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Although the risk of failure in starting a business is real, even high, we hear about the success stories far more than those entrepreneurs who crash and burn. Perhaps the allure of entrepreneurship inevitably outshines any mention of the downside. Still, start-ups impose a higher-than-normal degree of risk, and that might incentivize people to cut corners or discard ethics for short-term profits. Let’s turn to the evidence for this now.
What is the specific nature of entrepreneurial risk? Different studies yield different results, but business consultant Patrick Henry reported that 75% of venture-backed start-ups fail—50% within the first five years. This data might be enough to chill the enthusiasm of any would-be entrepreneur who believes an exciting or novel concept is enough to support a successful company with a minimal amount of time and effort, and a great deal of other people’s money. Still, the number of start-ups expands each year in the United States.
Even start-ups that beat the odds financially need to be watchful for a different sort of pitfall: an ethical failure that is nourished by the very strengths that allowed it to get off the ground. That pitfall is the hubris or excessive pride that characterize some entrepreneurs, particularly after they have had some initial success. “At all costs thinking” can carry high costs ethically.
Uber, the famous rideshare app, was founded by Travis Kalanick and Garrett Camp in 2009. Offering a cheaper and more convenient service than hailing a cab on city streets and capitalizing on the explosion of smartphone use in the 2010s, Uber was valued at $70 billion in 2017 and operated in 70 countries at that point. However, the corporate culture, especially at headquarters, left many observers aghast in early 2017 after Uber engineer Susan Fowler blogged about her experiences with misogyny and sexual harassment. Other employees substantiated her account, revealing a toxic company culture. The company’s value dropped by $10 billion as of 2023.
This behavior was permitted—even fostered—by Kalanick, who reigned unchecked for several years over what the New York Times labeled an “aggressive, unrestrained workplace culture" (Isaac, 2017). Muted grumblings inside the company never received much attention outside the firm, allowing Kalanick to become a high-flying role model for would-be entrepreneurs who wished to emulate his success. A reckoning finally arrived when Uber’s board of directors asked him to resign his position as CEO in June 2017.
Another high-profile case in Silicon Valley was Theranos, a blood testing company that promised quicker results than existing tests with only a few drops of blood; they soon had machines set up at drug stores around the country. Theranos founder Elizabeth Holmes first rose to celebrity status as an entrepreneurial icon, but the pressure to live up to her own hype led to major ethical lapses, primarily fraud, lying to customers and investors about the accuracy and consistency of the tests. This eventually led to a prison sentence for her and other executives at the company.
Many start-ups have experienced this. Holding egos in check is an ethical challenge at many successful businesses, particularly at hard-riding start-ups. Founders and their teams need to be aware of how deeply their attitudes toward others, their visible treatment of employees, customers, and clients, and their display of fairness will shape the company they are building. It is not enough for the founders to hypothesize, “We’ll get around to establishing the right protocols after we’re solvent.” Nor is it adequate to insist that standards of ethical business practice will naturally emerge on their own. An initial culture of ethics—or its absence—will set a tone from the first day of business. The founders can do this with a thoughtful code of ethics, and by demonstrating the values they want to impart to staff.
Start-ups are exciting. Many of their founders attain near-rock star status, and the companies can generate enormous profit. They allow many to do what they have always wanted to do and be their own bosses. Yet we often overlook the fact that even some of the most successful entrepreneurs experience many failures before they succeed, and long hours of hard work are typically required even for these failures. Smart entrepreneurs learn from their failures, but each lesson can be painful, frustrating, costly, and time-consuming.
EXAMPLE
In 1985, Apple Computers fired its founder, Steve Jobs. Though nobody doubted that Jobs was a brilliant visionary, his people skills were lacking. He clashed with everyone, including his own board of directors and other executives. Eleven years later, as Apple was floundering, Jobs was appointed CEO again. This time Jobs demonstrated that he had learned how to work with people instead of clashing with them, and led a revitalized Apple into the 21st century with a focus on handheld devices (Schlossberg, 2020). As many people have observed, getting fired may have been the best thing that ever happened to him.The culture of entrepreneurialism allows for many business leaders and their staff to make deep personal sacrifices, including time for themselves, their families, and their communities, along the way to success. Thus, a preeminent ethical consideration is whether the result justifies this cost. At the very least, determined entrepreneurs must be advised of these possible sacrifices and their long-term effects. Will one emerge at the end of the process as the sort of person one most wishes to be?
Even if a start-up becomes what its founders wish it to be—astronomically successful—inevitably, it will change as it grows, acquiring new locations and hiring more employees. These changes may eventually produce an organization with added layers, essentially, a hardened bureaucracy. Bureaucracy refers to a complex system with rigid hierarchies and systematic processes which slow down and complicate the management process. The company may no longer make essential decisions with the speed and nimbleness that once were possible. In short, success for a start-up is often accompanied by the risk of becoming, over time, exactly the traditional business structure its founders once rejected. Problems that arise out of bureaucratization are additional layers of management, more codified procedures, and internal obstructions that surface as a business attempts to capitalize on its initial success. As more employees are added to the mix, the original team’s sense of common purpose can become diluted. But while there are problems, additional layers and procedures can encourage ethical behavior because the organization is no longer a free-for-all, “do what you want” type of culture.
Simply put, the very same success that permits a start-up to flourish eventually produces bureaucratic structures that chip away at the free-flowing camaraderie that allowed a handful of founders to act nimbly and with one mind. As the staff expands, employees’ ranks become more defined, titles and hierarchies appear, and individual achievements become harder to spot. This is what changes within a successful start-up, and it moves the company away from the more congenial atmosphere that characterized it at its outset. An original small partnership often becomes a corporate behemoth, and it takes on many of the attributes of those cubicle workplaces that frequently inspired its founders to strike out on their own in the first place.
All the better, then, if ethical practices that permit coworkers to bond as colleagues with a sense of commitment to each other and to their customers or clients is there at the outset. Only if the founders and initial staff emphasize treating all stakeholders with honesty, courtesy, and respect will the new firm stand a chance of indelibly cementing ethics into its operating matrix.
A fairly common characteristic of successful start-ups is charismatic, driven founders with take-no-prisoner competitive mentalities, as was illustrated earlier in this chapter in the example of Kalanick and the leadership values at Uber. After all, it takes a thick skin and powerful ego to get through the inevitable disappointments that confront a start-up leader. Often, however, even when these self-assured personalities evade the most egregious behavior of a Kalanick, they still remain very difficult for others to tolerate. Many companies discover that a different leadership ethos is necessary as they grow. Could entrepreneurs still succeed if they also embraced a humanistic leadership style at the outset, or would this invariably undermine the already low initial odds of success? It is a difficult problem with which many firms wrestle.
Dedicated employees may be put off by demanding leaders who are harsh, giving little back to loyal workers even after achieving success. New employees may decide the working climate is less congenial than they anticipated and simply leave. This turnstile effect of workers voting on management with their feet constitutes an ethical judgment of repugnant leadership at the top.
These observations identify what may be unique to start-up culture, which emphasizes ambition, competition, and working long hours above other values like stability or even ethical principles.
This is a combination of personality and management style often identified with those business leaders who strike out on their own, bring a start-up to life, and shape its initial business practices and culture on the job. If the enterprise is successful, the principles and philosophy of the founder become enshrined in the lore of the company, so that long after their departure, succeeding leaders find themselves beholden to the management philosophy exemplified from the early days of the firm. As you seek the right leadership style to implement on the job, begin by asking precisely what kind of leader you would prefer to work for if you were not the boss. The answer you provide may very well be the best model to follow as you develop your own leadership personality, whether it is at a start-up or a more established company.
The first employees of a start-up realize what is at stake as the company tiptoes into new entrepreneurial waters. The founder may be the boss, but those associated with him or her sense a collaborative spirit that directly joins them to the founder, as well as each other. There can be a genuine fraternity among those who have been with the firm since day one or shortly thereafter. Founding members of an entrepreneurial business are also often willing to undergo the strains and rigors attached to a start-up in return for an ownership stake in the company that allows them to profit handsomely from its later growth and success.
Newer staff, however, may not share this mindset. They may simply be seeking a secure position with a growing business rather than a chance to get in on the ground floor of a risky start-up. They will not necessarily have the tolerance for the demanding hours, chaos, and abrasive personalities that often characterize the early days of an enterprise. They may not want to burn the candle at both ends. Can entrepreneurial founders shape a company’s culture so it can accommodate talented employees who are looking for a corporate culture that supports some work-life balance?
Consider also the ethical practices of an entrepreneur and the ethical expectations of employees. Suppose that one of the distinguishing features woven into the fabric of the start-up is the respect extended to customers or clients. An entrepreneur typically promises to hold customers in the highest regard, never lie to them, and serve them well. Furthermore, suppose this entrepreneur successfully instills this same ethos among all employees from the outset. Respect for customers is intended to become a distinguishing feature of the business; even if it causes monetary loss to the company, this entrepreneur will not cheat a client or misrepresent the company’s services. Finally, presume that this ethos is embedded into the culture of the company while it is still in start-up mode.
Now, suppose the company defies the odds and becomes successful. This may signal the hardest time of all for the entrepreneur. Growth often accompanies success, and growth means, among other things, more employees. Not all these new hires will be as committed to the same degree of responsibility for customers. They will not necessarily set out to cheat clients, but they might lack the founder’s enthusiasm for the most honorable treatment of customers. How can an entrepreneur ensure that the initial commitment carries over to the second generation of leadership? They cannot simply order it to happen—human nature usually does not respond so easily. So, entrepreneurs must do their best to ensure that their version of customer service, one that prioritizes respect for clients, is passed along to new employees. It may be ingrained in the longest-serving employees, but it must be nurtured so it has the same significance for the newest hires. This can be done in many ways, such as by empowering employees, ensuring they feel valued, and building trust with employees. This is where leadership mettle is tested to the severest degree.
Source: THIS TUTORIAL HAS BEEN ADAPTED FROM OPENSTAX "BUSINESS ETHICS". ACCESS FOR FREE AT OPENSTAX.ORG/BOOKS/BUSINESS-ETHICS/PAGES/1-INTRODUCTION. LICENSE: CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL.
REFERENCES
Isaac, M. (2017, February 22). Inside Uber’s Aggressive, Unrestrained Workplace Culture. The New York Times. www.nytimes.com/2017/02/22/technology/uber-workplace-culture.html
ProofHub (2021, July 29). 10 Startups With The Best Company Culture in 2022. blog.proofhub.com/10-startups-with-the-best-company-culture-in-2021-e0ec395b5d22
Schlossberg, M. (2020, October 6). Why did Apple’s board fire Steve Jobs in 1985? The Corporate Governance Institute. www.thecorporategovernanceinstitute.com/insights/case-studies/why-did-apples-board-fire-steve-jobs-in-1985
