I Would Only Fund an Entrepreneur with High Integrity

Posted on Feb 14, 2010 | 90 comments


Back in November I agreed with Nivi over at VentureHacks to do a series on the ten most important attributes of a successful entrepreneur.  This is the last post in that series.

This is actually an addendum to my list rather than “on” my list.  That in itself will be controversial, I know.  When Nivi published the series he titled it “the top 10 things I look for before I write a check.”  As a result I felt compelled to add this final attribute because it matters a lot to me.  Unfortunately, I don’t believe it is perfectly correlated with what it takes to be a successful entrepreneur.

12. Integrity – The most obvious attribute that isn’t on my original top list is “integrity” or honesty.  If I thought I could make a lot of money backing somebody that made money through low integrity I would personally pass.

I know that sounds trite but that is exactly how my firm talks about things in partner meetings.  If we’ve seen a company present where we feel that the CEO is shady.  It becomes a large part of the conversation in our partners’ meeting afterward.  A few months ago we saw a CEO present who had personally made hundreds of millions of dollars in a financial services business and had a plan to capitalize on the current market conditions.  A large part of our post meeting conversation was how we felt the individual seemed to be of low integrity.  We thought he might actually find a way to make money again – but we decided he wasn’t the type of individual we could work with.

Another CEO presented to us from a company that was growing at a tremendously fast clip.  We were super excited by their offering – they had patented technology in a field that we believe will continue to grow massively.  During the final pre-term sheet due diligence we discovered that the CEO had had a felony arrest for a significant crime that he hadn’t disclosed to us.  When confronted with this he told us, “Oh, I thought I told you.  We certainly told every other investor we had spoken with. It must have been an oversight.”  I called two other firms we knew he had been speaking with – he hadn’t disclosed it to either of them but both of them had found it during their due diligence.

As usual it wasn’t as much the initial crime that bothered me as it was the bending of the truth afterward that he felt comfortable with.  I’m not sure how we would have responded if there would have been an initial disclosure – I’ll never know.  Perhaps VC isn’t the vest route for this individual.  It’s a shame because as a person I really liked and felt connected with him and his business seems to still be thriving.

I’m proud to say that most early-stage VCs that I know really do care about making money ethically.  So consider integrity on my personal list of attributes required to raise money from a reputable, early-stage VC.  I know that many media outlets would like to portray this in a different way but knowing many of these individuals I believe it is true for most.  When companies start to make huge sums of money it’s always easy for the media to question the integrity of the company.

Unfortunately people with low integrity can be successful and can raise money from investors.  I personally know a billionaire CEO who I wouldn’t put high on the list of people with high integrity but he built his company from scratch to become a very large enterprise.  He is well respected (but not liked) in his industry and in his company.

He has a lot of money to spend on personal marketing so the story is written as he wants it to be.  But I have seen his actions at close range and would not claim that they are high on the integrity scale.  I’ve heard this about similar technology executives of some of the biggest names out there in history.

I also know him to not be a very happy man.  Money can buy a lot of things but as the saying goes it can’t in and of itself buy you happiness.  I believe that true happiness comes from a sense of fulfillment, giving and doing what your moral compass knows is right.

Better that you be this person, whatever level of business success you achieve in life.

(any guesses what the image is from?)

  • http://www.facebook.com/people/David-Murphy/13303029 David Murphy

    Good post. Without integrity, everything is at risk. I would advise startup entrepreneurs to be as absolutely careful as they can with co-founders on this issue, too — it's not just something that VCs should be thinking of.

    Sometimes, you can't really tell, though, so even if you think things are going to work out beautifully, set things up so if the worst case happens, you'll be as protected as possible. Ask yourself what would happen in the worst cases, even if you don't think they'd happen. Sadly, it can be a tough world and people can do strange things. Protect yourself.

    Learn from the truisms, “expect the best, but plan for the worst” and “trust but verify”.

  • http://sigma-hk.com Mark Westling

    I hear ya, Sammy. I do work in India, too — stayed in Pune for three months last year, in fact. Is your business able to work through local sales channels/partners? It's less margin but it also makes you less of a target and insulates you from the stuff that you and I find disgusting.

  • http://bothsidesofthetable.com msuster

    Thanks for the feedback – I hope your experiences go well. And, yes, Fountainhead was one of my favorite books when I was a teenager. I liked both the architecture discovery and the sense of the “perfect man.”

  • http://bothsidesofthetable.com msuster

    Sleeping soundly (metaphorically) is one of the most important outcomes of integrity.

  • http://bothsidesofthetable.com msuster

    Karmel, unfortunately it's hard to be prescriptive about a topic like this. Ethics are not absolute – they are relative. They are not hard and fast rules – they are defined by each society and each person. What is ethical in one society might not be considered ethical in another. What is ethical in one man's mind might not be in another persons. Example: I'm not a vegetarian. In some people's eyes that's wrong. But I sleep well at night with it. We each have to define the ethical compass that we feel comfortable with and that comports to our societal rules.

  • http://bothsidesofthetable.com msuster

    re: Google – yeah, tough call. I'm sure in their internal meetings they really did believe that it was more ethical to bring more knowledge to the people of China with some censorship than to bring no outside search results. As I always say, “ethics are relative, not absolute.” Not everybody agrees but that's how I see it. I'm also fond of saying, “one's opinion on an ethical issue is shaped in direct proportion to whether they have actually dealt with that issue personally.” This can be seen in the “parable of the sadhu” that all business schools teach (maybe I did actually learn something there? ;-)) see –> http://awe.sm/51MMR

    re: determining low-integrity: like everything else – it's a subjective call based on the data and perceptions you draw from experiences with the person.

  • http://bothsidesofthetable.com msuster

    Agreed. Great addition.

  • mattkantor

    This relates very closely to the need to blow up your projections to raise money (mentioned previously on this blog and BSotT I think). Ultimately, we (people who refuse to lie for money) won't be able to raise money as easily the way someone who makes claims that are completely unreasonable with the sole purpose of convincing someone of the investment value. But thats what we have to deal with. In 15 years of Technology, I've seen this happen.

    Here is another scenario: you start a company with a bunch of investors, vc or angels. You have the opportunity to take cash out directly to avoid paying taxes. Nobody likes paying taxes, right? Many business owners don't consider this a problem because they are just taking money that belongs to them anyway (i.e. taxes). Aside from the tax issue, the bigger problem is that the money ALSO belongs to the investors, and it effects the revenue and profit numbers at EOY. So now you have defrauded a whole bunch of people. (NOTE: This tends to happen more in cash-based businesses and not as much as tech, but the principles remain the same).

  • http://www.littlekitchen.ca/ Matt Kantor

    …and its Howard Roark. A most appropriate picture for this article.

  • http://twitter.com/karmel_a Karmel Allison

    Mark,

    Fair enough; while I would stray from the absolute relativist path (pun intended), I agree that one's personal set of ethical judgements cannot be assumed paramount or universal. That said, in your position of power as VC and funder of possibility, you get to define to an extent what qualifies as “of integrity,” insofar as you play a role in defining where the money goes and what comes to market. To clarify my question then, I am not asking what integrity is in a universal sense; it would be unfair and naive to expect you to answer for everyone– but what is integrity to you, when an entrepreneur approaches your table? And, for the broader picture, what is integrity to the VC culture (at least the part you consider your own)? The often negative reputation given to the VC world seems largely based on the perception that it is money-hungry and integrity-blind; it is promising to hear integrity is required by many VCs, but that is only meaningful as far as we can come to some mutual understanding of what integrity is :)

    Thanks!
    Karmel

  • briansq

    Couldn't agree more! I always say: ” When I leave this planet I may not leave the wealthiest, but I will leave with integrity and the love of my family and friends”
    Nice post!

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  • http://sigma-hk.com Mark Westling

    I hear ya, Sammy. I do work in India, too — stayed in Pune for three months last year, in fact. Is your business able to work through local sales channels/partners? It's less margin but it also makes you less of a target and insulates you from the stuff that you and I find disgusting.

  • http://www.astramatch.com/blog pemo

    Wow Mark you're talking about a subject that is close to my heart & having integrity can often cause a tougher road to walk!
    I love looking at words & found this at Wikipedia: The etymology of the word “integrity” can suggest insight into its use and meaning. It stems from the Latin adjective integer (whole, complete).[2] In this context, integrity may comprise the personal inner sense of “wholeness” deriving from (say) honesty and consistency of character. As such, one may judge that others “have integrity” to the extent that one judges whether they behave according to the values, beliefs and principles they claim to hold.
    So I gather we all have our own levels of integrity related to our values – in other words there are levels of integrity rather than it being a marker???? Really interesting to investigate this…
    Bottom line though is that it is very hard to work/collaborate with someone whose integrity is on a lower bar than your own. It leads to disappointment and loss of respect for the other. If you have a high ramped level for integrity then it means the path you tread is more difficult & fraught with challenges than the lower bar. However you are right Mark, the payoff is that you can sleep at night and your behavior is consistent for others and you therefore make a difference when you are not even trying. Integrity makes the world a more wondrous place and relationships easier.

  • http://www.littlekitchen.ca/ Matt Kantor

    This relates very closely to the need to blow up your projections to raise money (mentioned previously on this blog and BSotT I think). Ultimately, we (people who refuse to lie for money) won't be able to raise money as easily the way someone who makes claims that are completely unreasonable with the sole purpose of convincing someone of the investment value. But thats what we have to deal with. In 15 years of Technology, I've seen this happen.

    Here is another scenario: you start a company with a bunch of investors, vc or angels. You have the opportunity to take cash out directly to avoid paying taxes. Nobody likes paying taxes, right? Many business owners don't consider this a problem because they are just taking money that belongs to them anyway (i.e. taxes). Aside from the tax issue, the bigger problem is that the money ALSO belongs to the investors, and it effects the revenue and profit numbers at EOY. So now you have defrauded a whole bunch of people. (NOTE: This tends to happen more in cash-based businesses and not as much as tech, but the principles remain the same).

  • http://www.littlekitchen.ca/ Matt Kantor

    …and its Howard Roark. A most appropriate picture for this article.

  • http://twitter.com/karmel_a Karmel Allison

    Mark,

    Fair enough; while I would stray from the absolute relativist path (pun intended), I agree that one's personal set of ethical judgements cannot be assumed paramount or universal. That said, in your position of power as VC and funder of possibility, you get to define to an extent what qualifies as “of integrity,” insofar as you play a role in defining where the money goes and what comes to market. To clarify my question then, I am not asking what integrity is in a universal sense; it would be unfair and naive to expect you to answer for everyone– but what is integrity to you, when an entrepreneur approaches your table? And, for the broader picture, what is integrity to the VC culture (at least the part you consider your own)? The often negative reputation given to the VC world seems largely based on the perception that it is money-hungry and integrity-blind; it is promising to hear integrity is required by many VCs, but that is only meaningful as far as we can come to some mutual understanding of what integrity is :)

    Thanks!
    Karmel

  • briansq

    Couldn't agree more! I always say: ” When I leave this planet I may not leave the wealthiest, but I will leave with integrity and the love of my family and friends”
    Nice post!

  • http://www.astramatch.com/blog pemo

    Wow Mark you're talking about a subject that is close to my heart & having integrity can often cause a tougher road to walk!
    I love looking at words & found this at Wikipedia: The etymology of the word “integrity” can suggest insight into its use and meaning. It stems from the Latin adjective integer (whole, complete).[2] In this context, integrity may comprise the personal inner sense of “wholeness” deriving from (say) honesty and consistency of character. As such, one may judge that others “have integrity” to the extent that one judges whether they behave according to the values, beliefs and principles they claim to hold.
    So I gather we all have our own levels of integrity related to our values – in other words there are levels of integrity rather than it being a marker???? Really interesting to investigate this…
    Bottom line though is that it is very hard to work/collaborate with someone whose integrity is on a lower bar than your own. It leads to disappointment and loss of respect for the other. If you have a high ramped level for integrity then it means the path you tread is more difficult & fraught with challenges than the lower bar. However you are right Mark, the payoff is that you can sleep at night and your behavior is consistent for others and you therefore make a difference when you are not even trying. Integrity makes the world a more wondrous place and relationships easier.

  • eliaschelidonis

    Mark, but while deciding to invest on a new company, especially on a startup, how could you tell that these people are honest ?

    How to handle such cases?

    Maybe this is why most VCs tend to invest on companies reffered by others? reduce level of uncertainty?

    Elias

  • http://www.blackbeltguide.com/ Marc Winitz

    Great post, and discussion as usual. This is a broad ranging overview of integrity and clearly you are pointing to unethical behavior as a primary definition of “integrity”. So a question to you Mark as this forum is primarily pointed towards start-ups and early stage entrepreneurs. What's the line that you do/don't cross with customers or investors when you need to make that sale or get that bridge loan to get your company to the next level (or even just survive) but your product/service offering isn't where it needs to be to accomplish either? Is vaporware (or lacking whole swaths of functionality) and representing it differently lacking integrity? I am sure you have seen this, I certainly have. Curious as to your thought here.

  • http://bothsidesofthetable.com msuster

    Again, I apologize, but I'm going to pass on trying to put a tight definition on it. I would say that I do think most of the VC industry is very ethical in the general sense of the word as I would define it. That does not mean they always treat people fairly or that they don't have sharp elbows. And, yes, there are some individuals who are unethical. But on the whole the reputation is worse than reality.

  • http://bothsidesofthetable.com msuster

    I think referrals help greatly in short-circuiting the ethical questions. Sure.

  • http://bothsidesofthetable.com msuster

    Selling “futures” is maybe the positive spin on that situation -right? I think it's a fine line. I think it's important to show the direction your product is taking. I think it's important not to say outright that you have features that you don't. But in a long bake off you may have a view on when your product will ship and may choose to show some features that will be ready by the time the customer has reached a decision. I think there are situations where this doesn't cross my definition of unethical. But as I've said before – everybody will have their own line.

    But a better example for you. When I was weeks away from running out of cash in my first company and a customer signed a multi-million dollar order with a large pre-payment I told the COO of the company (a major UK enterprise) that I wouldn't take payment until our round had closed and I inserted a clause that if we didn't raise the money the deal was null and void. Why? Because I understood that people make decisions – not companies. And his reputation would have been tarnished if he announced a major contract with us and then we went bust. And I know that he mostly signed that deal because he trusted me. I have many witnesses to this event (in case any of them read this and want to verify it!). That is the kind of ethical leadership I look for in people.

  • eliaschelidonis

    Mark, but while deciding to invest on a new company, especially on a startup, how could you tell that these people are honest ?

    How to handle such cases?

    Maybe this is why most VCs tend to invest on companies reffered by others? reduce level of uncertainty?

    Elias

  • http://www.blackbeltguide.com/ Marc Winitz

    Great post, and discussion as usual. This is a broad ranging overview of integrity and clearly you are pointing to unethical behavior as a primary definition of “integrity”. So a question to you Mark as this forum is primarily pointed towards start-ups and early stage entrepreneurs. What's the line that you do/don't cross with customers or investors when you need to make that sale or get that bridge loan to get your company to the next level (or even just survive) but your product/service offering isn't where it needs to be to accomplish either? Is vaporware (or lacking whole swaths of functionality) and representing it differently lacking integrity? I am sure you have seen this, I certainly have. Curious as to your thought here.

  • http://bothsidesofthetable.com msuster

    Again, I apologize, but I'm going to pass on trying to put a tight definition on it. I would say that I do think most of the VC industry is very ethical in the general sense of the word as I would define it. That does not mean they always treat people fairly or that they don't have sharp elbows. And, yes, there are some individuals who are unethical. But on the whole the reputation is worse than reality.

  • http://bothsidesofthetable.com msuster

    I think referrals help greatly in short-circuiting the ethical questions. Sure.

  • http://bothsidesofthetable.com msuster

    Selling “futures” is maybe the positive spin on that situation -right? I think it's a fine line. I think it's important to show the direction your product is taking. I think it's important not to say outright that you have features that you don't. But in a long bake off you may have a view on when your product will ship and may choose to show some features that will be ready by the time the customer has reached a decision. I think there are situations where this doesn't cross my definition of unethical. But as I've said before – everybody will have their own line.

    But a better example for you. When I was weeks away from running out of cash in my first company and a customer signed a multi-million dollar order with a large pre-payment I told the COO of the company (a major UK enterprise) that I wouldn't take payment until our round had closed and I inserted a clause that if we didn't raise the money the deal was null and void. Why? Because I understood that people make decisions – not companies. And his reputation would have been tarnished if he announced a major contract with us and then we went bust. And I know that he mostly signed that deal because he trusted me. I have many witnesses to this event (in case any of them read this and want to verify it!). That is the kind of ethical leadership I look for in people.

  • http://www.affenstunde.com/ James Barnes

    A disquieting post. Fiefdoms often do make successful companies, for a time. I don't think they make for effective start-ups anymore.

    Collaboration makes for a successful start-up, not the cult of personality.

  • http://www.affenstunde.com/ James Barnes

    A disquieting post. Fiefdoms often do make successful companies, for a time. I don't think they make for effective start-ups anymore.

    Collaboration makes for a successful start-up, not the cult of personality.

  • Vincent van der Lubbe

    Great last example – completely agree. It is always about people. And you wouldn't do that to a friend.

    You might like Charles Munger, if you don't already. He and Warren Buffett define three main qualities: Intelligence, Energy and Integrity. If only one of those lacks, you can figure out what might happen :-)

    And about integrity: it's rather difficult to figure out what is right. And I certainly did not get trained too much on practicalities at university. Where do you learn this apart from one's own parents? It takes a good person I guess. I certainly would welcome to get it higher up on the agenda.

    Another framework is also quite good: the 4 cardinal virtues = 1. prudence (in the sense of practical wisdom, understanding how the world works), 2. justice (what is “due”), 3. temperance (now we would call it differently because it means how to deal with your emotions) and 4. courage.

    Practical example: Has anyone read the story on Totlol (I think I saw it on the lean startup wiki), his version on how Google dealt with him? Does not sound like” don't be evil”: http://www.totlol.com/t/story But I have no primary source, so I don't know what to think of it for sure.

  • Vincent van der Lubbe

    Great last example – completely agree. It is always about people. And you wouldn't do that to a friend.

    You might like Charles Munger, if you don't already. He and Warren Buffett define three main qualities: Intelligence, Energy and Integrity. If only one of those lacks, you can figure out what might happen :-)

    And about integrity: it's rather difficult to figure out what is right. And I certainly did not get trained too much on practicalities at university. Where do you learn this apart from one's own parents? It takes a good person I guess. I certainly would welcome to get it higher up on the agenda.

    Another framework is also quite good: the 4 cardinal virtues = 1. prudence (in the sense of practical wisdom, understanding how the world works), 2. justice (what is “due”), 3. temperance (now we would call it differently because it means how to deal with your emotions) and 4. courage.

    Practical example: Has anyone read the story on Totlol (I think I saw it on the lean startup wiki), his version on how Google dealt with him? Does not sound like” don't be evil”: http://www.totlol.com/t/story But I have no primary source, so I don't know what to think of it for sure.

  • Ricky Singh

    Mark, I'm wondering what else goes into the due diligence. What things should I be disclosing beforehand? A felony seems obvious, but what about a bad credit score or a college transcript?

  • Ricky Singh

    Mark, I'm wondering what else goes into the due diligence. What things should I be disclosing beforehand? A felony seems obvious, but what about a bad credit score or a college transcript?

  • narayananvenkataraman

    Mark,

    I have recently started following your blog and I enjoyed reading your posts in this series.

    Thank you for your time and insights. I look forward to participating in debates on this forum.

    Narayanan

  • Narayanan Venkataraman

    Mark,

    I have recently started following your blog and I enjoyed reading your posts in this series.

    Thank you for your time and insights. I look forward to participating in debates on this forum.

    Narayanan

  • jackdempsey

    Ricky,

    I agree with Mark and others: it really comes down to where you draw your own line and how you feel about things. Perhaps credit scores matter more than I would expect, but I'd imagine a not-so-great score is on one side of the line, while a history of plagiarism and passing off other's work is on the other.

    For instance, there are some open source libraries that I've used around the net, and sometimes find more convenient to upload to a different site. They'll often come up under my name if people search for them, and could lead one to believe that I wrote the code myself. I try to always make it clear what I'm doing and how I'm using the code. Legally I may not have to, but ethically (as far as my feelings go), it's the right thing to do.

    I've seen others do the opposite and replace the original author's name with their own. Perhaps that doesn't cross their line, but personally, that wouldn't work for me.

  • http://jackndempsey.blogspot.com/ Jack Dempsey

    Ricky,

    I agree with Mark and others: it really comes down to where you draw your own line and how you feel about things. Perhaps credit scores matter more than I would expect, but I'd imagine a not-so-great score is on one side of the line, while a history of plagiarism and passing off other's work is on the other.

    For instance, there are some open source libraries that I've used around the net, and sometimes find more convenient to upload to a different site. They'll often come up under my name if people search for them, and could lead one to believe that I wrote the code myself. I try to always make it clear what I'm doing and how I'm using the code. Legally I may not have to, but ethically (as far as my feelings go), it's the right thing to do.

    I've seen others do the opposite and replace the original author's name with their own. Perhaps that doesn't cross their line, but personally, that wouldn't work for me.

  • http://jackndempsey.blogspot.com/ Jack Dempsey

    Ricky,

    I agree with Mark and others: it really comes down to where you draw your own line and how you feel about things. Perhaps credit scores matter more than I would expect, but I'd imagine a not-so-great score is on one side of the line, while a history of plagiarism and passing off other's work is on the other.

    For instance, there are some open source libraries that I've used around the net, and sometimes find more convenient to upload to a different site. They'll often come up under my name if people search for them, and could lead one to believe that I wrote the code myself. I try to always make it clear what I'm doing and how I'm using the code. Legally I may not have to, but ethically (as far as my feelings go), it's the right thing to do.

    I've seen others do the opposite and replace the original author's name with their own. Perhaps that doesn't cross their line, but personally, that wouldn't work for me.

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  • LagoonP

    Hi Mark,
    Great post and an even greater website. Will recommend to fellow entrepreneurs.

    Mark, this is one of the issues consistently on my mind as I finally get ready to approach VCs for funding. I am a start-up founder that has been working alone for the last 5 years building the foundation of the company. I have been putting in an average of 14 hour days, 7 days a week consistently for the last 3 years of the 5 years. During the five years I have seen my financial situation go from bad to worse; consequently, my credit is completely shot, literally in the in the dumps. If I were to come to you for funding, would that be a show stopper and in general do you and other VCs consider that a serious issue?

    I am an American, but an immigrant from a country many people consider very corrupt, crooked and shady. Needless to say, 99.99 percent of the people from the country, including myself have nothing to do with such dishonesty, yet, we bear the burden. So as you can see I am already swimming against massive waves, which in my view would make VCs / potential funders even more suspicious and hyper vigilant, which is no way to start a business relationship. They say perception shapes reality; this has certainly been my personal experience. Would love to hear your take.

    LagoonP