For startups transparency is transformative

Last week, I took a much-needed break and spent a few days on the beach trying to reset my brain. And though I was only partially successful in doing so, I did manage to get rid of some detritus of the mind, and that meant that I was able to open my mind to new things.

As luck would have it, I ended up having a coffee with Lewis Cirne, founder and chief executive officer of San Francisco-based software company, New Relic. In his past life, Lew — as he is affectionately known in industry circles — had started Wily Technology and sold it to CA (Computer Associates) in 2006.

A regular presence at our Structure events, Lewis is a font of wisdom and as an entrepreneur it is always enjoyable to talk to him, and learn from him. During our conversation last Friday at Crossroads Café in San Francisco’s SOMA district, Cirne offered some insights that are particularly important for startup founders embarking on their entrepreneurial journey.

Our conversation centered around the importance of transparency in a startup. We were talking about how many of us first-time entrepreneurs — when it comes to raising money from venture funds –tend to fall for the celebrity associated with brand names.

Instead, we should be asking ourselves some tough questions, including about your ability to talk to an investor openly, especially when it comes to bad news. “When it came to picking an investor, that was the number one thing,” Lew said. Why? Because startups don’t follow a linear path. They are unpredictable and things — more often than not — don’t work according to plan. When that happens, can you be transparent with your board member?

Josh Silverman, former CEO of Skype told me in an interview that company employees take their cue from their leader, and a confident leader instills confidence in her troops. Similarly, a founder or a CEO who is unable to be transparent with his board will make excuses. He will cut corners and create a company culture based on fear and deceit.

One doesn’t have to look too far. Look at the phone hacking scandal at News Corp’s UK division, where it is becoming apparent that the entire company was taking its cue from the firm’s leaders, including Rebecca Brooks, who was arrested earlier this weekend. As a telecom reporter I saw bad behavior at Enron and the old Global Crossing, where the rot started at the top.

“If you have a culture of hiding, it is perpetuated in the company and has an impact on the business, and leads to erosion of trust,” Lew said, and that one decision leads to corrosion of the company culture. Why? If you are unable to be transparent with your investors, then you are also not being transparent with your employees, who in turn would be fearful of giving you the bad news. This leads to a culture where everyone is trying to sweep things under the rug.

Lew isn’t the only seasoned entrepreneur who has made similar arguments of keeping a culture that is open and based on transparency. A lot of companies tend to hoard their data or their metrics, worried that the bad numbers are going to erode confidence in the company. But I personally think that is defensive thinking – if your team cannot handle bad news, then it cannot figure out a way to work itself out of a hole. You lose either way. By being open and transparent, you trust your team members to not only do the right thing, but you are also including them in the process.

Sharing information means that the team is less likely to be influenced by what they hear from the outside world. More importantly, you are building a culture of trust and respect. And that in itself is transformative for a startup!

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From GigaOM Archives: A video chat with Lew Cirne