Why it makes sense for entrepreneurs and VC’s to be ethical– Deepak Srinath

Recently, I was talking to a partner in a top VC fund about why the fund had passed a particular investment opportunity. The startup we were discussing had created a lot of buzz, revenues were growing faster than their competitors and the founding team was aggressive and impressive. The partner replied that the fund had decided not to invest because they were not comfortable with the ‘moral compass’ of the founders. Investors often find themselves in a dilemma about the ‘moral compass’ of founders, i.e, the innate sense of ethical right or wrong on the basis of which an individual makes business decisions.

As an I-banker I’ve encountered plenty of entrepreneurs with dodgy moral compasses. The misdemeanors range from showing inflated sales numbers to shortchanging customers intentionally. There are times when I’ve even had serious doubts about an entrepreneur’s intention of using VC money for the right purpose. With some entrepreneurs its just a gut feel that something is amiss even if you can’t put a finger on it.

Conversely, I’ve been in situations that have exposed the moral compass of funds. A couple of years ago, we were in the process of raising funds for an internet firm.  A VC showed great interest in our client and we shared all the data on the business with them. A couple of weeks later, we found out that the VC had issued a termsheet to a close competitor of our client. One can argue that this situation is normal- A VC will evaluate all the players in a space and make a decision on whom to invest in. This is perfectly fine and part of the VC game.  However, a few days later when our client happened to meet the CEO of the firm the VC had decided invest in, he was shocked to discover that his competitor seemed to know everything about his numbers and growth strategy. Clearly, the data we had shared with the VC had found its way to the firm’s competitor.

In an industry that is more often than not on thin ice when it comes to ethics, why is it so important to possess the right moral compass? I think its not just about taking a moral high ground; it actually makes solid business sense to do so. The world of Entrepreneurship and Venture capital is a relatively close-knit and well informed group, especially with social media and blogs disseminating stories instantly. The best entrepreneurs will never want to raise money from an investor with a dodgy track record. Similarly, an entrepreneur who cuts corners will get caught out sooner rather than later and will never be able to raise a follow on round or attract the best talent, leave alone build a scalable and sustainable business.

I hope the anti corruption fervor in Indian society spills over to the entrepreneurial and investing world too. What do you think?

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About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

One Response to Why it makes sense for entrepreneurs and VC’s to be ethical– Deepak Srinath

  1. MCM says:

    It is also sometimes the other way around when promoters wanted to be clean and sincere and just because the Investors are investing it is not that the slight doubts on the promoters will not create barrier as both are to be working together for long term on the business front. In some of the cases where promoter will be pulling out from the Investors before conclusion of any term sheet/agreement or after the due diligence were made. Moral compassing should be on both sides and u have well written on this and we want to share our thinking on the write up.

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