by Isaac, Mike
In high school, he began to wear the right clothes, got the right girlfriend, and hung out with the right people. Life became much less difficult after he figured out how to fit in; a geek in cool kids’ clothing.
His entrepreneurial spirit continued to shine through. As a teenager, Travis began selling Cutco knives door-to-door in his neighborhood. In cold call after cold call he honed his natural sales ability. This would prove indispensable years later when Travis had to raise money pitching startups. That summer back in the ’80s, he claimed to sell $20,000 in knives. Cutco salesmen twice his age had trouble meeting those numbers; Kalanick did it with ease, his commissions growing larger with every new knife he sold.
Selling for a big company wasn’t enough. At eighteen, Kalanick decided to start his own SAT preparation service with a classmate’s father—a strange pairing that ended up working out rather well. The business, which they called “New Way Academy,” was a workshop, taught by Kalanick, where he reviewed test-taking strategies and quizzed roomfuls of sixteen-year-olds with sample questions. He saw it as a performance, another way to sell to an audience.
Kalanick himself was no slouch on the SAT. He scored a 1580, just twenty points shy of perfect, and whipped through the math portion of the test with plenty of time to spare.
Friends remember his savant-like math abilities. “We were driving across town in Los Angeles once, and Kalanick saw a street sign that said we were seventeen miles from where we were going,” recalled Sean Stanton, a friend and former colleague. “He looked down at the speedometer and saw our average speed, and in a few seconds rattled off how long it would take us to get there so we could make it in time for our meeting. I mean, who does that?”
With his test scores and extracurriculars, Kalanick could have his pick of colleges. He chose to stay close to home and enrolled at the University of California, Los Angeles. It was there he would find his first real opportunity to build a startup.
The era Kalanick matriculated at UCLA would prove to be pivotal in the history of the internet. In 1998, people largely accessed the internet through sluggish modems and dial-up connections. Back then, 28.8 kilobauds per second was considered decently fast; it took minutes to download an image file and a half hour for a three-minute music track, if you were lucky.
College campuses, however, offered young techies like Kalanick an enormous upgrade. By the late 1990s, most major universities provided their on-campus students with access to college networks connected to the internet through so-called “T1” lines. Using fiber optic cables, T1 connections relied on digital signals rather than analog ones used by most telephone lines. A college campus wired with fiber optic cable, delivering 1.5 megabits per second meant a student like Travis could surf the web more than a thousand times faster than he could on his parents’ old 28.8-kilobit dial-up connection. Files that used to require hours to download could zip through in seconds.
Kalanick was a double major in computer science and economics, and joined the Computer Science Undergraduate Association, which put him in the middle of a rapidly expanding field.
He and his computer science friends took full advantage of their T1 connection. They battled each other in games like Quake, Doom, and StarCraft. File-sharing parties were common; groups spent hours trading and downloading music, movies, and images, swapping files as if they were baseball cards.
Then it occurred to some of them: “Wouldn’t it be cool if we had a page where we could search for some of this stuff directly?” Kalanick would later recall. A central hub, like the internet portals they grew up on, where they could search for any media they wanted and download it. It would make more sense than emailing files between friends; anyone in the world could use it.
What Kalanick was describing, without realizing it, was a proto-version of Napster, the iconic file-sharing network co-founded by Sean Parker, an internet entrepreneur and, later, an early advisor to Mark Zuckerberg at Facebook.
Eventually, Kalanick joined six of his friends to build Scour.net, a Google-like search engine that gave users the ability to “scour” millions of files and then download them, like Napster. Kalanick later claimed to be a co-founder, though his friends disputed this status. Eventually, Kalanick was tasked with Scour’s sales and marketing efforts.
By his senior year, Kalanick decided to drop out of UCLA to work on Scour full time, following the example of entrepreneurs like Bill Gates and, later, Mark Zuckerberg. It upset his parents, though they wouldn’t tell him as much until years later. He technically lived at home, but spent all his time down the road in a two-bedroom apartment with his six other co-workers, where he “worked, ate and slept.”
Scour didn’t have much of a business model. But Kalanick and friends had absorbed the Silicon Valley maxim that growth was paramount. A path to profit could come later.
Work was everything to Kalanick. He didn’t have friends, he didn’t have girlfriends. To have a relationship with Kalanick, one former Scour colleague said, you had to be working alongside of him. Beyond his parents, Kalanick had few personal relationships.
All he thought about was building a great company. He wouldn’t wash his clothes, leaving piles of laundry accumulating on the floor of his room. He would borrow money from friends and forget to pay them back. He would go weeks at a time without looking at his mail; one person close to Kalanick recalled a stack of unopened letters piling up on Kalanick’s bedside table. Work took precedence over everything.
Much like Facebook, Scour grew popular across college campuses with broadband networks, praised for its ability to help students download illegal files quickly. Soon, Scour was competing head-to-head with Napster for file-sharing dominance, though Scour’s edge was the ability to search for files other than music.
After a series of articles in local and national newspapers, the Scour team finally captured the attention of investors, a moment that would stick in Kalanick’s mind for years to come. “We were running out of money, our server costs were going up, our traffic was going through the roof,” Kalanick said. They could run Scour on fumes in the beginning; server costs were free, thanks to the campus network, and they weren’t taking salaries. The half dozen members of the founding team pitched close friends and family on a small round of initial investment. But it quickly became clear that Scour was going to need to take on real investors to handle the influx of customers, especially if they wanted it to scale.
Through a friend of a friend, the group was introduced to a pair of investors to help bring Scour to the next level. Their names were Ron Burkle and Michael Ovitz, two venture capitalists who would change the way Kalanick saw VCs for the rest of his life.
Burkle was a billionaire, known for his philanthropy and his private equity and venture firm, The Yucaipa Companies. Ovitz, a legend in the Los Angeles entertainment industry, was a talent agent and co-founder of Creative Artists Agency, or CAA, one of the world’s highest-profile sports and entertainment agencies. He also was coming off a gig as president of The Walt Disney Company, where he had been unceremoniously pushed out by then chief executive Michael Eisner.
Burkle and Ovitz offered Scour a term sheet, a detailed charter of investment terms stipulating what percentage of the company the investors would get in exchange for their money. It also included what is called a “no-shop clause,” wherein Scour couldn’t solicit other investors for money while the company was negotiating the final agreement with Ovitz.
Scour agreed to the term sheet, but found themselves mired in negotiations with Ovitz over the details. Finally, with cash reserves empty and bills piling up, Scour’s employees needed to either make the deal or walk away. Kalanick called Ovitz to level with him, and hope he would let the company out of their contract since it didn’t look like Ovitz was going to sign an agreement.
“Look, we are running out of money,” Kalanick told Ovitz. “It’s clear you aren’t funding this, and we need to go find money.” If Ovitz wasn’t going to give them fund
ing soon, Kalanick needed to raise money somewhere else.
Three days later, Ovitz sued Scour for breaking the no-shop clause.
Kalanick was livid. One of his investors—someone who was supposed to have his back and support the company—was suing his own founders for breach of contract.
“We’ve got this really litigious hardcore dude out of LA suing us,” Kalanick later told other entrepreneurs. “Do you think anyone else is going to give us money? No.”
Ovitz’s tactics worked. To keep Scour from going under, the team agreed to Ovitz’s onerous terms; the VC managed to acquire more than half the company for $4 million, wresting control of Scour away from its founders. But the episode—and the lesson in how to negotiate with venture capitalists—would stick with Travis for years to come.
Then Hollywood decided to fight back. In December of 1999, the Recording Industry Association of America, or RIAA, sued Napster for $20 billion. They wanted to send a message: Any entrepreneurs thinking of building their own file-sharing companies would be sued into oblivion. Six months later, the RIAA joined the Motion Picture Association of America and about three dozen other companies in a lawsuit against Scour for $250 billion.
During his long career in entertainment, Ovitz had learned to see around corners. His friends in Hollywood began to glare at the superagent who was now promoting a file-sharing startup. So Ovitz cleverly distanced himself from Scour using backchannel media connections. The New York Times quoted a person familiar with Ovitz saying the mogul was growing “increasingly uncomfortable with his association” with the startup, and further, that months earlier Ovitz had sent letters to Scour’s CEO and board “expressing concern about the copyright implications.”
The move was a second betrayal. Ovitz hired an investment banker to sell his controlling stake in Scour as soon as the lawsuit hit.
Each of the founders were hurt, but Kalanick took the lawsuit the worst. Scour had been Kalanick’s first real attempt at building a company, and he had thrown himself into it completely. He had dropped out of college, forgone a real salary, moved back in with his parents, and abandoned the idea of a romantic relationship.
Moreover, Kalanick had found himself enjoying the startup life. As Scour had grown more popular, he had loved being associated with a cool brand, something hundreds of thousands of people used regularly. He learned how to negotiate deals, strategizing out loud with his partners each of the steps of managing an important client relationship. He loved the hustle of sealing deals, making the Hollywood connections, building and growing.
By the end of the ordeal, he was exhausted and depressed, sleeping fourteen to fifteen hours each day. He watched as Scour—a company they believed could grow into a global destination for media—was sold for parts in bankruptcy court.
Kalanick was devastated. And he swore he would never be played by a man like Ovitz again.
Chapter 3
POST-POP DEPRESSION
Despite the RIAA’s obliteration of Scour and the betrayal by Ovitz, Kalanick walked away from bankruptcy court with some money in his pocket. He had thought Scour was going to be worth millions of dollars—and had he been just a few years older and lived five hundred miles to the north he might have been right.
When Travis Kalanick was still an undergrad, South of Market—SoMa for short—in San Francisco was a dot-com wonderland. In the 1990s, the airy lofts at the corner of Second and Bryant housed dozens of startups with dreams of transforming the web. Companies like Bigwords.com, Macromedia, and Substance were quartered along South Park, a cozy green area tucked between Second and Third streets. WIRED magazine covered the rise of the dot-com era in breathless detail from its offices just a block away.
In the days of Scour, Kalanick was just launching his career as an entrepreneur. He watched from the periphery as a culture defined by young startups, rich in venture capital, sprung up around him, bolstered by the promise of the ever-growing internet.
Private estimations of company values soared. Businesses with no revenues and enormous losses were valued at tens of millions of dollars. More than 4,700 companies went public from 1990 to the mid-2000s, many of which had no business doing so. After they hit the public markets, shares in the companies—from Pets.com (dog food delivery) to Webvan (grocery service)—initially skyrocketed. Investors trolled the markets for speculative new internet stocks while bankers cold-called fledgling internet companies to pitch them on going public, since bankers made fees on every IPO.
Some companies were indeed good bets. Amazon, eBay, Priceline, Adobe—a number of the startups formed in the ’90s outlived the dot-com era. These companies were able to do something many of their contemporaries weren’t: build a sustainable underlying business.
In the 1990s, Silicon Valley in particular was ripe for an economic bubble. Federal interest rates were extremely low at the time, resulting in wide investor access to cheap capital. That cash was injected into a slew of newly formed companies, which in turn used those dollars to purchase things like servers, bandwidth, and other IT products from other dot-coms, creating an artificial bubble of increasing revenues and success. In addition, financial advisors on Wall Street were pumping tech stocks. They encouraged average investors to sink their savings into internet startups, which they described as strong investments with good, long-term growth potential.
An entire ecosystem of companies that catered to dot-com companies sprung up around the Valley (along with the popularity of the shopworn San Francisco adage that it’s better to sell shovels during a gold rush than to actually prospect for gold). For a starting price of $25,000, employees at Startups.com would help new companies find an office, pick their furniture, even figure out their payroll software.
In response to this frothing market, and worried about inflation, the Fed raised interest rates several times in quick succession in 1999 and 2000, closing the faucet on free-flowing capital. That, in turn, forced many startups to rely on actual revenues—not those artificially propped up by venture capital dollars—a feat that eluded many. And since so many of the companies purchased products from one another, an economic downturn hurt all the companies in the sector. One investor compared it to a collective Wile E. Coyote moment. Startups had run off the edge of a cliff. When they stopped to look down, they realized there was no ground beneath their feet. Hundreds of private companies closed their doors, unable to find further investment. Public companies saw their shares fall to mere pennies on the dollar.
“I remember walking into our office on Dore Street, near Eighth and Townsend, after the bubble burst,” recalls Rob Leathern, a former financial analyst at Jupiter Research. “I’d see the empty offices of failed startups all throughout the halls of our building, with weeks’ worth of copies of the Wall Street Journal piling up in front of their doors, and the same FedEx missed-delivery stickers stuck to their windows for months.”
Leathern isn’t exaggerating. Billboards lining the stretch of Highway 101 down to Palo Alto were advertising internet companies that no longer existed. A website dedicated to chronicling the startup death march appeared: Fucked Company. One fifth of all office space in the SoMa area was vacant in the summer of 2001, an enormous increase from the record lows of .06 percent just eighteen months before. Rents dropped by an average of $300 a month across San Francisco, while Craigslist was flooded with listings for hundreds of computer towers, monitors, servers, and other caches of hardware, some of which had been used for as little as a few weeks.
As companies liquidated themselves, employees moved out of the area—some even left the state—to find other jobs. Some gave up on the industry entirely. Ryan Freitas, who would later become a product design executive at Uber, began working as a line cook (albeit a high-end one) after being laid off from the digital and IT consulting firm Sapient in 2001.
“Anyone trying to start a company in San Francisco back then had to be fucking crazy,” Leathern said.
Travis Kalanick apparently was
fucking crazy.
Almost immediately after Scour closed its doors, Kalanick started brainstorming with Michael Todd, one of his Scour co-founders. In relatively short order, the two of them dreamed up what Kalanick called his “revenge business,” a way to get back at the RIAA and MPAA, and the other companies who sued the partners and torpedoed Scour. That company was called Red Swoosh.
“We basically took our expertise in peer-to-peer technology, took those thirty-three litigants, and turned them into customers,” Kalanick said. The new idea was similar to Scour: Red Swoosh would use connected “peer” computers in a network to transfer files between systems in a more efficient way. This time, however, those files weren’t going to be illegal downloads; the media companies were going to supply the files themselves. Kalanick would convince the RIAA and MPAA and others to hire Red Swoosh to deliver multimedia files—videos, music, whatever—to paying customers via set-top boxes on their TVs, or to their home computers.
That kind of efficiency fascinated him—whether transferring computer bits or moving physical atoms in a vehicle. It all came down to one proposition: What is the fastest, simplest way to transfer something from one place to the other?
Launching Red Swoosh required Kalanick to make his first true sojourn to the startup Valhalla: Silicon Valley. Unfortunately for him, he arrived just as the party ended. By the time he was taking meetings in Palo Alto and pitching Red Swoosh to investors in the fall of 2001, the streets were empty.
“Tumbleweeds blowing through,” Kalanick said.
He persisted despite aggravating early experiences with potential Red Swoosh investors. VCs who had lost their shirts just months before when the bubble burst mostly laughed him out of the room. Often, he couldn’t even get a meeting.
Other investors looked at Red Swoosh and only saw the ghost of Akamai Technologies. A networking software firm, Akamai was the company most similar to Kalanick’s startup. Before the bust, Akamai had a $50 billion market capitalization. After the bubble burst, Akamai’s shares plunged, and the market cap sunk to $160 million. Investing in Kalanick’s fledgling startup, if it even had potential, wouldn’t yield the outsized returns venture capitalists require.