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Leadership from the transparency of the entrepreneur

A startup founder finds many valleys and mountains to cross to grow his company. As much as he wants to present positive information to stakeholders, it's equally important to be upfront when product and financial performance falls short of expectations.

As an angel investor financing promising startups, I have occasionally, and fortunately very few, encountered dishonest behavior. The point where “faking it” translates into lying to investors, clients, and oneself is the point where ego and reality collide, and the ego in some cases ends up coming out on top.

A highly publicized case is that of the founder of Theranos, Elizabeth Holmes, who was convicted of defrauding investors about the diagnostic device company she founded. Less 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 in income and assets that did not exist.

These and other equally egregious cases present a warning to entrepreneurs and investors: transparency is not an option; it is a necessity.

The founder of a company I had to deal with secretly kept two sets of books: one with the correct historical financials and one with numbers inflated more than 10 times the real numbers. Sales and product performance had fallen short. His solution was to present inflated financials to investors.

But investors are always vigilant and felt that something was wrong. We quickly discovered the second set of books after digging into the data. This founder was unable to secure additional investment in his company and found himself in legal trouble.

Finally, there are cases of sales or projections of the same optimists accompanied by a supposed creativity and intellectual property of what is finally "nothing". As the technical solution is deepened, it is appreciated that there is nothing concrete beyond a lot of loquacity.

It's natural to want to show positive news, but presenting challenges is just as important. Challenges can become bigger problems if they are not communicated. Never let the pressure of investors looking for good news tempt you to exaggerate, sugarcoat or even hide the truth.

optimism and reality

As a philosophy, “fake it until you make it” was never about play With the truth. He suggests adopting a proactive mindset toward success, even when you're not sure you'll achieve it.

It's okay to project an optimistic view of where product development and finance will be in the future. But it is crucial to present the reality, not the reality that is want, but the real one when informing about the current state of the product development, the clients in the portfolio and the financial performance.

The ego-driven climb

One trait that allows founders to take big risks to create and execute their vision—that is, inordinate confidence and ego—is the same trait that can cause some of them to lose their sense of what's right and what's wrong. wrong. With their moral compass adrift, they cheat their way forward.

In extreme cases, ego-driven founders are addicted to deception. They envision themselves as the CEO of the next unicorn. They unleash a stream of lies that support their invented reality. These people are trapped in a fantasy space, immersed in arrogance. As we saw with the rise and implosion of Theranos, the deception spiraled out of control until, inevitably, the founder was caught in the lie.

The temptation to inflate the client portfolio

Before handing out capital checks, investors look for proof of concept, proof of sales, or outside interest in the product. There are early-stage founders declaring blue chip companies as customers, even though these big companies are still evaluating the technology. The evaluation does not mean, nor does it guarantee, that a company will become a client.

One founder told investors that 30 blue-chip companies were paying, when in fact there were only 10. We found the inflated number during the previous analysis process on the company's books and immediately stopped all investment in that business.

The ethical strategy is simply to state the facts: a blue-chip company is evaluating the product. This in itself is an achievement as it shows interest.

Portray a gargantuan performance

It can be tempting to claim that product development is further along than it actually is.

An example in the AI ​​and machine learning space: One founder commented that their product was fully enabled through their AI and machine learning application. The truth, uncovered through investor analysis, was that the product was nowhere near 100% AI/ML enabled. Due to deception, this founder received no funding.

This type of deception is, like any other, a product of the myopia of the founder. Investors will be extremely put off by any type of deception they come across, as it will produce distrust of the entire conversation.

Take an informed approach

A good rule of thumb is to see all stakeholders, including investors, as part of the team. If investors, board members and advisers know about the challenges you've faced, they can step in to offer help beyond capital. They want to help. Many of them have been in the role of founders before and as entrepreneurs they understand that it is essential to take advantage of their ideas and experience to solve problems.

Another example of my own: a company sold only through physical stores. They didn't have e-commerce when the pandemic hit. Several founders on his advisory board gave the founder critical advice on best practices for transitioning to e-commerce and how to invest for this new challenge.

They are all part of the solution. Interests were aligned and help was gladly offered. Today, the company's sales increased 300% before the transition to e-commerce.

Respect compliance, legal and regulatory aspects

The Theranos fiasco demonstrated that lying about product, partner commitments, and finances has serious legal consequences. The Holmes case also demonstrates that staying out of legal breaches is easy.

Instead of twisting the truth, adjust the plan to raise a smaller amount of investment rather than misrepresent financial or product performance. Experienced founders know that the pressures from stakeholders to achieve aggressive financial and product development milestones, showcase product efficacy and accuracy, and deliver results are enormous.

You need strength and integrity to stand up to pressure when product performance and numbers fall short and be completely transparent about results. The long-term consequences of being caught in falsehood will wipe out any short-term gains from inflated figures.

It is never worth risking your company or personal reputation.

Earn trust and communicate with integrity

In my view, the most important attributes that investors, board members, employees and advisors expect are trust and integrity. As the business develops, everyone knows that not everything will be positive over time. By regularly sharing both good numbers and uncomfortable details on short notice, credibility and trust are established and maintained.

In updates to investors, consider what works, explain challenges, and ask for help. Whether it's a complex problem in need of a solution, staffing issues, or new business acquisition, make these questions an integral part of company updates.

Investors have a wealth of experience and connections that can make valuable contributions to the business. You have to know how to take advantage of their wisdom. Involving stakeholders reinforces that everyone is aligned towards the same goal.

A good suggestion is to send updates once a quarter, or at least twice a year. If a particular difficulty appears, inform investors in a separate update.

Under promise and deliver more

Show full transparency by forecasting realistic revenue targets and product development milestones. Investors will remember what they are told.

Overpromising creates all kinds of unrealistic pressure not just for the founder, but for the entire organization. Delivering results as close to forecasts as possible is critical to credibility, so being realistic when preparing projections is key.

It's great if you can beat a sales goal or product milestone. Meeting investor expectations must be the target. If, despite best efforts, certain targets are not achieved, inform investors and the advisory team as soon as it becomes known that the stated forecasts will not be met.

Summary

The message for all founders is as unequivocal as it is moral or ethical: control the ego, always be transparent and never evade the truth. That said, be optimistic and adopt a positive mindset about the company.

There is nothing wrong with imagining future success: transparency and optimism are not contradictory to it. They can and should coexist. You just have to make sure that the dream does not obscure reality. Always present accurate information about the current state of the business.

Presenting anything that is not the truth is a risky game because the truth is always revealed. Being transparent and you get personal mental balance, more investments and peace of mind.

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