The trust thing

A year ago, we announced Bloomberg Beta — our fund to invest in and make companies, and (we hope) it is a fund built differently. For one, we are extremists on openness — and I want to explain why.

There have been some difficult moments this year, and some lovely ones.

Yesterday, we had a good one: LinkedIn shared they acquired Newsle, where we were investors. Slow clap for Jonah and Axel on a victory deserved. (We had our second exit a few weeks ago, our role in that one is still unannounced.)

Since launching our fund, we reviewed 1,606 companies, funded 28. We’re grateful to the founders who took a chance on us. Ask us in five years if we know what we’re doing. (Surprise: to mangle the saying, in investing, the days fly by but the years drag on… it’s a game where you make many fewer moves than you do as a founder.)

The hardest choices this year have been around the question of trust.

The investor-founder relationship is, by nature, out of balance. Founders are devoted to the most important (work) project of their lives; investors have the luxury of more than one such project at a time. Founders can do incredibly well personally, under circumstances where the investors may do fine though not great. Founders know much more about their company, investors know a little more about what’s happening elsewhere in the world (maybe).

The ingredient in the startup stew that balances the potential bitterness of these differences: trust. When founders believe their investors will do right by them, even when it may be against their narrow, short-term self interest, and investors believe the same about founders, it’s magic.

For people who do contracts with large corporations, or private equity-backed companies, they are often stunned at the simplicity of legal documents in startups. That’s because with trust, the paper means less. Everything is easier, less stressful. Without trust, the paper is worthless.

To begin to build that trust, we strive to be the most open fund — we published our full operating manual to Github, people who come in to meet with us have called us “shockingly transparent,” and we still feel the pain ourselves from our own experiences of how much investors’ lack of clarity cost founders in time and headache.

And we think hard about how to build trust with each and every founder. My new way of thinking about it: trust is an egg toss. We start close together, and try out little moments with each other: Will they call when they say they will? Will we make the introduction we promised to make? And then, slowly, we step further apart and keep throwing the egg. Will we keep our word on the terms of the investment? (An investor once broke a term sheet on me. It hurt.) Will they use their judgment to communicate important things with us beyond what’s explicitly required by our agreements? And then the furthest. Will they share when something has gone horribly wrong (as it inevitably does) and we need to fix it together? Will we make a sacrifice that’s in our shared long-term interest?

The egg toss is even harder, and more rewarding, when you’re playing as a team — and the five of us in Bloomberg Beta have been blissfully trustful. No dropped eggs among us.

In our fund, we like it when, early in the founder-investor relationship, each of us has opportunities to do the right thing — or not. If we do, then it’s a good way to tell how the rest of the relationship will unfold.

I’m trying to figure out how to tell if we are doing well at building trust.

We’ve been thrilled with the openness founders have shown toward us. Truth is, it’s probably easier to take advantage of us than of other firms. We avoid exploding offers. We narrate our level of interest honestly, whenever asked.

Yet few have taken advantage of us. (Sure, there have been moments, and our lesson from those moments is to avoid the temptation to lock down and tighten up — our lesson is the opposite, give founders more chances to develop trust in us, and for us to develop trust in them. It’s an inexpensive lesson when you work with someone if they drop the egg on the first or second toss.)

So, catch. We’re ready to toss you an egg.

When we, and founders, choose to do the right thing despite easy opportunities to take each other for a ride, we learn to trust each other. And trust is the thing.