Is Entrepreneurship Unethical, Illegal or Immoral?

When entrepreneurs develop new start-ups or early stage ventures, they must inevitably overcome the challenge of bringing their new ideas or innovations to the marketplace. To help overcome this challenge, entrepreneurs regularly engage in three activities that could, under different circumstances, reasonably be considered unlawful, unethical, and/or ill-advised.

These three activities are:

  • Trading insider information as a sort of currency to allow entrepreneurs to hone their understanding of market needs, future technology trends or their possible intersects;
  • Creating and sustaining monopolies of products or services the entrepreneurs intend to bring into the marketplace; and
  • Timing the market for economically opportune market introductions of the start-up’s products and/or services.

Market Timing, Trading on their Business/Technology/Market insights and seeking the Construction of (temporary) Monopolies are core of the Entrepreneurs behavior.

Insights as Currency

As entrepreneurs transform their innovations into products and/or services, they invariably network within their social contexts, pitching their ventures and seeking enlightened investors, potential customers, future employees, fellow entrepreneurs, mentors, and others to help improve their ideas. The reasons for this practice are obvious: entrepreneurs want to raise their profile by “selling” their visions as a kind of currency to the multiple potential stakeholders. In this process they have to become master salesmen. It is often said that the difference between an entrepreneur and a charlatan is that the former actually believes what he or she says!

There is a far less obvious reason for this constant dialogue: trading insider information. Why? The entrepreneur’s journey is a perilous labyrinth wherein the pathway to success is rarely found with the resources and time allocated. The entrepreneurial struggle is a battle of ideas in which an entrepreneur seeks to optimize the economic value of a solution to a specific problem. In the vulnerable early stages of entrepreneurs’ ventures they face criticism, skepticism, as well as competing ideas. In this adverse climate, entrepreneurs seek to test and optimize their vision against others with different perspectives to improve and fine tune his/her concept.

This early stage “contact exchange” constitutes a kind of insider trading. Entrepreneurs constantly assess the overlap of society (market) trends, market needs, and technology-enabled opportunities. Some of these insights are their own; others were passed on by experienced executives, scientist, or engineers; and others still were gleaned secondhand as confidential corporate secrets. Silicon Valley is, after all, a gossip mine.

An entrepreneur’s access to the highest tiers of Silicon Valley’s hierarchy depends on one’s ability to network, the pitch, as well as the depth and breadth of one’s rolodex. The pitch is a simple, passionate delivery of a compelling business proposition—with an emphasis on the word simple! The intersection of future business opportunities and technology is often not fully understood[1] and hence even harder to explain. With regard to complexity, it is often said that what separates genius from amateur is an ability to make the complex simple. Anybody can take a complex concept, expound upon it, and make it sound complex, but taking that same concept, and expounding upon it in a way that makes it sound simple, effortless, is a far more impressive and challenging task.

Indeed, one of the tickets to gaining access to the highest levels of the entrepreneurial hierarchy is an ability to master the complexity of new business opportunities envisioned and communicate it with elegant simplicity (e.g., the infamous “elevator pitch”). A final comment applies to those already at top of the entrepreneurial hierarchy of Silicon Valley, the super-angels, VCs and “rain markers”. They possess an ability to combine and synthetize the relevant trends and extrapolate potential opportunities from the pitches they received, having better access to privileged insights than other people. 

This intense activity of information trading at all levels of the entrepreneurial hierarchy, would likely be punishable in the corporate world, where, for example, anyone attempting to profit in the stock market by acting on  privileged information would likely receive a prison sentence[2]. Top management consultants constantly walk a fine line between making informative insights and providing privileged, illegal information to clients. However, these concerns do not apply to early stage ventures. In the early stage, entrepreneurs only have ideas without yet proven economic value.[3] Furthermore, keep in mind that the vast majority of great ideas alone are mostly economically useless. In fact, the conversion rate from great ideas to the next Google is roughly thousands to one (i.e., for thousands of great ideas that exist, only one of these will become a company as successful as Google). Obviously execution is KEY!

Constructing (Temporary) Monopolies

Entrepreneurs do not like to compete.[4] More accurately put, entrepreneurs love to win. Competing concedes the possibility of loss, which is psychologically untenable to the entrepreneur when in his or her mind wining is the ONLY option. Competing is exciting, especially if you are a spectator, but it is not always appealing to the entrepreneur, since competition alone does not guarantee economic reward. While economists show a bias towards perfect competition, I cannot help but think that they have an affinity for the sheer simplicity of the perfect competition model passed around in academic circles. However, if you are one of the competitors in the marketplace, there is nothing perfect about that model! The more intense and perfect the competition, the harder it is to capture value within the marketplace.

We all understand the general indictment against monopolies –– it’s bad when companies grow too large and exhibit “anticompetitive conduct.” Monopolies set prices at unreasonably high levels, establish price discrimination policies depending on strategic goals for specific geographies or consumer segments, and stifle innovation by increasing (artificially) the barriers to entry for new entrants (since they dominate a segment of the market blocking access to new entrants).

Looking closely at prevailing entrepreneurial practices, though, we find that entrepreneurs seek to mirror these monopolistic practices all the time. In fact, the promise of creating a temporary monopoly is probably the most appealing outcome of bringing a new innovation to the marketplace. Entrepreneurs aspire to be the only kids on the block by solving a specific problem in a small niche, enabling them to grow larger and eventually scale globally. This scenario is compelling, even if temporary, because it can give a new venture the head start it needs to carve out a dominant market position. The new venture can then capitalize on its dominant position and apply Schumpeterian notions of “Creative Destruction”[5] by constantly making its own products/services obsolete with new innovations, allowing it to capture new (and hopefully greater) value from more customers.

Large corporations often face intense scrutiny from regulators like the U.S. Department of Justice and similar agencies in the EU, Japan, and most developed economies.[6] In contrast, entrepreneurs can create monopolies without facing significant consequences. Today’s great technology companies enjoyed this advantage decades ago. These companies pioneered new markets and introduced disruptive innovations, even at the cost of undermining other key market players.[7] Today’s entrepreneurs launching tomorrow’s great technology company share the same motivations: creating a unique competitive advantage based on key innovations, growing globally, and in the process capturing huge rewards.

Timing the Market

Finally, entrepreneurs also seek to time the market. This flies in the face of conventional wisdom. Financial advisors tell us that timing the market is a bad idea––not because it is illegal or unethical, but because it simply doesn’t make money. Nonetheless, entrepreneurs constantly gauge the readiness of the market to adopt their innovations. If entrepreneurs prematurely bring an idea to market, their ventures will suffer major losses that they will not be able to sustain because customers aren’t ready to embrace the idea. Consider Apple’s handheld Newton personal digital assistant (PDA), which suffered devastating losses for Apple over a decade before that market became ripe for the iPhone.[8]

Most entrepreneurs engage in these three aforementioned behaviors. It is essential and expected that they test their visions with others, sell their vision to others, and test the likelihood of their success and the tenability of their sought impact. These three practices are not widely accepted in many parts of the world, despite the fact that they are not illegal, unethical, or immoral. In fact, these practices, and the mindset that gave birth to them, are part of Silicon Valley’s extraordinary appeal! Countries that seek to replicate the Silicon Valley success story should consider further enabling these practices to promote their own healthy entrepreneurial ecosystems.

Until my next posting – Carlos B.

[1] Paradigm changes are well understood and easy to explain in hindsight.
[2] For example, earlier this year, Rajat K. Gupta, the retired head of the consulting firm McKinsey & Co., and a former Goldman Sachs and Procter & Gamble board member, was found guilty of conspiracy and securities fraud for leaking boardroom secrets to a hedge fund manager.
[3] This does not apply in the context of patents, trademarks or trade secrets.
[4] Peter Thiel’s CS183: Startup – Class 4 Notes Essay April 11 2012—The Last Mover Advantage, at Stanford University. 
[6] For example, the acquisition of T-Mobile by ATT was blocked by the Department of Justice, and the acquisition of Motorola by Google was delayed by over 9 months to obtain the blessings of anticompetitive agencies in relevant countries where they were present (EU, USA, China, Japan, etc.).
[7] Skype and other VoIP services destroyed the telecom industry’s most lucrative market: long-distance and international toll calls.
[8] The Newtown was retired after massive losses just before Steve Jobs returned to Apple. However, it paved the way to simpler PDAs pioneered by Palm and others, before the smartphone category emerged.

About Carlos S. Baradello

Investor, thought leader, university professor, and advisor in areas of corporate innovation, born global entrepreneurship and venture capital investing.
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