In early 1998 I walked the open plan floor of what was then one of the largest web development shops. The founder was giving me a tour so I could see the scores of web developers working diligently. They looked the part, the founder looked the part, the place had good energy. I liked it.
The founder was looking for venture capital to expand internationally. He was a much more experienced businessperson than I was and he knew it. At one point he gave me a sly look and said "How do you know that I didn't just hire a bunch of extras to fill an empty office building floor for the day so I could impress you?"
Now I had done my due diligence and some of the people who would have had to be in on that sort of scam were people who had more to lose lying to me than they could possibly gain lying for him. I trusted my due diligence and I knew the company was real. But I no longer trusted him. At the end of the tour I told him we were passing on investing.
He was pissed. He went over my head to the CEO of my company, directly and through common clients. When I was called on the carpet to explain myself I said only that I did not want to work with that founder. I did not say why. The CEO did not give me a soul-searching stare, he did not grill me, or even ask why that would be so. He knew me well enough to let me have my reasons. He just waved me out of his office.
It's an odd fact that our capitalist system--our brutal, unsentimental, Darwinian, sink-or-swim system--relies almost entirely on its protaganists' ethical behavior to function. Our entire economy relies on trust. You probably don't think about this much. Most people don't think about it at all. I think about it a lot. What I do--what all VCs do--would not be possible without the honest behavior of an overwhelming majority of founders. If even 10% of founders decided to start cannily lying the entire startup ecosystem would come tumbling down shockingly quickly.
I hear objections. Let me distinguish between transactions and relationships. Many transactions are entirely caveat emptor: you need to know what you are doing and what questions to ask. Transactions have a simple API and learning how it works is your responsibility. But a business relationship is different: it is too complex, there are too many ways to be dishonest. It is not possible for both parties in a business relationship to verify everything the other side has told them; if they had to the cost of doing so would make it infeasible to have business relationships at all.
There are many gradations and steps between transactions and relationships; navigating through them requires experience. But if you do not trust a person you should not have a business relationship with them.
Some of the oldest business advice in the world: "A good name is better than great riches."* What happens to those of ill-repute? "The sons of men of no name, they were driven out of the land."** In our community a bad reputation results in being driven out of the land. If you're known for not being trustworthy your career amongst the highly interconnected venture capital community is probably at an end***.
The flip-side has always been that our community hesitates to accuse other people of certain types of ethical lapses. I can only think of one time in my fifteen years of venture investing that I have gotten a third-party reference from a venture capitalist that called someone's ethics into question. The closest a VC will come to saying something bad about someone is to refuse to say anything of substance at all. If you don't like someone, you don't have to do business with them. But impugning someone's character can put their life's ambitions at risk. You need to be extremely sure of what you're doing and cognizant of the effect your words might have before you do this. If you don't, you can do a great amount more damage than your dislike of that person deserves.
I won't do business with someone I don't trust. When someone I worked with has turned out to be a liar I have ended my business relationship with them. Luckily I have not had to do that often and not in almost ten years. But likewise I won't have anything to do with someone who puts someone else's life's work in jeopardy by carelessly judging their ethics in public. These offenses--breaching trust and baseless accusations--are two sides of the same coin. The ignominy of the offenders should be likewise the same. If a good name is better than great riches then heedlessly sullying someone's reputation is low theft, and leaves the perpetrator, the victim, and the rest of us equally impoverished.
* Proverbs 22:1
** Job 30:8
*** Every field has different standards for trust. With startups we expect baseless optimism for instance, where in academia this would be frowned on. With startups we expect confident predictions of the future as if it has already come to pass, while in banking this would be looked at askance. People in the community know the norms. And, in our community, are willing to give allowance for the fact that many entrepreneurs were not part of the community before starting their company so may be unfamiliar with our ways. Mistakes made with good intentions are not ethical lapses, they are mistakes.