“Thefacebook is an online directory that connects people through social networks at colleges.”
That was the first mission statement written in 2004, of the company that would become Facebook then Meta. The mission statement has changed a few times since then, describing the company as a “social utility” and as a way to give “people the power to share and make the world more open and connected.” Today Meta offers “the power to build community and bring the world closer together.”
It’s all very upbeat and positive… and a long way from the exploitative algorithms, data harvesting, violations of privacy, and the promotion of misinformation and divisive content that Facebook has engaged in over the last few years to increase clicks and viewing time.
What started as a way of enabling students at Harvard to get to know each other (and perhaps get laid) has turned into a behemoth that has divided the country, fostered hate around the world, and spread lies in order to increase its revenues.
Facebook isn’t alone. Theranos started with a vision of offering one-stop, multi-condition blood tests. It descended into faked data, wire fraud, and even the building of a fake lab to impress then-Vice President Joe Biden.
How does that change happen and why does it happen? What makes a start-up with plans to bring people together, make the world a better place and treat the sick transform into an organization that causes harm and doesn’t care?
And how can entrepreneurs prevent their start-ups from sliding down the same slippery slope?
Earlier this year, a couple of researchers reviewed the way start-ups operate, examined companies that had engaged in illegal, immoral or unethical behavior, and identified the unique vulnerabilities of entrepreneurial ventures to misconduct. Donald Palmer of the University of California at Davis, and Tim Weiss of Imperial College London focused their analysis on a particular group of companies.
The ventures had to be less than ten years old when they performed their act of misconduct. They had to still be owned and controlled by their founders, financed with risk capital with the intention of turning a profit, and use innovative technologies or business practices. Those conditions excluded companies like Amazon, Google, and Facebook which, although they’ve had scandals of their own, have grown into established firms. But the conditions did allow the researchers to include Elizabeth Holmes’ Theranos in their analysis, Elon Musk’s spat with the SEC regarding tweets that affected Tesla’s share price, and Adam Neumann’s self-dealing at WeWork, among other examples.
As for the misconduct the researchers discussed, the offences were broad and included wire, scientific, and data fraud; performance and product misrepresentation; sexual harassment and assault; wage theft; and anti-competitive practices, among others.
8 Ways Start-Ups Become Evil
Palmer and Weiss theorize that there are as many as eight different causes of organizational misconduct.
The first is performance strain.“Organizational actors experience strain when they possess a strong desire to achieve an objective but are unable to achieve it through legitimate means,” the researchers state.
That happens when the sales figure don’t match the sales target or the product doesn’t function in the way that it should. The result is a trick that tries to hide the shortcoming, at least until it can be fixed. Just Mayo’s founder Josh Tetrick sent employees to buy cases of his company’s vegan mayonnaise from grocery stores to inflate the company’s sales figures. Theranos used commercial blood analyzers when it found its unique technology couldn’t conduct the more than one hundred tests it claimed to perform.
The researchers argue that entrepreneurs are “particularly likely” to experience performance strain. They have a strong desire to achieve their business objectives and they’ve usually invested their own money first—as well as taking contributions from friends and family—so they can’t afford to fail. They also tend to operate in uncertain areas, in new industries, with new technologies, and where there are few, if any, models for success.
And the objectives only become harder. Investors are looking for increasingly outsized results, giving entrepreneurs escalating commitments—the second possible cause of misconduct—and more reasons to fudge results.
The third possible cause of start-up misconduct are perverse incentives, when the benefits of wrongdoing outweigh the anticipated costs. For a tech start-up, those incentives can be particularly skewed. After Elon Musk tweeted that he had secured funding to take Tesla private at $420 a share, the company’s value rose 14 percent. The funding wasn’t secure and Musk was fined $40 million, lost the company’s chairmanship and was ordered to run his tweets past lawyers.
None of that has stopped Musk from tweeting up the company’s solar roof production, tweeting down the firm’s stock price or moving the price of Bitcoin and Dogecoin whenever he had a whim. For Musk, as for other entrepreneurs, the cost of misconduct is often easily affordable.
The administrative systems of start-ups are often flawed too, argue the researchers. Well-designed administrative systems create modes of behavior within corporate units and for defined positions. Established rules and standard operating procedures make clear how staff members are meant to behave and they mark the lines beyond which behavior is errant. Data analysts don’t leak data. Sales staff don’t tell buyers that a product will do something it can’t do.
Those barriers are weak or absent in start-ups.
“Entrepreneurial ventures are nascent, small, and utilize unproven technologies,” explain Palmer and Weiss. “Thus, their role structures tend to be flexible, their routines minimal, and their decision-making centralized in the hands of a few.”
And the few whose hands centralize decision-making are particularly unusual. Palmer and Weiss also not that authority in entrepreneurial ventures often rests on the charisma of the leader.
“Start-up founders frequently are portrayed (and sometimes portray themselves) as heroic figures, possessing one-of-a-kind exceptional qualities, including unique foresight regarding the needs and possibilities of the human enterprise,” they argue. “And as such, they possess broad authority to enlist the support of subordinates in their preferred courses of action, including the perpetration of misconduct.”
It’s hard not to see in that description the founder of SpaceX, dedicated to saving mankind by building a base on Mars, or the leader of WeWork and his New Age outlook. When the founder is a charismatic leader with purported superhuman qualities, the result is a skewed power structure which gives too much influence to unaccountable individuals.
The remaining two causes of start-up misconduct concern social influence and culture. The paper’s authors note that when angel investors and venture capitalists make investment decisions they often rely on their intuition. They meet entrepreneurs, talk to them, and choose whether or not to invest based to a large extent on their impressions of the people they meet.
Having made those decisions, they’re more likely to tolerate entrepreneurial misconduct whose publication would betray their own poor judgement. And ultimately, what investors are looking for is a return, however that return comes. Adam Neumann tanked the value of WeWork from $47 billion to $8 billion and licensed the word “We,” charging the company almost $6 million to use it. But when he set up Flow, a new real estate company, he was quickly able to raise $350 million from Andreessen Horowitz, valuing the firm at a billion dollars before launch.
In Neumann, investors get a combination of skewed power structures, perverse incentives, and social influence. But as long as they also get healthy returns on their investment, Neumann will keep taking the checks.
That success determines the corporate culture. Talking to The New York Timesin 2019, Harrison Weber, WeWork’s one-time editorial director, describes standing with Neumann and three other employees on the ledge of the 57th floor of the Woolworth building. They had all been drinking, tossing beer bottles down the elevator shaft to hear them smash on the way down. Neumann then picked up an old bottle of beer left behind from some past celebration and told the others to drink the stale liquid remaining in the bottle. All but Weber did.
When a culture is that encompassing, and especially when the culture is characterized by bros typically found at start-ups, the result is often the kind of sexual misconduct expected at a frat house rather than a company.
Build a Better Company
The combination of eight causes of organizational misconduct—performance strain; perverse incentives; flawed administrative systems; misaligned cultures; skewed power structures; social influence and group dynamics; escalating commitment; and institutional factors—makes bad behavior in start-ups “normal,” argue the researchers, “a function of structures and processes inherent in entrepreneurship.”
So what can you do if you don’t want your company to become a lawless place filled with hard-drinking coders and entrepreneurs, breaking the regulations, self-dealing and cheating their investors and customers? How can you move fast and break things without breaking the law or the rules of good behavior?
The researchers make a few general suggestions, particularly regarding the relationship between investors and entrepreneurs. The board of directors has to be strong and knowledgeable enough to protect all stakeholders’ interests and call out misconduct. “Hence, we applaud efforts by incubators, accelerators and investors that have gone beyond evaluating a startup’s technological and market potential to monitoring and assessing the feasibility of a startup’s actual evolving technology.”
Founders should also broaden their first hires beyond friends and family to reduce the groupthink that can let rule-breaking go unremarked. And they can disseminate codes of behavior to which everyone at the company must adhere. When everyone knows where the boundaries lie, even in a new field with new technology and a new market, actions within those limits become the norm and anyone breaking those norms stand out.
The bigger a company grows, the harder it becomes to “do no evil.” But with proper caution, the right hires, a strong board, and a positive culture, it is possible to build a start-up that connects people without tearing them—or the rules—apart.
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