Uber Needs to Transition from “Pirate” to “Navy”

Uber recently named Dara Khosrowshahi as its new CEO. I’ve known Dara for a number of years, and Uber has made an excellent choice in picking him. Dara is a steady, capable, well-respected executive, which will be important as he works to turn around Uber’s woes, including multiple lawsuits, government investigations, a troubled culture, and most recently, simply astonishing board shenanigans.

Yet while Dara will be dealing with many flashy, well-publicized issues at Uber, these have largely masked a fundamental underlying problem. One of his biggest challenges (and greatest opportunities) will be steering Uber through one of the key but difficult transitions required when you try to blitzscale a company: The shift from “Pirate” to “Navy.”

This essay explains the challenge facing Uber, the origins of the problem, and what he can do about it. As the Uber story continues to unfold, it will become one of the canonical examples of scaling, like the stories from my Masters of Scale podcast, and in my upcoming book on Blitzscaling. Whether Uber changes its approach will determine whether it becomes a positive example or a cautionary tale (or both).

The pirates of entrepreneurship

For decades, technology entrepreneurs have had an affinity for pirates. As with many of the classic tropes of the startup world, the link between startups and pirates was codified by the late Steve Jobs. When Jobs gathered together the Macintosh team for an offsite shortly after the release of the Lisa, he kicked off the proceedings by laying out three “Sayings from Chairman Jobs” as guiding principles for the project:

  1. Real artists ship
  2. It’s better to be a pirate than to join the navy
  3. Mac in a book by 1986

Inspired by these words, the Macintosh team created a homemade pirate flag, complete with the classic skull and crossbones, and a rainbow-colored Apple logo decal as an eyepatch. Piracy became so associated with startups that when, in 1999, the cable network TNT released a movie about the heated rivalry between Steve Jobs and Apple, and Bill Gates and Microsoft, it was titled, “Pirates of Silicon Valley.”

Entrepreneurs (and the press that covers them) have found the image of a swashbuckling pirate so appealing that they’ve allowed the popular conception of pirates to lead them into patterns of behavior that hurt, rather than help, their companies.

Much as with Silicon Valley’s fondness for the term “disruption,” piracy is a sexy label which projects the wrong image of entrepreneurship, and promotes connotations that can lead entrepreneurs astray. It may sound cool to say that you’re disrupting a market, but to the rest of the world, you sound like you’re focused on destroying the old rather than creating the new. It may sound cool to say that you’re a pirate, but to the rest of the world, you’re essentially saying, “I’m a no-good thief.” Entrepreneurship is about creating new value for many, rather than destroying or stealing what’s already there.

That’s why to be truly successful, any startup that begins as a pirate has to eventually join the navy, as Steve Jobs did when he returned to Apple to become one of the greatest CEOs (and Admiral!) in the history of business.

Startups ARE a lot like pirates

One of the reasons the pirate label seems so appealing is that early-stage startups are a lot like pirates. They both lack formal processes, and are willing to question and even break rules to “steal” from incumbents (market share and booty respectively). This adaptability is critical in the early stages of building a great company. My favorite analogy for entrepreneurship is that it’s like jumping off a cliff and building an airplane on the way down. Pirates don’t convene a committee meaning to decide what to do when the ground is approaching—they act quickly and decisively, and are willing to take risks because they know that the default outcome is failure and the death of the company.

Startups are used to behaving like pirates—striking quickly, using surprise as a weapon, and taking on risks that established companies can’t and won’t. This is one of the main benefits of being small. We coined the word “blitzscaling” in our class at Stanford to describe the process of rapid growth from startup to scaleup. During the early stages of blitzscaling—the Family (1-9 employees) and Tribe (10-99 employees) stages—it’s easier to take risks.

As Kris Kristofferson wrote and Janis Joplin (among others) sang, “Freedom is just another word for nothing left to lose.”

In the long run, it’s better to join the navy than stay a pirate

But if you succeed as a pirate, your stockpiles of treasure will grow. The territories you control will widen. You’ll need more manpower to protect all that booty and patrol all that terrain. Once you move from the early stages of blitzscaling to the Village (100 – 999 employees), City (1,000 – 9,999 employees) and Nation (10,000+employees) stages, you’ll lose the ability you enjoyed as a pirate to communicate and collaborate effectively on an ad hoc basis, and you’ll have to trade in your Jolly Roger for the flag of legitimate, disciplined navy.

In other words, the impulsive Captain Jack Sparrow has to grow up and start acting more like the sober and responsible Captain Picard. This transition can be challenging; founders and early employees often resist changing their approach; after all, didn’t it bring initial success? But failing to make the transition from pirate to navy can lead to disaster.

Ethical vs. criminal pirates

Before we go further, we need to spend at least a little time on dispelling some of the connotations of the word “pirate.” In print and on screen, pirates fall into two basic categories: Lovable rogues, and sociopathic criminals and thieves. The lovable rogue may question and break the laws of polite society, but always adheres to a personal code of ethics and tries not to harm others (think Captain Jack Sparrow). They are willing to break the rules, but remain moral — an ethical pirate. In contrast, a criminal pirate behaves in a purely selfish manner, breaking rules and harming others whenever doing so brings material benefits.

While startups and their founders may benefit from behaving like ethical pirates, they should never behave like sociopaths, thieves, or criminals. The key is to assess whether or not you’re being an ethical pirate.

The broad question you should ask yourself is, "Am I a creator who is trying to improve the state of the world for everyone, or am I a thief who is just trying to grab things for myself?" In creating a company, entrepreneurs are creating something for themselves, but in order for them to become wealthy, their companies usually have to make a wide variety of consumers and businesses better off.

Ethical pirates have ethics that most of their crew members share. The executives and employees following a founder or leader should ask themselves, are we on a mission to improve the world, or are we just in it for the booty? Do we truly care about the importance of diversity and inclusion for our team? Are we following the principles of The Alliance and creating mutually beneficial relationships with managers and employees? If you’re working with an ethical pirate, you should feel proud of your shared values.

At PayPal, for example, we bent and broke some rules, but we did so because we believed we were working towards a better future for society at large. We felt that our actions were ethical because we believed that in the long run, we would convince the world to change its rules, and that the economy would be better off as a result. History demonstrates that we were right. The various parties that were upset by our “piracy”—eBay, banks, regulators—all see the value of PayPal today, and by changing the rules, we helped pave the way for other payment companies like Square and Stripe, which have improved the world even further.

A present-day example of a field where there are both ethical and criminal pirates is the rapid development of cryptocurrencies like BitCoin, and the development of Initial Coin Offerings (ICOs) as a financing tool. The startups that are creating currencies and holding ICOs are operating in a grey area, and are likely breaking rules. Some of these startups are ethical pirates, who are working to change the rules for everyone. Others are simply thieves. Both types might make money in the short term if the market is hot enough, but only the ethical pirates will be able to build lasting businesses, and only the ethical pirates will have a positive impact on the world.

Uber and the consequences of failing the pirate-to-navy transition

This brings us to the situation facing Uber. The ride-sharing company, which at its last round of financing was the world’s most valuable startup, has been in the news quite a bit for a number of serious issues.

Some of these issues are due to clearly unethical behavior, including internal problems such as the sexual harassment reported by former Uber engineer Susan Fowler, and various external attempts to subvert free competition, regulation, and the press, such as (allegedly) appropriating intellectual property from Waymodeveloping software to prevent law enforcement and regulators from accessing the service, and then-executive Emil Michael suggesting that the company spend money to hire opposition researchers to intimidate journalists.

This kind of behavior is unacceptable, regardless of the size or stage of the company undertaking it, and has rightly been widely condemned.

Yet even if Uber had never engaged in the unethical behaviors outlined above, the company would still be facing real issues because of its historic reluctance to abandon the principles of piracy (even ethical piracy) despite its much greater size and scope.

These structural and management issues haven’t attracted nearly as much attention as Uber’s potential unethical behavior, various lawsuits, and leak-intra-board conflict, but they represent a completely separate but similarly serious threat to Uber’s long-term success.

Dara has a reputation for running a no-drama operation (a classic naval leader, in other words). But just as important is his experience in successfully growing Expedia into a profitable $20 Billion, 20,000 employee giant that has won praise as one of the best managed companies in its industry. Over his tenure as CEO, Expedia tripled its number of employees and more than quadrupled its gross bookings, demonstrating his ability to command a major enterprise through a period of significant growth. In other words, he is a successful Admiral, who has demonstrated the ability to manage a company’s growth from a scale below that of Uber (which currently has 12,000 employees) to a scale above.

From pirate captain to navy admiral

Most startups recognize the value to being small. Small means innovation, nimbleness, focus, and outcome as opposed to process, internal communications, and meetings. Successful entrepreneurs realize that they need to keep the positives of staying small, while building in the virtues of bigness.

When an organization makes the transition from single pirate ship to a fleet under naval discipline, there are well-established techniques and approaches that can help make this transition smoother and more effective. A fleet isn’t just a large collection of pirate ships. While the individual ships still have some freedom of action, captains are both individuals and part of a larger organization. You can’t run a successful navy if what you really have is a set of pirate ships pretending to work together.

If you’re building a global business, there are three key elements you need to put in place:

  1. A set of country managers who are responsible for, and have strong executive control over, their individual markets
  2. An understanding of how those markets differ, which leads to a variety of plans for how to grow in each of those markets
  3. A unified executive team to coordinate global operations, including the activity of the individual country managers

Elements 1 and 2 involve a decentralized command structure that allows the individual “captains” in the fleet to operate with entrepreneurial vigor. Element 3 involves a centralized staff that can help the “admiral” coordinate the actions of the fleet for maximum impact.

Uber actually did a good job with Elements 1 and 2. Uber’s General Managers are like individual ship captains, and their ability to act independently helped Uber develop innovations like surge pricing (which was an independent experiment conducted in the Boston market). Where Uber failed was its inability to commit to Element 3 — a unified executive team. When you have strong individual captains, and an admiral who can’t or won’t build a staff to help him or her actually manage the fleet, you end up with an uncoordinated group of pirates.

The failure to build a unified executive team is sadly common. Some entrepreneurs find it difficult to accept the increased structure and decreased freedom of a formal staff; many of these people started companies precisely because they disliked the feeling of working in a large organization. In his book on Uber, “Wild Ride,” Adam Lashinsky describes how Uber’s founder and former CEO Travis Kalanick tried to navigate this shift:

I ask if he likes running a big company. “The way I do it, it doesn’t feel big,” he says, falling back on a favorite trope: that he approaches his day as a series of problems to be solved. He obviously thinks of himself as troubleshooter-in-chief as much as a CEO.

Bigness clearly is scary. “I would say you constantly want to make your company feel small,” he says. “You need to create mechanisms and cultural values so that you feel as small as possible. That’s how you stay innovative and fast. But how you do that at different sizes is different. Like when you’re super small, you go fast by just tribal knowledge. But if you did tribal knowledge when you’re super big it would be chaotic and you’d actually go really slow. So you have to constantly find that line between order and chaos.”

Kalanick’s words reveal a pirate’s discomfort with running a large organization. Being a “troubleshooter-in-chief” might be a good fit for his personality, but diving into the details of individual problems is generally a poor use of a CEO’s time.

The purpose of hiring a management team is to solve the organization’s problems in a more scalable way. The CEO should be the hub, and the executive team the spokes that connect the CEO to the frontline managers and employees where the rubber hits the road. Kalanick was trying to be the hub and the spokes, rather than building up the organization’s ability to get things done without his personal involvement. Another symptom of this dysfunction was Kalanick’s habit of cancelling his executive staff meetings. Without spending time together, it is difficult for a management team to cohere, or to coordinate the many initiatives of the organization.

Kalanick is absolutely correct when he argues that staying small helps organizations stay innovative and fast, but staying small isn’t always a possibility. Rather than avoiding “getting big” for as long as possible, it is better to steer into the process so that you can iterate the organizational structure multiple times as you scale. This means you make the transition over time, instead of making the shift in a single giant leap “someday”.

As you blitzscale, you have to build structure in order to have a functional organization. Even someone as smart as Larry Page learned this during the early days of Google. Page initially tried to run Google’s entire engineering department without management by having all 400 employees report directly to Wayne Rosing. The failure of this experiment convinced him to allow Eric Schmidt to build a real organizational structure at Google.

Any given management structure is likely to be temporary; you can’t run a Village (100 – 999 employees) the same way you run a Tribe (10 – 99 employees), and you can’t run a City (1,000 – 9,999 employees) the same way you run a Village. But without a management structure that works for your current size, you won’t make it to the next stage of blitzscaling.

Larry Greiner wrote about precisely this dynamic in Harvard Business Review in 1998:

“The critical task for management in each revolutionary period is to find a new set of organizational practices that will become the basis for managing the next period of evolutionary growth. Interestingly enough, those new practices eventually sow the seeds of their own decay and lead to another period of revolution . Managers therefore experience the irony of seeing a major solution in one period become a major problem in a later period.”

It appears that Kalanick’s discomfort with Uber feeling “big” led to a dysfunctional organizational structure where he clung to his previous ways. Rather than a cohesive management team, Uber seemed to operate on a model that Susan Fowler described as “a Game of Thrones political war” with managers fighting for advancement:

The ramifications of these political games were significant: projects were abandoned left and right, OKRs were changed multiple times each quarter, nobody knew what our organizational priorities would be one day to the next, and very little ever got done. We all lived under fear that our teams would be dissolved, there would be another re-org, and we’d have to start on yet another new project with an impossible deadline. It was an organization in complete, unrelenting chaos .

When Uber tried to transition from pirate to navy by hiring experienced executives like Jeff Jones from Target, those executives ended up resigning rather than changing the organization. During the first half of 2017 alone, Uber lost eight VPs or department heads.

In contrast, companies like Facebook and Amazon, and leaders like Mark Zuckerberg and Jeff Bezos found ways to successfully recruit leadership from the outside, blending them with existing team members to change and strengthen the organization. Facebook promoted insiders like Chris Cox, but also brought in compatible outsiders like Sheryl Sandberg and Mike Schroepfer. Jeff Bezos’ key lieutenants like Jeff Blackburn and Andy Jassy are Amazon lifers, but he also brought in key outsiders like Rick Dalzell from Walmart. These outside hires can help even at massive scale. When Microsoft acquired LinkedIn, it also brought in executives with different and valuable skills and experiences.

Facebook joins the navy

Uber can take heart from the example of Facebook, a former ethical pirate that overcame scandal and skepticism to become a respected and responsible Navy.

Do you remember the early days of Facebook? Back then, Facebook wasn’t one of the most valuable companies in the world, and Mark Zuckerberg wasn’t viewed as one of the world’s great CEOs. In fact, Mark faced criticism for many of his early actions, and the company had to live through significant turmoil, such as the user revolt over the introduction of Newsfeed, now the core of the service.

The reason Facebook is Facebook today is that the company made steady progress from pirate to navy. This is readily apparent in the transition from the motto, “move fast and break things,” to “move fast with stable infrastructure.” On the management side, Facebook continued to develop and hire “navy captains” like David Marcus. Mark has been able to balance being a hub for his “captains”—he literally sits with them and collaborates on a daily basis—while still giving them the broad authority to operate independently that helps keep Facebook nimble and innovative.

Both Mark and Facebook have grown a lot since those early days, and it is precisely many of those changes which allow Facebook to be so successful.

Blitzscaling means turning in your pirate swords for naval cannons

When it comes to startups, Steve Jobs was right—it’s good to be a pirate. But if you’re a successful pirate, you have to become the navy.

First, and foremost, you have to be an ethical pirate, even if you’re challenging norms and rules. Be a lovable rogue, not a criminal; not only is it the right thing to do, but it also makes going legitimate later on that much easier.

As your fleet of pirate ships and followers grows, you need to intentionally shape them into a disciplined navy. A fleet of ships requires strong captains AND a strong centralized staff that can coordinate and harness their entrepreneurial vigor. Navies can establish nations, whereas pirate fleets eventually collapse.

Every successful founder and every successful organization need to go through these changes. But as Uber has discovered, Blitzscaling makes this change simultaneously harder (because of the speed at which it must happen) and more important (because of the risk inherent in investing in speed over efficiency).

In Uber’s case, even if the company had stringently adhered to the standards of ethical piracy, its failure to transition from pirate to navy would still have caused a host of major issues and challenges. Uber is a great example of blitzscaling in many respects: from its aggressive capital acquisition and deployment strategy, to its speed in entering different global markets and its willingness to challenge outmoded transportation regulations. Nevertheless, Uber has failed to do some of the key things that are a part of successful blitzscaling, like the transition from pirate to navy. Fortunately, it’s not too late for Uber’s pirate fleet to change its ways. Dara Khosrowshahi will absolutely need to fix the company’s values and culture so that it acts like an ethical pirate, but he must also make fixing its organizational structure a top priority. No doubt these changes will be difficult, and require the reform or departure of many pirates, as well as the recruitment of many experienced officers from the outside. But there is no shortcut. Scaleups need to manage risks and coordinate numerous groups and initiatives. They need become a navy.