Excerpt from The Launch Path (a new book, under development).
Startup Founder Integrity
Some entrepreneurs have a tenuous relationship with truth-telling. Don’t be one of those.
My first full-time job, at the age of 21, was with a company in San Francisco. One day the Feds came marching into the accounting office and arrested the CFO. It turned out that he had been writing himself company checks for $50K to support his personal gambling habit. He kept thinking he’d win back the money and put it back into the company bank account before anyone noticed. But he kept losing, kept sticking his hand back into the cookie jar, and eventually the whole mess caught up with him.
Today, of course, the poster child for Silicon Valley startup fraud is Elizabeth Holmes of Theranos. Her story has been covered widely in the media, turned into a book and a movie, and Holmes is now awaiting trial for fraud in San Francisco. Once hailed as “the next Steve Jobs”, she’s now the most famous example of an entrepreneur who crossed the line between over-promising and outright fraud.
Throughout Silicon Valley history there have been other examples of startup fraud, and many of them are sort of comedic to look back on. Like the disk drive manufacturer MiniScribe, whose managers boosted their numbers by packing 26,000 bricks into disk drive boxes, shipping them to Singapore, and booking them as “sales”. Or Pixelon, which raised $30M in venture capital, spent $12M of it on a launch party in Las Vegas, and filed for bankruptcy the next year. Or LightSail Energy, which raised $70M for their revolutionary energy storage technology that turned out to be a tank of compressed air. Or Juicero, which produced an expensive machine that didn’t really do very much. Or Autonomy, which “cooked the books” before selling themselves to HP for $12B (HP had to write down $8B in value).
Just last year, app-testing startup HeadSpin announced a “unicorn” funding round (a financing at a valuation more than a billion dollars). In the financing pitches the founders represented to investors that the company had annual recurring revenue of $100M. It turned out to be more like $15M, and the co-founder/CEO is now under indictment for fraud.
Startup founders often find themselves walking a thin line between bluster and deceit. You’re making big promises in pitch meetings with investors, you’re projecting confidence in interviews with the press, and with your internal team you want to be an upbeat, motivating presence, even on bad days. “Fake it till you make it”, is a common mantra in startup land.
There’s always temptation to fudge the numbers a little. Accounting rules allow for a little leeway here and there, and startup CEO’s are always working with the accounting team to make things look as good as possible. Deals that close on the threshold between two quarters will get booked in whichever quarter needs them most. Uncollectible receivables can be kept on the books until after the first of the year to improve this year’s numbers. Deals signed on May 1 can be backdated to April 30th. It all comes out in the wash anyway, the saying goes. But it can be a slippery slope from a harmless fudging to outright fraud.
The Theranos case, to me, has always been an example of what I call “the promise overhang”. Every entrepreneur makes promises about their product that slightly overhang what the product can actually do. That’s common for exuberant optimists. But when that overhang gets too big, everything collapses.
I don’t know Elizabeth Holmes, but I suspect that she started out as an earnest entrepreneur who overpromised a little. But then the promise overhang grew and after while her overpromising turned into lies as she kept hoping that the product would eventually catch up to her promises. And then the lies became a habit. And once the lies became a habit, soon she was committing outright fraud without even being fully conscious of it.
We tell our kids to always tell the truth and never to get into the habit of telling lies. Because once telling lies becomes your default reaction to everything, bad things happen.
And so it is for entrepreneurs, I think. So my recommendation for startup founders is to be in the habit of telling the truth. This means that sometimes you’ll be telling customers and investors things they don’t want to hear, but by doing so you’ll be building trust that will serve you well in the long run.
You’ll also be establishing the right tribal culture for your team. A team built around values of honesty, transparency, and long-term decision-making will always outperform a team run by a CEO who is in the habit of telling lies for short-term gain. “A fish rots from the head down”, the saying goes.
So if you want to be a successful entrepreneur and company leader, develop a reputation for truth-telling, from the very first pitch you deliver. If you do this consistently, good things will happen.
