NGL: When does founder fibbing become fraud?

Storytelling, cherry picking, fudging the numbers, fraud. Founder dishonesty comes on a sliding scale. You’re not 100% sure how the product will work, how you’ll scale, or how the market will respond. But you’ve got to be sure to secure funding. Are little white lies ever okay when you’re trying to win investor confidence?

There’s a fine line between overselling and obfuscating. 

Between getting investors pumped and telling porkies.

As her shiny new criminal conviction shows, Elizabeth Holmes planted herself firmly in the latter category, and now she’s paying the price. 

Elon might be having a rough year, but things are even worse for EV rival/Nikola founder Trevor Milton, who will be sentenced in early 2023. He’s looking at up to 25 years if convicted on all four counts of wire and securities fraud.

And less than two years after a $175 million acquisition, JPMorgan is suing financial aid platform Frank after hitting a 70% bounce back rate on a marketing email – implying less than 10% of Frank’s alleged 4.25 million strong user base was real. 

Will it spark a wave of ethical enlightenment? Or will the charismatic entrepreneurs turned cautionary tales just be more careful this time? 

Does crime ever pay?

When you’re founding and fundraising, lying is a roll of the dice scenario which has three most likely outcomes: 

  1. You manage to make the lie come true, no one ever finds out, and everyone wins
  1. You don’t manage to make the lie come true, the investor discovers the lie before the deal, and you lose the deal and the faith of any other investors they speak to
  1. You don’t manage to make the lie come true, the investor discovers the lie after the deal, and you get sued for fraud. 

There are of course slightly less dramatic outcomes. Your investors might not uncover shocking truths courtroom-drama style. They might just slowly realise you misled them, your reputation will suffer, and further funding rounds will be a wash out. 

The likelihood of each outcome is yours alone to gamble on.

But we’re talking about outright mistruths here – big picture lies that most sensible founders won’t go near. What about those big projections and little promises that get you through the pitch? 

What about the competitive and sometimes FOMO-driven nature of VC, which in many cases forces you to promise big or go home empty handed? 

In the words of founder/healthcare industry commenter Nikhil Krishnan: “Some might even argue that venture as an asset class is incompatible with maintaining high quality clinical models alongside hyper growth expectations.”

When does aspirational marketing become outright fibbing?

Lying close to the truth 

Let’s look at the murkier forms of misrepresentation. 

Let’s say you’re an early stage crypto startup and you have 100,000 active accounts. But many of your users have 2 or 3 wallets. So while you might be able to show 100,000 accounts, your individual users are probably closer to 30,000. Do you still tell investors you have 100,000 users, because, in a way, you do?

If you’re a social media platform and you hold the unfortunate knowledge that 20% of your accounts are bots, do you “forget” to caveat that “minor” point in your investor pitch?  

And if you have terrible MRR but your LTV is looking good, and will likely transition into high MRR over time, do you just pan that MRR stat from the pitch deck?

Then there’s the trap of drinking your own Kool Aid. It’s a common trait of narcissists to believe their own lies. Adam Neumann lied about a lot of things, but he wasn’t lying about his utter conviction that WeWork would succeed. 

It’s hard to call someone a liar when they’re so convinced of their own success. But conviction and delusion are close neighbours. 

Lying in the bed you made 

Ask yourself: how much ass biting is going to come from the lie? Repercussions range from losing the trust of one customer/investor to losing the trust of all of your customers/investors (present and potential) to scary fraud allegations and class action litigation. 

And it’s not just the cost of getting caught. the Harvard Business Review warns of two other very serious implications:

“Deception results in market inefficiencies; it locks up resources by prolonging the lives of doomed ventures and making it difficult for VCs and employees to know where best to invest their money or labour.

Then there’s the toll on your wellbeing, given the “debilitating stress that often accompanies lying.”

Here’s a saying less frequently subscribed to by ambitious entrepreneurs: “Complete honesty is the access to ultimate power”.

As explained by this anonymous angel investor: “Telling lies is the number 1 reason entrepreneurs fail. Not because telling lies makes you a bad person but because the act of lying plucks you from the present, preventing you from facing what is really going on…. Every time you overreport a metric, underreport a cost, [or] are less than honest… you create a false reality and you start living in it.” 

His tactic to force founders past the fatal urge to fib? Ask them at the end of the pitch how many lies they just told.

Be prepared for that one.

No harm, no foul?

Stonyfield Farm founder Gary Hirshberg has a very comforting justification for truth-bending business founders. 

“You do whatever the heck you have to do to make it. We were fighting for employees’ jobs and our mothers’ and mothers-in-laws’ and friends’ investments. Fighting for our lives. And I think anything goes, as long as you’re not injuring anybody.”

Then there’s the dog-eat-dog argument. You’re going after a fixed and limited pool of capital. You might be working to save employee jobs or secure returns for friends and family. You’re chasing your dreams. Your marriage is on the rocks. You just need a few more months. If you don’t lie, someone else will. 

The truth is, there’s rarely a lie without a casualty. There are plenty of founders prepared to fib; fewer with the integrity and transparency that make them true gems for investors. 

And, if you’re caught, the mud sticks not on the failed company, but on you as an individual. 

Fibbing, fabricating, and fraud are all on the same spectrum. It’s an unfortunate truth that all founders sit somewhere on it at some point in their startup.

Ultimately, if you really have to tell white lies, just be careful what you put in writing.

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