering, nanotechnology--will be something else entirely.

If Uber's stunning stumble proves anything, it's that in the absence of any rule makers that can keep up with them, the architects of the new economy--which may be another way of saying, the new world--must hold themselves accountable. And consumers need to be able to trust them to do that well. It's possible the Valley has never had a trust-testing moment quite like this one.

It's also possible that what we're witnessing is the birth of a new Silicon Valley value, the concept of responsible disruption--one that incorporates inclusion and diversity, unsexy and difficult as they may seem, alongside thinking differently.

All of which Uber seems to have at least begun to grasp. The company's board unanimously voted to accept every recommendation of the Holder report. Kalanick will go on leave. As the executives who remain work to implement the changes, other businesses will be watching to see what happens, how easy it is or isn't for Kalanick's "Uber 2.0" to come into being. "The key here is to recognize that we all unequivocally condemn the past," Huffington told employees in the all-hands meeting, "but we need to judge ourselves going forward from today on what we are doing right now."

Right now turned out to mean immediately. During the meeting, board member David Bonderman, a partner at private equity firm TPG, interjected with a sexist quip which quickly made the rounds on social media. Within hours, he resigned.

--With reporting by LISA EADICICCO

Correction: A previous version of this story misstated the amount of venture capital invested in U.S. startups last year and at the peak of the dotcom boom. It was $59.1 billion in 2015, the highest amount since the peak of the dotcom boom in 2000.

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