Iterations: The Tension Between Transparency And Privacy In The Startup Ecosystem

Editor's Note: Semil Shah is a contributor to TechCrunch. You can follow him on Twitter at @semil.

Everyone wants more transparency. It is part of a deep, fundamental trend. In government. In the workplace. Inside large systems like health care. And, more recently, around early-stage startup metrics and investment data. The crowd wants more transparency. They want to know more about metrics, revenues, and stats, and they want to know more about how investment dollars are allocated. Yet, the result of this shift raises concerns about privacy. In this world of imperfect, asymmetric information, combined with the desire among participants to build up, invest in, and report on the industry itself, frustrations can mount easily because, somewhere in the recess of our minds, the game feels slightly rigged in the other person's favor, and the light of sunshine offers a promise of transparency to perhaps root out those bad apples and, just perhaps, inject an ounce of fairness, comfort, and peace of mind in an otherwise shady world.

In this real tension, we find many nuances.

For companies, unless they're growing as fast as Pinterest or booking revenue as fast as Bloomreach, there's little incentive to be fully transparent and publicly disclose metrics. Doing so may impact future fundraising efforts, strain relationships with existing investors, hamper potential partnerships, and inform competitors of an opening. Remaining relatively quiet is one of the key benefits of being a small, closely-held private company.

For investors, transparency may be an even dicier proposition. First, companies they invest in may want to remain stealth or not have their investors made public. In these situations, it is the founders who drive privacy — not the investors. Second, some investors may prefer to keep their moves private so as to not give their own competitors actionable information, especially in a climate where competition among funds within a contracting industry is growing fiercer. By law, investment funds are required to make filings with regulatory agencies, but those laws do not include, for example, listing out limited partners and other details many would like to know. Many people are also simultaneously investors in many funds at multiple stages, compounding the sensitivity.

So, here we are. Many want — in fact, at times, demand — that all of this data be made public to identify, tag, and call out the early-stage companies and investors who are not active, who are not what quite what they say they are. Investors may be growing tired of companies who craft and broadcast vanity metrics, and founders may be growing tired of converting their investor spreadsheets into a never-ending cascading waterfall of pointless investment pitches that waste time. Investors are in pursuit of perfect information when considering pulling out the checkbook, and every minute a founder spends pitching an investor who likely won't pull the trigger because they're generally disinterested, are phishing for information, or may not have any gunpowder left.

We have forgotten one dimension. We must investigate what fundamentally drives all of this to begin with: It is our collective curiosity to know more during a time in society where demand transparency is rising and at loggerheads with keeping some information private.

Nearly everyone in the ecosystem participates in the making of, analyzing of, or reporting on the news. Nearly everyone has a desire to know more about "who" funded "what" and at "what price." Founders are lured to coordinating PR around their funding announcements, helped by an industry devoted to this and a network graph of relationships which can make dreams sing above the noise to target the right set of potential partners, the next key hires, and even the next investor. By the same token, investors love to be mentioned in these announcements, their brands gently stitched into the threads of the story. Both, ironically, work in concert, revealing what is material but oftentimes — as is currently their right — cloaking the specifics. The result is speculation masked as information. Add the real-time nature of Twitter to the mix, and perception distorts any signal frequency into reality.

People are keeping score, if even in the back of their mind, of who is following who, who is investing in who, who has real growth, who has real money, who is walking dead, who won't be able to raise their next round, who won't be able to raise their next fund, and all the other aspects and currencies of what makes the Valley's parlor game so dynamic and opaque. I believe in more transparency on a fundamental level and am not an apologist for shadowiness, but I do recognize that part of the draw of private enterprise is, well, privacy.

The big fault line here is between transparency versus privacy. The web continues to make imperfect markets more efficient, and it is only rational that in these imperfect markets, rational actors will want as much information as possible before transacting. The startup world, in this context, is just another market, one that has traditionally been kept largely private and is slowly opening up thanks to new platforms, blogging, and (ironically) private dashboards created by actors to try to use data to make sense of the madness. The cost of this transparency is privacy, but not just for private companies and firms — but also perhaps for people, because a person's reputation in our industry is tied so closely to one's place of work, the drive for transparency might mean that individuals, in addition to firms and startups, may have to give up more privacy than they bargain for.

Photo Credit: midorisyu / Creative Commons Flickr