Business ethics is a funny thing: Any two people seem to have a different opinion on what is ethical or not. Pick an example prevalent in the thinking of a would-like-to-be-Entrepreneur like me: Who owns a business idea? Who owns the idea, strategy, and data that are developed in the course of refining that first creative spark?
This question came up in my Entrepreneurship and Venture Capital class, as taught by Peter Wendell (Sierra Ventures) and Eric Schmidt (Google). We were talking about the formation of Lotus, the proverbial groundbreaking PC company and the creator of Lotus 1-2-3. In the early eighties the founder of Lotus, Mitch Kapor, was seeking venture capital from Sevin Rosen Funds.
Most venture capitalists who invest in an early-stage company are foremost concerned with the people that make up the company. Can they pull it off? Do they have the guts, intelligence, and experience to succeed? On paper, Mitch Kapor looked like a pretty wild card: He had studied all kinds of soft things, had taught transcendental meditation, and dropped out of grad school.
So it seemed only natural that Peter, the lecturer, asked a student whether the VCs should take Kapor's idea of a new generation of office software to some other more seasoned entrepreneur. To my surprise, the student answered that the VCs should do this. When questioned further, he answered that he saw no ethical problem at all with the VCs taking the business idea to some other person.
I jumped on the opportunity and asked Peter to call for a vote on whether the class considered such behavior ethical or not. Peter agreed. To make the point even stronger, he cast the question in such a way that the VCs should keep talking with Kapor while searching for another entrepreneur who to supply with all the information from Kapor and who then to fund. I got my vote. Out of a class of 60 students, 3 considered such behavior unethical. A stunning 95% of all students saw no problem at all.
It is a dirty (but well-known) secret of Silicon Valley that some venture capitalists exhibit exactly this type of behavior. Our textbook "The Money of Invention: How Venture Capital Creates New Wealth" talks about the importance of a VC's reputation as treating any entrepreneur fairly and with respect. They then follow up with a list of companies who are known for this fair behavior. This list includes many of the industry's greats. What's telling is which famous venture capital companies did not make the list.
I don't understand my classmates nor do I understand some of the VCs. Even when ignoring the ethical dimension, such predative behavior does not make sense to me. Business is a repeat game, and reputation is key. Reputation is the main currency that gets you started on a new venture. If you have a reputation of screwing entrepreneurs, what do you have to assume about someone who comes to you? That he or she is very confident? Or maybe that he didn't do his homework or is generally clueless? What does this say about the quality of your potential investments?
I can't see how not treating an entrepreneur with respect and his idea as his intellectual property will get you anywhere.