Alan Blinder (former vice chairman of the Federal Reserve) is one of my favorite economists.  His book, Hard Heads, Soft Hearts, outlines a compelling philosophy in economic policy – whereby a tough-minded, analytical approach is applied to solve difficult social issues.

Thus, I read his recent NY Sunday Times article on the central role that trust plays in capitalism with great interest.  "The new president's most fundamental job," he writes, "is to restore the people's confidence that the economy will perform — for them".

Translating this mantra to the start-up world is a thought-provoking exercise.  Do the principals in the start-up economy — the entrepreneur and the VC — trust each other?  In these economic times, tensions can flare over strategy, burn rate and performance.  Tough conversations and arguments over tough issues is natural, but if there isn't a foundation of trust between these two parties, the start-up ecosystem fails, just as our markets fail.

Trust often breaks down in the VC-entrepreneur relationship when either side senses that the other isn't being straight with them.  The telltale signs for a VC to not trust the entrepreneur is when they see an entrepreneur:

• Get more defensive during tough times, rather than more transparent.
• Avoid confronting tough issues, rather than forcefully raising them early and often.
• Blame poor performance on others, rather than embrace accountability.
• Focus on their own situation and wealth equation, rather than focus on shareholder value.

On the flip side, the entrepreneur worries that their VC isn't being straight with them when they see a VC:

• Disengage in the details during tough times, rather than engage more vigorously.
• Be a pollyana when things aren't going well, rather than providing realistic assessments and tough feedback on performance.
• Seek to apply general formulas (e.g., let's implement the Sequoia Manifesto!), rather than cater their response to the specific situation.
• Focus on their VC fund's situation and agenda, rather than the portfolio company's.

Successful corporate chieftans turned philosophers, such as Jack Welch (GE) and Bill George (Medtronic), have identified authenticity as the key success factor to leaders.  I would suggest entrepreneurs VCs (not often necessarily thought of as leaders!) face a similar standard.  If your VC or entrepreneur can't pass the "Authentic Leadership" test, you are in trouble.  Bill George points out authentic leaders are those that:

• Are true to themselves and their beliefs.
• More concerned with serving others than their own personal success or recognition.

• Engender trust and develop geniune connections with others.

Restoring trust in our economy and government for Americans and the broader world community is a monumental task for President-elect Obama.  We VCs have the (admitedly smaller but still critical) task of navigating these tough times by demonstrating to our two major customers – our entrepreneur and our investors – that we are worthy of their trust.