Hyping, shading and puffing are normal in entrepreneurial circles and, properly limited, are probably expected to some degree. People discount the statements accordingly.
Misrepresenting material facts or omitting to disclose something major (like the loss of your major customer the day before a funding) constitutes securities fraud and can get you in a heap of trouble, notwithstanding how it may have worked out in a particular case such as that cited in this piece.
There are also limits to hyping if it amounts to misrepresenting material facts. I was once approached by an entrepreneur whom I turned down as a client and who later got busted for securities fraud for having done a demo claiming that certain of his company's whiz-bang technology was in fact doing something stupendous when it was in reality just a rigged demonstration designed to simulate what he claimed his technology could already achieve. Having raised $7 million based on such demonstrations, mostly from gullible investors, he went to jail for his "over-hyping" of his product.
When it comes to issues such as lying, there are moral issues and there are legal ones. If you are an entrepreneur who wants to avoid serious problems, the rule should always be: never lie in a way that amounts to fraud or misrepresentation (legally speaking), no matter what the supposed benefit. It is not worth it.
Concerning moral issues, the issue for me is one of integrity. Just as we all can stretch something when it helps us, and just as we all do so to some degree, so we can stretch it to the point where it amounts to a pure fabrication. Mild stretching might be considered a gray area. Fabrication is a character issue that can reflect badly on the entrepreneur. Of course, this depends on context as well. If it is clear you are speculating (such as about growth rates), that is one thing. If you are knowingly misrepresenting facts, the natural thought that occurs to people you are dealing with is, "If he will do that once, how can I trust him not to do it again." You might think it is innocent in your mind, but crooks make a living off such misrepresentations. And there is no percentage in aligning yourself with that which is unseemly. I have repeatedly seen the consequences of such activity in courts of law, and they are not pretty in cases when things do blow up.
Another test is: Would the victim be annoyed if they found you had lied? I doubt a VC would get annoyed at inflated sales forecasts (they know it's part of the game), but they would be annoyed if you lied about the feasibility of your project.
I was talking with one investor late last year. Things were going pretty well in one direction with my company and I decided that it would be a good time to fund additional growth. Just before I closed the deal, however, some key relationships that I had been counting on fell through. Ever the optimist, it didn't cause me personally to doubt what I was doing and didn't think it was a big deal in the long term.
One thing that I think is true of technical people is that we are comfortable disclosing difficult things. We tend to view them as just bugs to work out and expect that everyone involved will have enough belief in the end goal to find workarounds to any challenges. So, perhaps naively, I told the investor what was going on and how I planned to proceed.
He (being a certain type of investor) took this as an opportunity to try to completely change the terms of the deal we had agreed upon. So, I ended the talks without taking any money.
I wondered for a few months afterwards if I had made the right decision in being so honest and came to the realization that some investors do expect you to only paint a rosy picture.
At the end of the day though, I realized that I don't to work with that kind of investor and, as things turned out, it was a very good thing to not take money from him. Since then, some unbelievably good things have happened and couldn't have taken place if I was tied to some investor in Japan who didn't believe in me.
So, the lesson for me was, be honest and be yourself. The people who believe in you as an entrepreneur will be there through the ups and downs. And the truth is a great way to weed out those of little faith.
This has been my experience in life as well. Doing the right thing, which may cost you in short-term gain, usually leads to long-term gain.
You had the opportunity to find out about this man's character that he wanted to take advantage of you. Better to find this out sooner rather than later.
"Robert Morris is an associate professor of computer science at MIT, where he is a member of the PDOS group. He has published extensively on wireless networks, distributed operating systems, and peer-to-peer applications. In 1988 his discovery of buffer overflow first brought the Internet to the attention of the general public. He has an AB and PhD in Computer Science from Harvard."
Emphasize the positive.
But it only works if you have a lot of positive to emphasize, and if whatever you're downplaying really isn't important.
Even though I've been in business for 20 years I'll bet the number of people who have knowingly, intentionally deceived me is very low, probably in single digits. Maybe none.
That sounds naive, and maybe it is. But psychological and neurological research all points in the same direction: that people perceive the same situation radically differently, and even remember the same incident differently. There are even physiological artifacts that accompany or cause these divergences. So most of the time when people are 'lying' to me they probably believe what they're saying.
That doesn't answer the original question, but it challenges the assumptions in the article, that lying is commonplace and a constant temptation. It also changes the way I (and I think others) should respond to a 'liar'. Assume the person isn't lying, even if you think they're wrong and should know it. Accept the data, evaluate, verify, and move on. Ascribing motives or morality might be satisfying, but it's unhelpful. Worse, emerging science suggests it may be a mistake.
when people are 'lying' to me they probably believe what they're saying.
One one level yes, this is true. More than true, it's wise. The problem is that we can deceive ourselves into holding self-serving beliefs... sincerely. Upton Sinclair said it best: "It is very hard to make a man understand something, when his job depends on his not understanding it."
And such people aren't lying or dissembling. It's just much cheaper, in terms of mental effort, to develop beliefs that the world is the way you would like it to be.
Hopefully, this article will be counter-balanced at some point by discussions with successful entrepreneurs who had open, candid, and honest relationships with their VCs and customers. In my experience, telling the truth builds relationships and lets people focus on problem solving.
If being honest with your VC means losing funding, it may still lead to funding of another, more viable idea.
"Fake it till you Make it" has become quite a popular mantra in this context. Is this lying, stretching the truth, marketing your "brand", or something else? It is for the individual to decide, no strict rules IMO...
Entrepreneurs obviously need to spin their situation in as positive a light as possible, see all the chatter around the monitization of twitter as an example, but I doubt outright lies are going to be a winning strategy. (it may work for Jobs, see woz-atari story, but is it worth the risk?)
I think it's important for the Entrepreneur to understand that VCs lie all the time however, it is just their nature, despite how open they look, they're especially good at lies of omission and manipulation of fund performance.
Playing the game, hyping or as some called it marketing is part of being an entrepreneur. You always have to encounter that the information given to you is often fashioned in that way. As long as the facts are not misrepresented or blank wrong information which can get you in some serious trouble it is part of business.
I personally stay away as far as possible on stretching the truth because of a simple fact. When you start it you have to remember, what you said to whom, how much you said and so forth. At some point it starts to catch up on you and people start to remember it. Despite all the thinking it just gets messy and integrity in business in the long run is key. Therefore I stick with facts and truth which keeps it simple. That might sometimes mean that I do not get the deals I wish, but I have a good sleep and no headache and for sure I will survive.
Best outcome - you Lie for strategic reasons, nobody ever finds out, and your company is a success, everyone makes lots of money, everyone is happy, and even if they find out you lied, they may not care if you've demonstrated nothing but good behavior since. Maybe.
Lie, and then fail, and get found out - that may follow you around forever doing untold damage to your credibility for the rest of your life. Trust is an easy thing to lose and a hard thing to gain.
If you leave aside the moral/ethical issues (which are very real, and which we each need to deal with for ourselves.) the usual rules of marketing apply; do you expect word of mouth? do you expect repeat business? If so, a reputation for dishonesty is going to kill the rest of your marketing.
(Of course, if you expect to encounter each customer once and only once, and if you don't expect your customers to talk to potential customers, the rules are clearly different, and you are mostly back to the ethical question I glossed over.)
I think his point about holding startups to the same standards of truth that we do "the most mature public companies" is actually a good one. We expect a lot of lying from the marketing departments of mature public companies.
But we feel worse about it when there are so few people that lying means it's Bob and Frank lying to us, not fifteen faceless people in a large department who we'll never meet, and never assign blame to.
What about this scenario? VC wants to know how much interest there is in your company. You claim to have 3 leads from other VCs although you have none.
IMO there is nothing wrong with this lie, because it doesn't lead anyone to make a bad decision. If you're a good investment, you get funding faster and on better terms. If you're a bad investment and the VC is any good, you'll get rejected even if you have 1000 leads.
Or another example... you're 30 and have a successful track record but you failed out of college at age 21. A VC is sizing you up and wants to know why you didn't finish. You're a different person at 30 than you are at 21, so it shouldn't matter, but you fear admitting the truth will kill the deal; VC's a bit of an Ivy snob. You say, "I ran out of money, 6 months later had an opportunity to do <X> and made a lot of money, and haven't had any need to go back". Is anyone hurt by this lie? Absolutely not.
People lie because they want more power in a social situation. In the "$10 million of VC investment" scenario, lying about the multinational customer gives the entrepreneur more power than he otherwise would have had in the deal with the investor. An investor-entrepreneur relationship works best as a collaboration. So why would you want to start that relationship with an obvious power play against your would-be investment partner?
i find a very helpful concept here is the 'appropriate level of abstraction'- when making some assertion, make sure that the language you use and the claims that you make are specific enough to be compelling, but abstracted enough to be 'not a lie'.
[+] [-] grellas|16 years ago|reply
Misrepresenting material facts or omitting to disclose something major (like the loss of your major customer the day before a funding) constitutes securities fraud and can get you in a heap of trouble, notwithstanding how it may have worked out in a particular case such as that cited in this piece.
There are also limits to hyping if it amounts to misrepresenting material facts. I was once approached by an entrepreneur whom I turned down as a client and who later got busted for securities fraud for having done a demo claiming that certain of his company's whiz-bang technology was in fact doing something stupendous when it was in reality just a rigged demonstration designed to simulate what he claimed his technology could already achieve. Having raised $7 million based on such demonstrations, mostly from gullible investors, he went to jail for his "over-hyping" of his product.
When it comes to issues such as lying, there are moral issues and there are legal ones. If you are an entrepreneur who wants to avoid serious problems, the rule should always be: never lie in a way that amounts to fraud or misrepresentation (legally speaking), no matter what the supposed benefit. It is not worth it.
Concerning moral issues, the issue for me is one of integrity. Just as we all can stretch something when it helps us, and just as we all do so to some degree, so we can stretch it to the point where it amounts to a pure fabrication. Mild stretching might be considered a gray area. Fabrication is a character issue that can reflect badly on the entrepreneur. Of course, this depends on context as well. If it is clear you are speculating (such as about growth rates), that is one thing. If you are knowingly misrepresenting facts, the natural thought that occurs to people you are dealing with is, "If he will do that once, how can I trust him not to do it again." You might think it is innocent in your mind, but crooks make a living off such misrepresentations. And there is no percentage in aligning yourself with that which is unseemly. I have repeatedly seen the consequences of such activity in courts of law, and they are not pretty in cases when things do blow up.
[+] [-] wisty|16 years ago|reply
[+] [-] stretchwithme|16 years ago|reply
[+] [-] rgrieselhuber|16 years ago|reply
One thing that I think is true of technical people is that we are comfortable disclosing difficult things. We tend to view them as just bugs to work out and expect that everyone involved will have enough belief in the end goal to find workarounds to any challenges. So, perhaps naively, I told the investor what was going on and how I planned to proceed.
He (being a certain type of investor) took this as an opportunity to try to completely change the terms of the deal we had agreed upon. So, I ended the talks without taking any money.
I wondered for a few months afterwards if I had made the right decision in being so honest and came to the realization that some investors do expect you to only paint a rosy picture.
At the end of the day though, I realized that I don't to work with that kind of investor and, as things turned out, it was a very good thing to not take money from him. Since then, some unbelievably good things have happened and couldn't have taken place if I was tied to some investor in Japan who didn't believe in me.
So, the lesson for me was, be honest and be yourself. The people who believe in you as an entrepreneur will be there through the ups and downs. And the truth is a great way to weed out those of little faith.
[+] [-] mattm|16 years ago|reply
You had the opportunity to find out about this man's character that he wanted to take advantage of you. Better to find this out sooner rather than later.
[+] [-] mnemonicsloth|16 years ago|reply
"Robert Morris is an associate professor of computer science at MIT, where he is a member of the PDOS group. He has published extensively on wireless networks, distributed operating systems, and peer-to-peer applications. In 1988 his discovery of buffer overflow first brought the Internet to the attention of the general public. He has an AB and PhD in Computer Science from Harvard."
Emphasize the positive.
But it only works if you have a lot of positive to emphasize, and if whatever you're downplaying really isn't important.
[+] [-] rfrey|16 years ago|reply
That sounds naive, and maybe it is. But psychological and neurological research all points in the same direction: that people perceive the same situation radically differently, and even remember the same incident differently. There are even physiological artifacts that accompany or cause these divergences. So most of the time when people are 'lying' to me they probably believe what they're saying.
That doesn't answer the original question, but it challenges the assumptions in the article, that lying is commonplace and a constant temptation. It also changes the way I (and I think others) should respond to a 'liar'. Assume the person isn't lying, even if you think they're wrong and should know it. Accept the data, evaluate, verify, and move on. Ascribing motives or morality might be satisfying, but it's unhelpful. Worse, emerging science suggests it may be a mistake.
[+] [-] mnemonicsloth|16 years ago|reply
One one level yes, this is true. More than true, it's wise. The problem is that we can deceive ourselves into holding self-serving beliefs... sincerely. Upton Sinclair said it best: "It is very hard to make a man understand something, when his job depends on his not understanding it."
And such people aren't lying or dissembling. It's just much cheaper, in terms of mental effort, to develop beliefs that the world is the way you would like it to be.
[+] [-] maxharris|16 years ago|reply
Context: assuming that you are dealing with civilized situations in which neither party has initiated or threatened the use of force against anyone.
[+] [-] rhettinger|16 years ago|reply
If being honest with your VC means losing funding, it may still lead to funding of another, more viable idea.
[+] [-] suprgeek|16 years ago|reply
[+] [-] inboulder|16 years ago|reply
I think it's important for the Entrepreneur to understand that VCs lie all the time however, it is just their nature, despite how open they look, they're especially good at lies of omission and manipulation of fund performance.
[+] [-] stretchwithme|16 years ago|reply
So, by all means, go ahead and lie to them. They'll know right away, while everyone else will only know eventually.
[+] [-] bg4|16 years ago|reply
[+] [-] eande|16 years ago|reply
I personally stay away as far as possible on stretching the truth because of a simple fact. When you start it you have to remember, what you said to whom, how much you said and so forth. At some point it starts to catch up on you and people start to remember it. Despite all the thinking it just gets messy and integrity in business in the long run is key. Therefore I stick with facts and truth which keeps it simple. That might sometimes mean that I do not get the deals I wish, but I have a good sleep and no headache and for sure I will survive.
[+] [-] dedward|16 years ago|reply
Legal analysis aside, it's risk -vs- reward decision.
Best outcome - you Lie for strategic reasons, nobody ever finds out, and your company is a success, everyone makes lots of money, everyone is happy, and even if they find out you lied, they may not care if you've demonstrated nothing but good behavior since. Maybe.
Lie, and then fail, and get found out - that may follow you around forever doing untold damage to your credibility for the rest of your life. Trust is an easy thing to lose and a hard thing to gain.
[+] [-] lsc|16 years ago|reply
(Of course, if you expect to encounter each customer once and only once, and if you don't expect your customers to talk to potential customers, the rules are clearly different, and you are mostly back to the ethical question I glossed over.)
[+] [-] angelbob|16 years ago|reply
But we feel worse about it when there are so few people that lying means it's Bob and Frank lying to us, not fifteen faceless people in a large department who we'll never meet, and never assign blame to.
[+] [-] edw519|16 years ago|reply
Especially if you're a software entrepreneur.
Even more so if you're an internet entrepreneur.
We don't make products that our customers can touch and feel. We make ones and zeros. All our customers have is trust and implicit promises from us.
Lie and we have nothing.
[+] [-] pw0ncakes|16 years ago|reply
IMO there is nothing wrong with this lie, because it doesn't lead anyone to make a bad decision. If you're a good investment, you get funding faster and on better terms. If you're a bad investment and the VC is any good, you'll get rejected even if you have 1000 leads.
Or another example... you're 30 and have a successful track record but you failed out of college at age 21. A VC is sizing you up and wants to know why you didn't finish. You're a different person at 30 than you are at 21, so it shouldn't matter, but you fear admitting the truth will kill the deal; VC's a bit of an Ivy snob. You say, "I ran out of money, 6 months later had an opportunity to do <X> and made a lot of money, and haven't had any need to go back". Is anyone hurt by this lie? Absolutely not.
[+] [-] techiferous|16 years ago|reply
[+] [-] moe|16 years ago|reply
[+] [-] mathewgj|16 years ago|reply
[+] [-] huherto|16 years ago|reply
[+] [-] techiferous|16 years ago|reply
Gandhi.
[+] [-] mcu|16 years ago|reply