Honesty Is the Best Policy - Trust Us

These Silicon Valley leaders are taking the ethical high road — and betting that it's the road to success.

It's always fascinating to step inside a Silicon Valley start up and ask the people there to share stories about what makes their company special. The anecdotes that rank-and-file employees tell a visitor tend to reflect the way that their company views its character and its culture.

At some companies, the legends in the making involve mad, all-night scrambles to launch a Web site or to release a new piece of software. At other companies, the best lore involves relentless efforts to line up customers. And if a company is attracting favor from venture capitalists or from public shareholders, it's a safe bet that at least one story will involve the shock and delight of employees upon realizing how valuable the business has become.

Employees at CenterBeam Inc., based in Santa Clara, California, could tell variants of all of these stories. Since April 1999, CenterBeam's main service — taking charge of small companies' computer departments by installing networks of wireless, Internet-oriented machines — has attracted hundreds of customers. While CenterBeam hasn't yet gone public, it has attracted ever-higher valuations from VCs and strategic investors. But those aren't the stories that CenterBeam's employees want to tell. Their favorite stories touch on a theme that hardly ever takes center stage in Silicon Valley: integrity — that is, the make-or-break importance of simply keeping your word.

Early on, for example, CenterBeam was on a hiring spree, trying to recruit enough people to carry out its rapid expansion plans. The company offered a job to one candidate, but before that person could accept, a résumé from an absolutely dazzling contender arrived. Could the first offer be rescinded, managers wanted to know, so that the company could hire this superstar instead? The answer from Sheldon Laube, 49, CenterBeam's chairman and CEO: No way. "We made a promise to the first candidate,'' Laube recalls. "If we're going to be the kind of company that people trust, we've got to keep our promises.''

Around that same time, CenterBeam executives ordered $500,000 worth of tape drives from a distributor. Those drives (vital equipment that the company uses to back up customer-data files) soon arrived at CenterBeam's headquarters. But before engineers could unpack the merchandise, they learned that a rival distributor was offering comparable machines at a price that would save CenterBeam $93,000 a year. A few engineers wanted to refuse delivery of the more-expensive machines. But CenterBeam executives treated the shipment as binding. Instead, they asked the distributor to take back the expensive system and then bought the cheaper system from the same distributor — at a cost that was roughly $50,000 more than the rival distributor was charging.

What's the road to success for a startup? For many companies, it's whatever road leads them to the most business in the least amount of time. The Internet economy worships at the altar of fast action, fast growth, and fast results. Plenty of companies (and the people who lead them) are prepared to cut a few ethical corners in order to move faster: not gross violations, such as accounting manipulations or outright fraud, but day-to-day dilemmas — leadership moments in which you do either the right thing or the expedient thing. Are you aboveboard with investors when you know that the next quarter may be disappointing? Will you say anything to recruit a great job candidate, or are you honest about the risks involved in an assignment?

If this were a Sunday-school lesson, the answers would be obvious. Virtue would triumph, and cheaters would be vanquished by truth tellers. But the startup business is not so simple. There's a widespread feeling among entrepreneurs and venture capitalists that if a new company doesn't display a bit of bluster and outright exaggeration in its launch phase, it won't be taken seriously — and it won't get a chance to change the world. What fun is starting a company if you can't be a little devious?

Yet if hubris was a winning strategy in the past, its perils have recently become all too clear. Many of the Net companies that went public on the strength of extravagant promises have stumbled badly. In some cases, signs of a credibility gap are so severe that they ooze from companies' financial statements — and translate into plummeting stock prices.

"It's amazing how many employees have come up to me and said, 'It's great to work at a company that has integrity,' '' says Laube. "Many employees tell me that at their old companies, 'people promised things that they just didn't deliver.' '' Yolanda Gonzalez, 48, VP of human resources at CenterBeam, estimates that two-thirds of the company's new hires tell her that they were uncomfortable with the low ethical standards that prevailed at their former employers.

Some of the clearest thinking about integrity in the Internet economy comes from Darlene Mann, 39, a general partner at Onset Ventures, in Menlo Park, California. Her firm has bankrolled dozens of startups, and she has worked inside numerous high-tech companies. If executives want "integrity" to be more than just a buzzword in a mission statement, she says, they need to think hard about three issues: the growth goals that they promise to customers and investors, the career opportunities that they promise to employees, and the tone that they strike in day-to-day negotiations with business partners. In some cases, Mann acknowledges, keeping one's word carries extra short-term costs. But wiggling away from the truth can be disastrously expensive in the long run.

The point, says Mann, isn't that startups need to let go of their ambitious dreams. But they do need to ensure that promises made to the outside world are believable to their own people. Otherwise, they will be built on a foundation of cynicism and distrust.

What's more, in the current culture of hype, companies that undersell their strengths can win remarkable loyalty. Last year, when Carl Russo was CEO of Cerent Corp., an optical-networking company, he signed up Calico Commerce to build his company's Web site. "Unlike everyone else, they were very subdued in what they promised us,'' recalls Russo, 44, now a VP and a general manager at Cisco Systems, which recently acquired Cerent. "But they came across as very reliable, trustworthy people.'' Russo had a good experience with Calico, and now he is one of that company's most valuable customer references.

As the Internet sector undergoes a shakeout of sorts, people are paying a lot of attention to the explicit or implicit promises that companies make to employees and managers. No one ever said that working for an Internet startup was a lifetime job. But some top executives and board members have done a good job of communicating, each step of the way, what could go right and what could go wrong — a practice that makes it easy to regroup when times change. By contrast, other business leaders have opportunistically hired what they thought was a winning growth team, making grand promises without building the kind of stability that gets a company through hard times.

At Onset Ventures, Mann tells some executive recruits to work in their new job for a few months, and to make sure that it will work out, before relocating their families. She also preps candidates on the risks that come with taking a given job. That may make it a little harder to wrap up recruiting efforts in a hurry, but Mann's honesty usually pays off when tough times arise. A person who knows the risks of a job up front, says Mann, "is much more likely to be a good hire in a difficult situation.''

Less dramatic, but every bit as challenging, is the issue of how high-tech startups treat their business partners. Perhaps the most common failing of a young, ambitious Internet executive is the tendency to squeeze every possible advantage out of negotiations with an outsider — whether the deal in question involves a $40,000 supply contract or a $20 million marketing alliance. That's just not wise, says Ram Shriram, 43, a former Amazon.com vice president who is now an angel investor. It leaves an undercurrent of bitterness — and a very small list of partners that will want to continue doing business with such a razor-sharp deal maker.

In the long run, argues Scott Sandell, 35, a partner at New Enterprise Associates, a Menlo Park-based venture-capital firm, a more even-handed approach may be the best bet — even in the fast-paced world of Internet negotiations. To illustrate his point, Sandell tells a story of the financing negotiations that got CenterBeam in business. New Enterprise had planned on being one of two firms that would bankroll the business. But at the last moment, a third firm, Accel Partners, swooped in.

That was good news for CenterBeam and for its CEO, Sheldon Laube — but potentially bad news for the earlier investors, who might have ended up getting a smaller stake in the company. Rather than unilaterally reworking CenterBeam's financing terms, Laube asked his early backers if they were willing to add Accel to the financing group. And he didn't revise the deal until they said yes.

According to Sandell, it's all too easy to think that because everything moves so fast in the Internet economy, there just isn't enough time to fuss over the fine points of integrity. In fact, he says, the urgency of Internet-based business means that "there is no time for lack of integrity. Without it, everything becomes more complicated, because you can't depend on people to do what they say they will do.''

Sure, we live and work in a world where "the Internet changes everything." But it's heartening to see that some of the Web's smartest mavericks believe that honesty is still the best policy.

George Anders (ganders@fastcompany.com), a Fast Company senior editor, is based in Silicon Valley.

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