Professional investors look for integrity in a venture's management team but that's not the only reason why it's such an important value to cultivate
About 18 months ago, I was giving a lecture at the business school of a Chinese university to approximately 200 undergraduate and graduate students.
I described what qualities venture capitalists look for in a management team when deciding whether to invest, and why these things matter. I told the students that in my twenty years of working with private equity investors, the one thing they looked for above all others is integrity. Integrity is a deal-breaker, I explained to my audience—if a professional investor is not convinced that a venture’s top management team has a track record of integrity, he or she will not invest, whatever the other merits of the team or the deal.
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| Philip Anderson |
After about 30 minutes of talking, I began taking questions, and the first one was from a young Chinese who appeared to be about 18 or 19. “I do not understand why integrity is considered so important,” he said. “We know many stories of Chinese businessmen who have become very rich even though they break many promises and operate in gray or black areas of the law. In fact, someone who is completely honest probably could never make money in China. Perhaps your theory applies in the West but is not relevant here.”
I explained again what venture capitalists are looking for when they assess integrity. I said it was much more than simply being ethical or not stealing. I said that integrity meant above all else not fooling yourself. Professional investors want to know that you have a track record of seeing reality for what it is, not what you wish it would be. This is vital because the signals that an entrepreneurial venture receives are usually ambiguous. You can almost always interpret data from the marketplace in a positive way, “proving” that things are working as you thought they would.
A person of integrity is aware of this tendency and struggles to overcome it. S/he realizes that when entrepreneurial ventures succeed, they usually do in ways that the management team did not foresee. Consequently, if a venture leader looks at feedback and data through rose-colored glasses, s/he will persist in a course of action that isn’t working and will fail to discover one that does work in a surprising and unanticipated way. That’s why integrity means, above all, viewing things objectively and mastering the human tendency to see what we want to see or expect to see.
Integrity also means “no surprises,” I told my Chinese audience. A venture investor does not want to hear about unexpected bad news for the first time at a board meeting. He or she expects the entrepreneurs to pick up the phone and tell them about surprises as soon as they happen. Experienced professionals are very suspicious of entrepreneurs who withhold bad news “just for a little while” in the hope that things will right themselves. Their mantra is “Tell me the bad news as soon as you have detected it, and we’ll work through it together.”
Integrity also means not moving one’s targets in order to achieve them. In corporate life, making one’s numbers is of such paramount importance that most executives who are accountable for results hold back a little slack, so that in case of emergency they can still achieve their quantitative goals. In the worst case, they report numbers that are not true; far more commonly, they move orders from one quarter to another; reassign expenses from one category to another; shift assets from one unit to another, and so on, in order to reach a goal.
This is particularly deadly for entrepreneurs because the data on which they operate are typically fuzzy and uncertain. For example, it is easy to say one is going to achieve 10% market share by the second quarter and then achieve this objective simply by redefining the market, depending on who the customers turned out to be. But if an entrepreneur does that, he or she will never know whether the venture is ahead of schedule, on track, or behind schedule. It’s like disconnecting all the warning lights on a car’s dashboard—you may fret less but you’ll be the last to know when danger arises.
This answer was enough to mollify my audience but they still weren’t satisfied. I could see a lot of heads nodding “yes” when my questioner implied it was naïve to think that an entrepreneur in China should (or even could) be a person of integrity. I could tell from the expressions on people’s faces afterward that they thought I had evaded the question that really concerned them: is it realistic for Westerners to insist on integrity as a pre-condition for backing an entrepreneur?
Now in a sense, the person who questioned me that evening in China confounded two different ideas. He believes that plenty of Chinese entrepreneurs have gotten rich despite being dishonest, and I have to take it for granted that he knows more than I do about how common that is. I didn’t say in my lecture that an entrepreneur couldn’t succeed unless s/he had integrity; I said that s/he couldn’t raise money from professional investors unless everyone on the top management team has a strong reputation for integrity. However, the fundamental question still applies: why don’t Western investors simply drop this requirement in China if the evidence suggests that a lot of the people whose ventures make money don’t meet this standard?
No doubt integrity is in part culturally defined. For example, there are many cultures in which there is no shame or dishonor in lying to or cheating an outsider, someone who is not of one’s clan, village or perhaps religion. If such people are so uninformed that they do not realize the norms that apply to insiders do not apply to them, then they were foolish to trust and deserve to be disappointed, says this form of ethical reasoning. In such cultures, no one has any obligations to those who do not understand what rules apply under what circumstances.
But I think there is a much deeper issue than whether integrity ought to be a perquisite for venture backers.
What do you want to stand for; what do you want your legacy to be? Every new venture represents a point of view not only on what activities are profitable but on what kind of organization the founders want to build.
Like it or not, if you are an entrepreneur, you create an organizational culture that in large part reflects who you are. The behaviors that occur in an organization you started mirror the kind of example you set, the kind of people you choose to employ, and the values that people infer from your behavior.
If you decide that you must bend to expediency in order to get your enterprise off the ground, realize that this choice will reverberate for a long time. If you cut corners in order to survive, then expect the people in your organization to cut corners in order to get ahead in your organization. If you say one thing and do another, then plan to run an organization where that is commonplace. If you over-promise, then don’t be surprised when the promises that people in your company make to you are what they think you want to hear.
Narayana Murthy, whose picture was on the cover of the first issue of DARE, tells me that he has never paid a bribe. That is a proud thing to be able to say, and when he said it to a large audience of INSEAD students, I think it influenced the way they think about business in modern India. What do you want to say to my MBA students ten or twenty years from now about how you built your company and what it stands for? What would make you proud of the organization you have built?
It may be possible to build a successful enterprise that has no reputation for integrity, as the Chinese students I met argued so forcefully. A different question is whether such a company can expand outside the boundaries of the culture within which such behavior was profitable. But the ultimate question is not whether people who lack integrity can start companies that survive and grow. It’s whether you have thought through before you start a company what behaviors you want to encourage. Your business will ultimately tell the world who you are and what you believe, and if it doesn’t make you proud to say “I’m one of the founders,” then you’ll have sacrificed one of the greatest rewards that comes with the honorable title of entrepreneur.
INSEAD Alumni Fund Professor of Entrepreneurship, Director, Rudolf and Valeria Maag International Center for Entrepreneurship and Director, 3i Venturelab.
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