RudeVC: Musings on ethics in VC

RudeVC: Musings on ethics in VC

horseLunar new year has taken place and the Year of the Horse is now underway. I had never really thought about the varied interpretations of the horse as a symbol across different geographies until now.

For my French colleagues, the horse is a manifestation of elegance, nobility, and masculine energy. I understand that in China, the horse symbolizes energy and strength. In my upbringing, the horse represented inner strength, integrity, and honor, a reflection of how well one handles one’s primitive desires and urges.

The symbolism of the horse led me to reflect on ethics and integrity in the VC business. Although the concept of ethics in business has evolved as societal norms evolved, the actual term ‘business ethics’ only came into common use in the U.S. in the early 1970s; and European business schools adopted business ethics after 1987 commencing with the European Business Ethics Network (EBEN). The topic of business ethics could fill an entire course, let alone a single blog post, so consider this merely a thought-provoking first step on a long journey of questions.

Where lie the boundaries of ethical behavior for people mandated to invest millions of other people’s money in search of financial performance? I know VCs who consistently claim that every single one of their portfolio companies is killing it, even when they’re floundering. Does this represent unethical deception, or rather clever messaging to promote their companies’ value? For some investors, the contract signing merely signals a starting point for additional rounds of negotiations. Or they push their startups to shoot for the stars but then swoop in with a dilutive down round when the cash dries up. Fair game?

I submit that the ethics of a VC firm are tantamount to a fruitful investor/entrepreneur relationship, especially in light of the inherent imbalance of power between financial shareholders and founders. Good VCs seek to align their portfolio entrepreneurs’ interests with their own as best they can (for example, with equity incentives). However, it is usually inevitable that at some point, the interests between investor and manager will diverge. An ethical foundation of transparency, open communication, and integrity serves as the framework to fill this gap.

Similarly, for entrepreneurs, managing ethics can prove particularly challenging. As per its definition, ethics involves respecting a set of rules for business conduct. The fact that entrepreneurs usually have a personality of breaking rules, or at least operating without constraints, is almost incompatible with the very essence of ethical behavior. When does outsmarting the system cross the line into cheating?

Often in startups, the tough questions are not black-or-white. Pioneering a new market requires a departure from the conventional business mindset. For example, when we launched our internet real estate portal, my co-founder crafted an ingenious way to automate copying home listings from the mainframe-based MLS database onto the web. Did we have the right to do this? We gambled that we could, but only with the express approval of our real estate brokerage clients, who represented the legal owners of their home listings. But my co-founder’s ingenious method of “screen-scraping the MLS” was the first of its kind in this market, and fell into a legal gray area without precedent. It is this very gray area where ethics comes into play. In our case, we chose to the route of favoring asking forgiveness over permission, and years later we negotiated a paid deal with the regional associations of realtors once the industry caught up with what we were doing.

The very nature of gray area means that no case is cut-and-dried, but rather depends on circumstances. It is therefore tempting to apply the principles of ethics on a case-by-case basis.

The trouble with this approach is that as humans, we cannot rely on ourselves to make completely unbiased judgment calls in the heat of the moment. No, ethical principles are best considered before stepping on those slippery slopes… and reflected upon periodically.