A startup culture poses unique ethical challenges

December 6, 2015

In the WSJ, Kirk O. Hanson writes that “Startup culture poses a host of temptations—and resistance is hard.”  He asked a panel of Silicon Valley entrepreneurs and venture capitalists to identify the greatest pressures and temptations they’ve faced, and where they think some entrepreneurs frequently fall short.

There are unavoidable ethical dilemmas in every profession and industry, of course, but the dilemmas entrepreneurs face are more formidable and more difficult to manage. Some entrepreneurs stay the ethical course. But they seem at times to be the exceptions. Startups generally have no infrastructure to address ethical challenges, and frankly, entrepreneurs have little time or focus for monitoring their own behavior. Their energies are elsewhere.

4 of the 10 questions addressed by the panel dealt with honesty:  do we lie to (1) the funders to get cash, (2) the customers to get revenue, (3) the public investors for a higher IPO valuation, or (4) to hit our numbers. Of course the answers in all four cases – each with its own color of temptation – is ‘No.’

We’ve often touched on this subject ourselves.  From Observing Honesty in Business:

You can’t always count on oreos to let you know if someone’s telling the truth

In our business dealings (as opposed to a poker table) we put a premium on transparency, as it’s easier to remember the importance of being honest when everyone involved in a business relationship can observe how decisions are being made.

This research gives us an opportunity to revisit the subject of when business promotes honesty.  Three years ago we cited this article from The Independent Institute, which argues that businessmen are more honest (or less dishonest) in their dealings than preachers, politicians, and professors.

Business promotes honesty, we argued, because of the importance of long-term relationships:

In our experience, the business case for honesty (the moral case is another discussion) can often be based on the fact that many businesses rely on repeat business.  So although dishonesty may improve the profit or advantage in a single transaction it would result in less success over the long term.

In that same post we quote Will Harrell of CapCo Asset Management:

The upside from being perceived as a reliable, consistent, trustworthy, &etc. vendor of certain kinds of goods and services is simply huge.  Costco’s CEO has a line I love: “No easy hits on the customer.”  Honesty is just a sub-category of this thesis, which in many cases has more to do with product quality or user experience than honesty per se:  McDonald’s consistency, the taste of a Hershey bar, etc.  It’s also not limited to customers – similar considerations apply to suppliers, capital sources, and employees.

We once wrote on this subject in a quarterly letter, On Being a Good Partner: “But however great or small a company’s advantages, it is our observation that their durability is usually directly related to how good a partner the company is to those with whom it does business.”

It may strike some as corny and simple, yet is exactly what game theory predicts will transpire between participants in repetitive transactions.  What’s surprising is that the effect is not more dominant, and that trustworthy players don’t completely squeeze out untrustworthy ones.

By the way, we mention above that the moral case for honesty is another discussion, and it is.  But we don’t want to leave the impression that the case for ethical behavior is purely a practical one.  We also try our best to act with honesty and integrity both within our firm at BPV and with our entrepreneur partners because we believe deeply that it is the right thing to do.  And we look to partner with entrepreneurs who share that view.  That approach may not always lead to a tangible win in business terms, but it defines who we are as people and allows us to sleep at night.

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