The fast-paced startup world, fueled by venture capital, isn’t for the faint of heart. In just a few short years, innovation can propel a tiny company to a successful IPO. But, as LRN’s Ty Francis explores, startups that overlook the importance of building a culture of ethics do so at their own risk.
Historically, many startups overlook traditional ethics and compliance, viewing them as cumbersome burdens suited for more established entities. But neglecting these principles can be perilous. Implementing foundational compliance programs helps young companies navigate intricate legal and regulatory frameworks, shielding businesses from potential pitfalls, safeguarding their reputation and promoting an ethos of ethics and compliance.
These programs aren’t just about ticking boxes; they are crucial roadmaps, guiding startups through difficult terrain and instilling a culture of ethics from inception.
One pivotal component of these programs is assessing the company’s ethical culture. The behavior and values that influence ethical decision-making provide insight into a company’s true ethos and reveal areas needing improvement.
Take Uber, for example. In 2017, the tech giant grappled with a storm of allegations, notably from former engineer Susan Fowler, depicting a disturbing picture of systemic sexism and harassment. This narrative, coupled with additional revelations, cascaded into an overhaul of leadership and culture. Uber’s tale is a cautionary one, illustrating the profound damage an unchecked culture can inflict on even the most promising ventures.
Similarly, Juicero, with charismatic leader Doug Evans at the helm, promised to revolutionize the juice industry. Yet, beneath its glossy surface were troubling reports of a cultish atmosphere, mismanagement and technology that perhaps didn’t live up to the hype. And in just three short years, the dream evaporated.
Fashion startup Nasty Gal and feminine hygiene innovator Thinx faced their own cultural quagmires, with accusations of intimidation and harassment, respectively. Then, there’s the billion-dollar behemoth, Zenefits. Once a Silicon Valley darling, its meteoric growth was marred by unscrupulous practices, eventually leading to significant downsizing and acquisition at a slashed valuation.
Yet, while the stories differ, the underlying theme is strikingly consistent: The vital importance of an ethical foundation, right from a company’s nascent stage.
Of course, assessing the ethical pulse of a startup isn’t always straightforward. Startups, especially those approaching IPO, often find themselves grappling with the balancing act of building robust compliance mechanisms without draining their resources, which may already be running low. Despite reverberations of so many corporate failures due to lapses in culture, quantifying ethical culture remains an uphill battle for startups. In a whirlwind environment, especially for those scaling to that elusive unicorn status, the focus is rarely on culture assessments.
Peter Lee, a UC Davis law school professor, opines that venture capitalists (VCs) can be the catalyst for change. Given their tendency for herd investment behavior, if a majority begins emphasizing ethics and compliance, the ripple effect could redefine the industry’s ethos.
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Stakeholders, now more than ever, should exercise meticulous scrutiny, particularly when revolutionary technologies are on the table. For VCs, the playbook should involve deeper dives into the startups they invest in. This means:
- Prioritizing ethical leadership: Pinpointing startups helmed by ethically driven founders is pivotal.
- Embedding culture in investment metrics: Integrating cultural evaluations, diversity initiatives and communication efficacy into due diligence processes.
- Guidance and mentorship: Offering tools, training and resources to nurture a positive work environment.
- Vigilant monitoring: Continual checks on cultural performance with readiness to intervene if red flags emerge.
- Assessing compliance infrastructure: Reviewing codes of conduct, especially those surrounding anti-discrimination, harassment and data privacy.
Cat Hernandez Middleton, a New York-based VC and a general partner at The Venture Collective remarked that, “The collision of the ‘Great Wealth Transfer’ and a shift towards mission, purpose and impact above all else alongside today’s challenging macroeconomic climate will require companies, young and old, to build with intention.”
As a former people leader, now an early stage investor, Hernandez Middleton‘s view is that focusing on healthy business practices and creating environments where diverse sets of people can thrive will not only change the world for the better but will drive outlier financial outcomes in the long run.
By weaving culture, ethics and compliance into investment criteria, VCs can funnel investments into ethically strong startups, thereby minimizing potential pitfalls. Indeed, the advantages of a robust compliance program extend beyond mere risk mitigation. These frameworks can lay the groundwork for ESG efforts — a beacon for modern investors.
But maybe the most compelling statistic comes from the U.S. Sentencing Commission. An analysis of the agency’s data reveals that of the nearly 5,000 organizations that have been sentenced for federal crimes since 1991, 70% had fewer than 50 employees, and the overwhelming majority of organizational offenders — nearly 90% — did not have an E&C program in place.
Venture capitalists have long been the torchbearers of innovation, molding the corporate titans of tomorrow. Perhaps they also hold the key to ushering in an era where compliance and ethics aren’t mere afterthoughts but pillars of the startup realm. In fostering an ecosystem where culture is paramount, they could herald an era where startups not only soar in valuation but also in virtue.
Ty Francis MBE is chief advisory officer at LRN. A CCEP, Francis formerly was executive vice president at the Ethisphere Institute, and he once served as vice president of the New York Stock Exchange. 
