As a founder, you’ll encounter many hills and valleys growing your company. As much as you want to present positive information to stakeholders, it’s equally important to be forthright when product and financial performance fall short of expectations.
As an angel investor who funds promising startups, on occasion – and thankfully it’s rare – I’ve run into less-than-honest behavior. The point where “faking it” translates into stating untruths to investors, customers and oneself is the point at which ego and reality collide – and ego in some cases ends up as the winner.
A well-publicized case is that of Theranos founder Elizabeth Holmes, who was convicted of defrauding investors about the diagnostic device company she founded. Less well-known is Adam Rogas, CEO of cyber fraud prevention company NS8, who allegedly raised $ 123 million from investors using financial statements that showed millions of dollars of revenues and assets that didn’t exist.
These and other equally egregious cases present a cautionary tale for entrepreneurs and investors: Transparency isn’t an option; it’s a necessity.
The founder of a company I invested in secretly kept two sets of books: one with correct historical financials, and another with numbers inflated more than 10 times actuals. Sales and product performance had fallen short. His solution was to present the inflated financials to investors.
The founder of a company I invested in secretly kept two sets of books: one with correct historical financials, and another with numbers inflated more than 10x actuals.
But investors are always on the lookout and sensed something was amiss. We quickly discovered the second set of books after digging into the data. This founder could not secure additional investment in his company and found himself in legal trouble.
It’s natural to want to showcase positive news, but presenting challenges is just as critical. Challenges can snowball into bigger issues if you don’t communicate them. Never allow the pressure from investors looking for good news to tempt you to exaggerate or sugarcoat the truth.
Optimism and reality
As a philosophy, “fake it till you make it” was never about playing with the truth. It suggests adopting a mindset that you’ll succeed, even when you’re not confident about achieving success.
It’s OK to project an optimistic view on where product development and financials will be in the future. But it’s crucial to present reality, not the reality you wish were true when reporting on the current state of product development, actual customers and financial performance.
The ego-driven high
One trait that enables founders to take huge risks to create and run with their vision, namely outsized confidence and money, is the very trait that can cause a few of them to lose the sense of what’s right and wrong. With their moral compass adrift, they deceive to get ahead.
In extreme cases, founders on an ego-driven high are addicted to the deception. They imagine themselves as the CEO of the next unicorn. They unleash a stream of untruths that support their made-up reality. These people are trapped in a fantasy space, immersed in hubris. As we saw with the rise and implosion of Theranos, the deception snowballed out of control until, inevitably, the founder was caught in the lie.