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Ethics in Flyover Ecosystems

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Presentation I gave at AUTM's Central Region 2018 Meeting

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Ethics in Flyover Ecosystems

  1. 1. Ethics in Flyover Ecosystems
  2. 2. Founders are the most scarce resource “If Chicago VC in the early days had a particular investing style, it was a hybrid of “East Coast, private equity mentality” applied to early-stage structures common on the West Coast. “ “Startups’ capitalization tables would be so mangled and confusing that, had the entrepreneur sought funding outside Chicago, even investors more accustomed to the financial needs of startup companies would turn them away” “It’s easy to forget that, just 130 miles outside Chicago… Marc Andreessen was building Mosaic at U of I, and Max Levchin, founder of PayPal, was down there too. He probably left for the Valley because we [Chicago investors] couldn’t structure a deal” History of VC In Chicago (as told by Chicago’s VCs) Private Equity Mentality = Onerous Terms for Founders  5% royalty in perpetuity from accelerators and universities  $30K seed for 8% from well-known accelerator Mangled Cap Tables = Bad Signal to Follow-On Capital  Dilution thresholds with no pro-rata required  Investors taking up to 50% in seed-round Chicago Now = Texas’ Future  Chicago Now  Exits: Groupon ($1.9B market cap), BrainTree ($800M exit to PayPal)  5 private unicorns including Outcome ($5B valuation)  Texas business / academic climate similar to Chicago, funding climate needs to evolve
  3. 3. The Hard Truths and Questions – Fred Wilson, Partner Union Square Ventures -Erin Griffith, New York Times In addition to external pressures above, founders also must deal with countless temptations to lie, cheat, and cut corners. Here are three common questions all founders should be prepared to answer: • Are you fully prepared for the journey? – starting a company creates stress on all your relationships, how will these change in success and failure? • What situations will challenge your integrity? – Will you take capital investors with questionable backgrounds but large check books? How far will you go to paint a rosy picture to customers and investors? How will you handle great employees with bad behavior or ethics? • How loyal are you to your customers? – How closely do you stick to your original values? How are you protecting data? How will you react to losing customers or revenue in the toughest times?
  4. 4. Key Factors Driving Bad Actions Many hear “move fast and break things” as “ignore the rules” Hype-driven media and private financials make it easy to create FOMO Results and hyper-growth are rewarded by life-altering financial events
  5. 5. Small Steps, Big Wins For Universities Legal Human Resources Mentor Programs  Provide required training for inclusive culture including hiring practices and sexual harassment  Create templates for HR policies and codes of conduct  Engage local large or growing firms for best practices  Set baseline standards for mentor programs like references / background checks  Process founder / mentor meetings through internal platform, require feedback from both parties  Engage alumni in the field as leaders of the mentorship community  Templates for common company formation documents, fundraising devices, and engagements with outside firms and human capital  Require startups to submit major agreements for review  MOVE QUICKLY!
  6. 6. Questions How many of you have a startup incubator / accelerator on campus? How many have a formal process for vetting mentors / investors? How many of your universities or offices have implemented classes or training for students on ethical leadership?

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