Trust But Verify: Words Of Warning For Early-Stage Investors

Startups lie.

More specifically, startup founders put out tons of information about their startups and their activities that is simply not true. The rule seems to be that the earlier the stage of the startup, the more lies they put out into the world. As early-stage angels, you guys are getting the brunt of it.

A brief list of examples I’ve had personal experience with:

  • a new San Francisco startup in the media space that has no users and no clients and is a guy sitting in his den with a WordPress template with zero traffic has testimonials on its website; needless to say they are all made up because nobody has ever used the service;
  • a guy who raised over multiple millions of dollars from serious big name investors said he graduated from an Ivy League school he simply never graduated from;
  • a startup has the logos of some of Silicon Valley’s hottest unicorns (startups that have a current valuation of more than $1 billion dollars) listed as clients has never served these companies (although the founders did some freelance work 5 years ago for contractors to these companies);
  • a lawyer who was never retained by a startup is listed as counsel of their AngelList page; this is important because connecting your startup profile on is a requirement to unlocking the fundraising round on the site;
  • at the demo day of one of the top accelerator programs in the world 8 out of the 13 startups presenting did not have a workable product but all talked about their product and alluded to the fact that it existed even though it clearly didn’t. Twelve of the 13 got at least $200k in demo day funding (on top of the accelerator’s contribution). They all showed wireframes and some even had a clickable demo (booyah!).

To be clear, this isn’t about startups saying they will take over the world or change the world or make the world a better place or revolutionize this industry or disrupt that industry. This has also nothing to do with morals or ethics. This is about efficiency and the user experience of doing business in the early stage investing world. For all I know you might believe in this:

That’s totally up to you. I’m not judging. I’m just going after factual information. After all, if you’re writing a $50k check don’t you want to make sure they’re at least not lying to you?

But that doesn’t mean we need this as we write checks.

Startups have to be ambitious, take huge bets and believe in themselves more than most find comprehensible. This is about putting out untruthful information that has nothing to do with reality: publishing testimonials that don’t exist; listing companies as clients that are not clients but unpaid users; putting up a MRR metric that isn’t even one-time revenue but is total gross topline sales; or listing committed investors who are no more than interested in learning more about the opportunity.

Does this really matter you might ask? That’s up to you. If you are okay working with guys who cut corners like this, and there are PLENTY of successful ones out there, then fine. My whole thesis is that you just need to know what’s going on and THEN decide on whether or not you feel comfortable with the process. If you’re assuming that a founder will live by the code of Lean Startup, which has effectively dominated the startup world, and execute on fake it till you make it against everybody EXCEPT their potential investors you need to come back to Earth. Most founders can’t turn it off. So if you want them to be honest towards you and liberal towards everybody else then you’ve got another thing coming.

You think this doesn’t happen or is an outlier? You are lying to yourselves. 56% of all LinkedIn profiles contain falsities. 90% of all husbands lie to their wives. 78% of workers lie at work. Now, let me ask you again: How many startup decks, websites and one-pagers contain straight-out lies? Just because we’re in this “tech-driven transparent meritocracy focused on making the world a better place” (little vomit in my mouth) we’re assuming we’re immune to this. We’ll find out in the months to come — both as my business takes off (continue reading) and the steroid-induced hypergrowth unicorns develop cancers and fall-over themselves and we start figuring out that some were built on straight-out lies (anybody said Clinkel). My hypothesis is that well over 70% of all profiles on AngelList contain lies (after all AL, Crunchbase and others are all self-reported) and that much of the information out there is simply not true.

Professional angels, so those that have made at least a dozen or so investments in the last several years and have exited their own companies in the past, can spot a lot of these right off the bat thanks to the fact that they’ve either been perpetrators of these actions or have had to deal with them for years. They can tell their own kind. They’re ready to dig deep and get to the truth. But even they get caught up in all of the unicorn farts happening in the Bay Area right now and forget to do some of the very basic work up front because of the ubiquitous FOMO. On the other hand it is clear that a lot of inexperienced angels, especially those coming into startup investing from other worlds simply do not know what to look out for and don’t know what questions they need to ask.

Let’s take a look at an example:

A startup will have a slide in their deck that says: “10 clients, including Google and Facebook“.

Sounds awesome!!! Wow! Well, if Google and Facebook are clients then they certainly must be the hot .new.shit. Many a Maine lawyer will tell their local doctor friends that they “have to get in on this deal because a college buddy of mine who’s now successful in Silicon Valley made this unique opportunity available to me”. Hmmmm, let’s take a closer (if only hypothetical) look:

First of all there are 7 companies. Not 10. 7. Yes. This happens. In the future the founder will say they were just rounding up.

Second of all, only 4 have paid. Can you have an unpaying client? Not in my world. Maybe in yours? Certainly in the startup world you can. I call these people users or even more precisely “people who’ve signed up in an email grab”.

Third of all, out of those 4 one was a $10 one-time charge on the personal credit card of a Google (full-time to be fair) employee. I am not kidding.

The other was a one-year trial at an 80% discount done with the founder’s college buddy who’s director of product at Facebook and he slept with the founder’s girlfriend so there. He now has a chance to atone for his sins and make it up to the founder. So much guilt bought off for the price of a large Starbucks order.

Number 3 is a paying client that you met at a conference and hustled to close…

The fourth is a real client. What Jason M. Lemkin calls a non-affiliated client. One that came in thanks to The Marketing Machine, went through the funnel and typed in a credit card.


So 10 clients is really 1 client, 1 favor from dad, 1 conference hustle and 1 guilt-trip from a college buddy.

In what world is 10 = 1? Somewhere between the startup world of New York , Chattanooga, Boulder, Las Vegas and Redwood City.

Because many startups aren’t that into the details of definitions and language (because they’re too busy “making the world a better place” that they don’t have time for bullshit minutia) as Bred Feld has pointed out in his post on mixing up the vocabulary of the startup world: many are not even doing this out of malice but simply they can’t tell their left-hand from their right. It happens when you’re “moving (maybe a bit too) fast and breaking things”. So what’s the different between client, customer and user and what is a paying client? Someone who let you charge her card for $5 and then cancelled an hour later or someone who’s entered into a 2 year contract with your firm?

Tren Griffin ‏@trengriffin

@teddiew @ttunguz @DanielleMorrill @jasonlk One startup’s CAC is another’s COGS. CAC is usually far more important than GM. Churn too.

I’ve had quite an interesting experience talking to people in the angel investing community about fact checking, vetting and doing due diligence. There are always two reactions. Dozens of conversations (are you going to fact check that?) and it’s always these same two points. First of all, they each have two stories about people in the startup world who have put out false information: a guy who’s been running a startup for 3 years still puts his technical co-founders name on everything (for the purpose of raising money, PR, hiring, etc.) even though they haven’t worked together for the past 2 ½ of these three years; a startup with no users and no clients that has 5 testimonials on the website from people who simply do not exist; a founder who regularly drops names of investors who he says have committed to a round but all they’ve done is express interest in possibly perusing the deck. And at the same time they all downplay the word “lie”: they’ve told me that these founders are not lying but: “exagerating”, “doing what they have to”, “living the dream”, “painting a picture”, “fudging”, “telling white lies” and “faking it till they make it”. These angels can’t get themselves to say: “The founders of company so-and-so lied to me and my friends”. That would make it too personal and spoil all the fun.

Everybody else is being taken. This stuff won’t happen to me.

Once these lies are out there they get traction as they’re validated over and over again. Techcrunch picks something up and although TC is great at putting out lots of content and getting a pulse of the world they seem to not be equipped with fact checkers to vet even the most basic set of information. Once it’s out there Mattermark and AngelList will deseminate that information over and over again and CB Insights will do the same. The CEO even told me directly that they source their data from: AngelList (self-reported), Crunchbase (self-reported) and Techcrunch (who does not fact check a lot of what they put out for lack of resources). I couldn’t make this stuff up if I wanted to. In a matter of days or even hours information that has no merit (“1000 paying clients!” “5 ex-Googlers are joining our startup”, “first ever this and that”) is out there and repeated as gospel. Now it’s no longer stuff founders made up but it’s the basis of decisions people like you make about cutting checks for $25,000 or $100,000.

Can you say: “Shit in. Shit out”?

But you’re not from this fake, unicorny world? You’ve made your bones in construction, old-school tech or pharmaceuticals. You know real people. You don’t drink $9 craft beer. You’re Mainstreet and your bullshit detector is full on.

Morgan Freeman and Christopher Reeves in the 1987 film Street Smarts

You’re just smart enough to think you won’t be taken. It’s easy to shore up the numbers on one end and jack you on the other. Magicians are really good at this. They’ll do something with their right hand out while the left hand is doing the magic. This is calld misdirection. You might think you have street smarts others don’t but the moment you think that makes you immune to one con you’re having your pocket picketed by the guy’s accomplice (I meant to say co-founder).

In the weeks to come I will be putting out content almost daily both on Medium and on the StartupFactCheck blog. Join me if you’re tired of wading through all of this bullshit interested in higher returns and more fun form early stage investing.

Some upcoming posts:

  • How To Effectively Screen A Startup In 7 Easy Steps
  • The Difference Between Fact Checking A Startup And Doing Due Diligence
  • The Single-Most Important Term To Use When Doing Startup Due Diligence
  • Analysis Of A Comparative Study On Returns Vs. Investment Due Diligence
  • Additional Questions You Need To Ask Your Potential Startup Investment’s Founders In Light Of The Recent Market Turbulence
  • Should You Do A Formal Background Check On Your Startup Potential Investors Founders
  • Does Your Potential Startup Investment’s CEO Hustle Or Is He A Hustler?
  • Investing In Syndicates And Groups: Wisdom Of The Crowds Vs. Group Think

A bit about me: After building 3 business, all of which were successful to a point (one $10MM annual revenue, another $1MM in annual revenue by the time I was 22) I crashed each and every one of them (because of stupidity, hubris or a drinking-daddy-didn’t-love-me-anger-I’m-a-victim problem that lasted the better part of two decades — usually all three). I’ve never lost investor’s money and I’ve raised modest angel capital. I’ve been the leader of several teams that built a couple early stage apps and have done some angel investments (results pending). For the past 12 months I’ve consulted in the startup world (Houston, Denver, Boulder, New York, Europe, Silicon Valley) and have seen the crazy. I’ve also done a lot of this stuff myself and will ‘fess up to it in the months to come. I am rebuilding my life (or really building a real one for the first time in my almost 40 years) and building a set of tools that allow early-stage investors to fact-check, vet, do due diligence on and basically tell if what the startups they are thinking of investing in are being truthful with the information they are putting out. Do they really have the qualifications they claim? Are the clients real? Is the product really almost done?

I’m hopeful that the work I perform in the years to come will make early stage investing more efficient, returns higher (angel investment returns are 7.1x higher when angels do at least 40 hours of due diligence) and get more money involved in the process (angels invested 24 billion dollars in startups in 2014) as we make our way to a more democratic and distributed startup funding model (from the $1MM to the $100 checks). In the future, together, we might build a truth-layer for startup investing platforms that source information through our filter instead of sucking up whatever muck is out there on the internet.

But let’s not get ahead of ourselves. For now, just don’t lie to me.