The Cover-Up Culture

In a startup “Good news needs to travel fast, but bad news needs to travel faster.”

There’s something about the combination of human nature (rationalization and self deception) and large hierarchical organizations (corporations, military, government, etc.) that actively conspire to hide failure and errors. Institutional cover-ups are so ingrained that we take them for granted.

Yet for a startup a cover-up culture is death. In a startup founders and the board need to do exact the opposite of a large company – failures need to be shared, discussed and dissected to extract “lessons learned” so a new direction can be set.

Lie to My Face

The first time I saw a corporate cover-up was as a new board member of a medium size public company. The VP of an operating division had run into trouble in product development; the product was late and getting later. The revenue plan had the new product baked into the numbers and it was clear that this division General Manager was going to crater his forecast (happens all the time, nothing new here). I knew this from talking to his people before the board meeting so none of this was a surprise. What was a surprise was the boldface lies the VP told us at the board meeting. “The product’s on schedule. No problems. We’ll make the numbers.” The disconnect between reality and a senior executive’s willingness to blatantly lie to his CEO and board just blew me away.

It would have been so much simpler for him to say, “We’re screwed, and I need your help.” Until I dug deeper and realized that the entire company had a “cover-up culture”—the CEO punished failure and bad news. Since only good news was rewarded (as defined by the revenue and product plan shared with Wall Street analysts), I understood why avoiding bad news and covering mistakes was the general manager’s rational choice in this company. Because earlier in my career I had a board that beat me senseless when I missed a milestone.

Cover-up Or Look Like an Idiot

In large companies executives are hired and compensated for pristine and efficient execution. If you screw up, there’s an unspoken assumption that you’ve screwed up a known process—something that was repeatable and predictable. You cover up because your screw-ups not only make you look like a failure, but everyone up the line (your boss, their boss, etc.) look like an idiot. Further, the odds are that the information you hide won’t immediately be discovered or damage the company.

I mention this not because this post is about cover-ups in large companies (I’ll leave that to the experts in organizational behavior and social theory), but to contrast it with the very different kind of culture that startups need to survive.

The Cover-Up Culture: The Role of the Board

As a founder I quickly learned how open I could be with my board. A few times I had not so great investors who believed that a startup should unfold like a Harvard case study. They ignored the reality that most startups are a chaotic set of events from which founders are trying to extract a repeatable and profitable pattern. The first time I delivered bad news I got my head handed to me. The lesson this chastened CEO took from that board meeting? Don’t tell this board bad news.

In other startups I was lucky and had great investors who knew how to manage and deal with chaos. They realized that conditions change so rapidly that the original business plan hypotheses becomes irrelevant. These investors taught me metrics appropriate for searching for a business model, how to work with the board when I didn’t make a milestone, and how we would figure out when it was time to change the strategy. I thought of these board members as partners and I shared everything with them; good, bad and ugly.

These board members encouraged me to instill the right culture in the company. They reminded me that failures in startups tell the founders which direction not to pursue – while teaching you how to succeed. This means covering up failure in a startup was like tossing their money in the street. So instead of a cover-up culture they encouraged a “Lessons Learned culture.”

Startups: Good News Needs to Travel Fast, but Bad News Needs to Travel Faster

A key element of a “Lessons Learned” culture is rapid dissemination of information. All information, whether good or bad, must be shared rapidly. We taught our company that understanding sales losses were more important than understanding sales wins; understanding why a competitor’s products were better was more important than rationalizing ways in which ours were superior. All news, but especially bad news, needed to be shared, dissected, understood, and acted on. At each weekly department and company meeting we discussed what worked and hadn’t. And when we found employees who hoarded information or covered up problems we removed them. They were cultural poison for a startup.

The resulting conversations made us smarter, agile and relentless.

Lessons Learned

  • Startups are built around rapid iterations of hypotheses. Most of them turn out be wrong
  • Make sure your board is not beating up on the truth
  • Build a culture of rapid dissemination of all news; good or bad
  • Founders lead by example in sharing Lessons Learned
  • Collectively analyze failures,then iterate, pivot and try again
  • A cover-up culture is death to a startup
  • Fire employees who hoard information or hide bad news.

Author: Steve Blank

A prolific educator, thought leader and writer on Customer Development for Startups, Steve Blank is a retired serial entrepreneur who teaches, refines, writes and blogs on “Customer Development,” a rigorous methodology he developed to bring the “scientific method” to the typically chaotic, seemingly disorganized startup process. Now teaching entrepreneurship at three major universities, Blank co-founded his first of eight startups after several years repairing fighter plane electronics in Thailand during the Vietnam War, followed by several years of defense electronics work for U.S. intelligence agencies in “undisclosed locations.” Four Steps to the Epiphany, Blank’s fast-selling book, details the Customer Development process and is increasingly a “must read” among entrepreneurs, investors, and established companies alike, when the focus is optimizing a startup’s chances for scalability and success. After 21 years driving 8 high technology startups, today Steve teaches entrepreneurship to both undergraduate and graduate students at U.C. Berkeley’s Haas School of Business, Stanford University’s School of Engineering and the Columbia/Berkeley Joint Executive MBA program. His “Customer Development” teaching and writing coalesce and codify his experiences and observations of entrepreneurs in action, including his own and those he advises. “Once removed from the day-to-day intensity of founding a startup, I was able to observe a pattern that distinguishes successful startups from failures,” Blank says. In 2009, he earned the Stanford University Undergraduate Teaching Award in Management Science and Engineering. The San Jose Mercury News listed him as one of the 10 Influencers in Silicon Valley. In 2010, he was earned the Earl F. Cheit Outstanding Teaching Award at U.C. Berkeley Haas School of Business. Despite these accolades, Steve says he might well have been voted “least likely to succeed” in his New York City high school class. Steve Blank arrived in Silicon Valley in 1978, as boom times began. His early startups include two semiconductor companies, Zilog and MIPS Computers; Convergent Technologies; a consulting stint for Pixar; a supercomputer firm, Ardent; peripheral supplier, SuperMac; a military intelligence systems supplier, ESL; Rocket Science Games. Steve co-founded startup number eight, E.piphany, in his living room in 1996. In sum: two significant implosions, one massive “dot-com bubble” home run, several “base hits,” and immense learning leading to The Four Steps. An avid reader in history, technology, and entrepreneurship who seldom cracks a novel, Steve has followed his curiosity about why entrepreneurship blossomed in Silicon Valley while stillborn elsewhere. It has made him an unofficial expert and frequent speaker on “The Secret History of Silicon Valley.” Steve’s interest in combining conservation with best business practices had Governor Arnold Schwarzenegger appoint him a Commissioner of the California Coastal Commission, the public body which regulates land use and public access on the California coast. He also serves on the Expert Advisory Panel for the California Ocean Protection Council. Steve serves on the board of Audubon California, was its past chair, and spent several years on the Audubon National Board. A board member of Peninsula Open Space Land Trust (POST), Blank recently became a trustee of U.C. Santa Cruz and a Director of the California League of Conservation Voters (CLCV). Steve’s proudest startups are daughters Katie and Sara, co-developed with wife Alison Elliott. The Blanks live in Silicon Valley.